A 35 per cent fall in UK GDP, the measure of our economy, this quarter sounds a big number. But if your business has been closed, then you would swap for this. Even if you are trading up 20 per cent, you still need to pause for thought.
The challenge all businesses face is to understand how our behaviour has changed and what may happen when the lockdown is phased out. The net effect for the year is forecast to be a 13 per cent drop in GDP. But there will be winners and losers.
What is GDP?
The best way to visualise GDP is to imagine that you are sitting at a round table with nine other people and you have one £10 note. If you pass the note to the person on your left and it makes one trip around the table, the GDP is £100. If you pass it around a second time, it is £200.
The measure, used by governments around the world to make financial decisions, depends on how many people are active and how frequently they are active.
So if three of the people leave the table, our GDP falls by 30%. Or if the banknote only gets passed seven times, our GDP falls by 30%.
Cash flow matters
The first recommendation to every business leader when the lockdown started was to do a cash flow analysis. It is a simple calculation. In one column, you add up the income that you expect to receive each month. In another, you total the expenditure you expect to make.
The gist of the advice was to speed up the money coming in and to pause as much spending as possible to avoid the need for borrowing.
However, this cannot be forever. At some point, enterprises need to spend as the money spent will become the money received.
There may be trouble ahead
“People should know that there is hardship ahead and we won’t be able to protect every job or every business,” Rishi Sunak, the chancellor, said this week.
Hardship is a useful word. Things are not impossible. But our business futures after the lockdown are unknowable and likely to be challenging.
Many enterprises face a strategic reset. No business can assume that life will resume as it was before. Buying behaviours have changed. Some of these changes are likely to stick.
Now is the time to review your business plans to make sure that you are focused on doing the right things and solving problems that customers will want to spend money on in the future.