Recession can accelerate innovation
Written for Sheffield Telegraph Business Review - published 15 October 2009
Look up 'recession' in any text book about the economy and you will find lengthy, academic arguments about what causes them. You will find that some argue that it was the decline of English cotton manufacturing rather than the innate laziness of the Edwardian upper classes that caused the economy to contract at the end of the 19th century. Others contend that over-inflated UK production costs, rather than rapid restriction of cash into the economy, caused the recession of the 1980s. But for most people, living through the current recession, debating causes is less helpful than discussing how to keep their jobs and businesses going.
Despite the debates about what causes recessions, it is a heartening that there is general census amongst the experts over the consequences of a recession: order books shrink, businesses close, people lose jobs, individuals become more burdened by debt, some people never enter the economy and others never regain their place in the workplace.
There is also a fair amount of agreement that recessions can actually accelerate innovation and encourage individuals to start up their own businesses. History shows us that those places that benefit most from upturns in the economy are those most able to respond quickly once demand picks up again. In real terms this means being able to restock and increase production just as soon as the orders arrive.
For businesses this a real challenge, because the same things they have done to keep themselves afloat during the downturn could stop them competing once trade starts to pick-up. As order books shrank, businesses destocked and reduced the number of hours being worked. This has all helped to preserve cash, balance the books, and so kept the business alive while sales fell off - but it could now mean that businesses are unable to fill new orders as quickly as their rivals in other parts of the world.
One of the reasons why businesses can not respond quickly is money. If they can not access finance, it becomes harder to pay suppliers as they restock, to pay staff as they increase working hours, and so to meet the new orders as they arrive.
To help make sure that Sheffield is ready for the economic recovery, already starting to be seen in other parts of the world, Sheffield First Partnership commissioned work to find out what needs to happen to make sure that there is good access to funding for local businesses.
The piece of work is still going on, but already we have found that the biggest factor in securing funding is how well prepared businesses are when they approach banks. In the current business environment, a good set of management accounts, sensible cash-flow forecasting and a credible business case helps persuade bankers that you are a good investment.
We have also found that the government’s good intentions sometimes have unexpected consequences. The government allowed businesses to submit abbreviated accounts in order to reduce red-tape. But those who did so have seen their credit scores fall simply because credit rating agencies can not see enough information to make a judgement on the company.
If I open a text book on the economy in twenty years time, I hope that Sheffield will feature as one of the areas to recover quickest from the first recession of the 21st century - even if the experts can't agree why!
Kirstie Haines