The Financial Crisis & The Lessons For Small Business

Wall Street’s recent financial “Bang” was heard ‘round the world and its effects will be felt for a long time to come. In the aftermath of this crisis, the US dominance of the global financial landscape is likely to erode and the bright lights illuminating Wall Street’s iconic marquees will dim. As we try to comprehend the gravity of the events that have transpired in the last week, our national self-confidence and unshaken belief in free markets have been dented.

For the longest time, our financial innovations were the envy of the world, contributing to employment growth in an economy where manufacturing jobs were being outsourced abroad. It is ironic that many of the financial “innovations” that gave the industry its competitive edge on the world stage were too complex and too risky in the end, becoming the “poison pills” that led to the current implosion.

At this critical point in time, with people feeling financially insecure and betrayed our “bruised” free-market remains the best guarantor of reform. While imperfect, free-market mechanisms are better than the alternatives, allowing flexibility and adaptability during moments of crisis. Ultimately, reform will usher in some dramatic structural changes in the financial sector, including global realignment through mergers and acquisitions. Business models will be revised, leveraging risk will be redefined, and regulatory oversight will no longer be an aberration. The lessons to be learned will be plentiful and I am sure numerous books on the subject will soon be featured on the New York Times Best Seller list, just in time for Christmas gifts later in the year.

Here are some rules which small businesses, should follow to manage risk and limit downside:

Ø Keep things simple and make sure you understand the products you offer and the markets that you compete in.
Ø Complex and elaborate plans are not a substitute for critical analysis of market opportunities and the resources needed to exploit them.
Ø Optimistic outlook is an important attribute in meeting challenges successfully. But always employ “reality checks” in your forecasting.
Ø Math never lies. Make sure the numbers make sense and can stand up to scrutiny.
Ø Market uncertainty requires the availability of reserved resources to address unforeseen emergencies. Never “bet the farm” on anything regardless of the allure.
Ø Make “management by numbers” a corner stone of your business model. Make measurement of performance and accountability the center of any business.

We are all “on the hook” to borrow Secretary Paulson’s own words, and not just because of greed. There will be a lot of blame to go around when the time comes, but I am convinced that what will emerge is mainly a failure of some businesses to adhere to time-tested economic fundamentals and sound management tools, from risk management to accountability. So let’s not throw the baby out with the bath water.