Why “The Recession” Doesn’t Belong in Your Vocabulary

By Garrett Fisher

July 29, 2011

While it appears that I am promoting a delusional state of denial regarding obvious economic events, the reality is opposite. Allowing a pernicious erosive effect to induce a person or business into financial decision-making paralysis is the issue in question.

Since late 2008, it has become a catchphrase for business owners and individuals alike to make reference to their stressed financial situation and follow it up with something to the tune of “when this recession is over things will get better” or “our situation is so bad because of the economy.” Those statements become cliché, are heard over and over again in mass media and become entrenched as established, unchangeable fact. Now the obvious contestation to this statement is “well isn’t the bad economy out of our control?”

The economy as a whole is out of our individual control. However, reasonable responses to economic changes and endeavors to profit in lieu of changing circumstances is the desired outcome.

When a person assigns responsibility for financial distress to the recession, they are in effect stating “our business was built on an assumption of certain revenue volumes and profit margin assumptions. Since we are no longer at those margins and sales volumes, we are having trouble meeting our fixed cost obligations. Our solution is to wait until the economy recovers.” So while the real enemy in a poor economy is contracting volume, pain materializes itself through difficulty making lease payments, loan payments, salaries and owner compensation. The pain is also felt on individual levels – inability to make mortgages, personal loans, car payments, food expenses, etc. Fixed costs are no longer bearable when volume drops. Furthermore, extraction from fixed cost obligations is either impossible or very painful when the economy contracts (loans don’t usually get forgiven, selling assets comes at fire sale prices; hence, being underwater, etc.). So in these situations, a person or a business owner is staring at a life or business that they have built, are seeing the foundation crumble and respond by [accurately] seeing the trigger as an economic reduction. It certainly looks, sounds and feels like a no win situation to anyone dealing with the situation. Where individuals and businesses go wrong is to stop there, operating under an assumption that an economic recovery is the only solution to the problem.

Here are some logical courses business owners should take and some common mistakes. We will then dissect the thinking behind it and solution.

In all of these situations, a person is making the choice to cause themselves more pain. Granted, they are choosing to avoid short-term pain (terminations, perceived shame discussing loan extension with banks, downsizing business) yet are willingly accepting long-term pain (absolute uncertainty, the inevitable). Such behavior appears to defy logic.

The source of this kind of decision making lies in an individual acting on quasi-accurate personal beliefs to take a course of action that is destructive in the long run. Varying from person to person, they are fundamental beliefs about life & human interaction that cause an individual to choose the “Common Reaction” column in the box above instead of the “Solution” column. For example, personal beliefs regarding shame or failure may prevent a person from contacting a bank or landlord to begin the process of working out a solution. Personal feelings of responsibility and obligation to employees may prevent reducing staff or compensation. Some of these beliefs have some truth to them; however, for some businesses they will cause the very same problem they were hoping to avoid. A bank not called may foreclose. Employees that a business cannot afford may be an expense load that drives a firm to bankruptcy and all employees lose their jobs.

Unfortunately, the solution to a quagmire of this nature is not direct and straightforward. It is best likened to someone being stuck in the mud with their car. Its not pleasant being there and the process is not pleasant to get out. Nonetheless, staying there is even worse; so, pressing forward (through the mud so to speak) is the best option.

Much like our mud analogy, “spinning your wheels” – continuing to do what does not work – is an easy rut to get into and usually the first thing people do (at least when stuck in the mud literally with a car). When dealing with real world conundrums, the solution is to find the trigger and develop a plan to avoid it. So, in the difficult case of a cash-burning enterprise with a reticence to make a needed step to cut staff, we analyze the trigger. In our hypothetical case, it is the feeling of obligation towards employees and avoidance of shame having to let them go. Again, by not taking a badly needed step of reducing staff overhead, what we are trying to avoid quite likely will happen: more jobs lost. So, is it possible to salvage jobs and still cut costs? Can a number of employees be reduced to part time vs. total layoffs? Can wage cuts be made (along with quantifiable bonus plans when company performance returns to give them specific direction on when wages could come back)? Are there underperforming employees that may have been contemplated to be terminated? Facing the issue and navigating to a health solution is the goal vs. continuing a path that is not working.

What is important in an exercise like this is that it is shifting an individual from blaming a perceived source of a problem and into a mode of taking corrective action. Blame generally leads to feelings of victimization à which is a paralyzing stance when dealing with financial issues.

An additional perspective is the effect of statements such as “it’s the recession” to others in an organization. When employees, bankers, & shareholders hear such words, it sets management direction on the issue of financial distress. Employees hear that the recession is the source of the problem and they also hear that company leadership is content with waiting as the answer. On the contrary, creating a viable leadership agenda with specific thresholds for employees to meet with regard to optimization, cost-cutting, efficiency, etc – allows employees to sign on to a solution and also affords them the privilege to work toward solving the issue. The same employee that we didn’t want to terminate earlier now can be made part of the team to solve financial stressors.

Bankers generally do not react positively when they hear that the recession is being targeted as the problem and the recovery as the solution. Banks will sense distress and helplessness. Absent a specific plan, they will likely take a self-protective and antagonistic stance. Banks thrive on proactive planning and make great partners when said plans are quantified in writing, shared and updated.

In lieu of viewing the economy as the source of issues, business and individuals alike can address seemingly impossible financial commitments, spending levels and overhead structures. While a very painful process in the short-term, making painful and beneficial decisions in the present will favor a successful long-term future.