Popular sentiment was that at the end of 2008 and during 2009 we experienced an unprecedented economic crisis. However, a leading research analyst for a prominent investment research and institutional management firm that manages $85 billion presented to full rooms of clients and business professionals that our economic conditions were not unprecedented, although they were of historic proportions. For every economic crisis, we have recovered stronger than the previous peak before another recessionary period occurred. The extent of recovery the past few years is debatable. An unprecedented financial stability plan by the Treasury should eventually stabilize the credit system. The concerns for the entrepreneur are the same fundamental financial management factors as during economic growth. The entrepreneur (and CFO) must address how recessionary GDP levels impact the magnitude of those factors.
The entrepreneur (and CFO) must plan and strive for long term sustainable cash flow and profitability growth. Reliable and timely cash flow forecasts and tracking will be critical to identify necessary short term adjustments. Unfortunately, there is no magic pill. Short term decisions must be a prudent part of a long term plan.
The first thing on many minds is the impact on lending. Contrary to popular sentiment, lending did not hit a brick wall for entrepreneurs. Community and regional banks have the appetite and capital to continue lending. Major banks have the appetite and capital to continue lending to existing customers. The same five Cs of credit still apply. They are 1) character (integrity), 2) capacity (cash flow), 3) capital (net worth), 4) collateral (assets), and 5) conditions (borrower and economic). Prudent credit risks based on modest underwriting scrutiny during credit expansion will still be prudent credit risks with more diligent underwriting scrutiny. Marginal credit risks approved by deteriorating lending standards during the recent credit expansion will now be denied. The research analyst I heard demonstrated that history shows we should expect a 20% contraction in loan balances as the aftermath of the economic crisis.