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The Return of Prudence?

At last, some evidence that suggests the economy is about to escape the doldrums.

In its June 2009 Investment Outlook, Morgan Stanley Smith Barney pointed to a number of important economic signposts that have charted upward since the beginning of the year. And while many economists and financial experts have been predicting the demise of the current recession, it’s always good to get some solid facts before making any major strategic or financial decisions.

Now that the economy might be picking up steam, I’m going to throw out two questions for consideration. What have we learned from this recent and fairly painful recession? And, what should we do differently going forward?

I recommend a return to prudence.

Over the last decade, business leaders came to expect explosive growth as the norm. As a result, many companies continued to take on more risks because they had been conditioned to expect only success, ignoring the clear evidence of declining markets. With few exceptions, they paid a painful price. So I’m suggesting that we reevaluate our assumptions and beliefs about what constitutes sustainable growth, and start acting a bit more prudently.

What does “prudent” look like in today’s economy? On the financial side:

  • Be realistic about your leverage. Just as many homeowners got into trouble by buying more home than they could afford, many companies sealed their doom by over-leveraging themselves based on unrealistic growth projections and valuations. Don’t count on never-ending growth in the value of your business, your products, or your markets.
  • Stop spending like there’s no tomorrow. A large part of the recent economic debacle was due to individuals and organizations living beyond their means. Create a budget you can live with, one that does not count on double-digit growth in revenue year over year.
  • Know where your money is going. Everyone watches their pennies like a hawk during down cycles. But once sales turn around and the cash starts rolling in again, many companies ease off on the financial oversight and return to sloppy spending habits. Don’t let this happen to you.
  • Save for the next rainy day. Every business experiences fluctuations in cash flow. To prepare for your next cash crunch, avoid unnecessary capital purchases, don’t use credit to fund daily operational expenses, and put some money aside for the next economic hiccup.

On the strategic side:

  • Challenge all your beliefs and assumptions. Don’t assume that what you knew as absolute fact a year or two ago is still true. Ask yourself, “Is it time to change any of my beliefs and assumptions? If so, which ones and what do I need to change them to?”
  • Check in with your workforce. What assumptions and beliefs are your employees holding onto that need to be changed? Remember – behaviors do not change until beliefs and assumptions change.
  • Adjust your expectations. The new ‘normal’ may be slow and sustained growth rather than a hockey-stick recovery curve. Instead of waiting for some economic miracle to rescue your company, strive to make the best of what you’ve got.
  • Get comfortable with uncertainty. Don’t wait until you have all the answers before investing in the future. Certainty is a thing of the past, especially for the short-term. Instead of making rash, uninformed decisions, gather as much real data as you can, test your assumptions, and then make the best possible decision based on what you know.

Finally, get focused and stay focused, not an easy task as new opportunities open up around you. Determine what you really do best as a business (based on what your customers tell you and not what you think you know) and invest your resources in those two or three areas. Stay lean, gather all the data you can, and make every decision after pausing to check on the facts rather than outdated assumptions.

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