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October 2008 and February 2009

[Click here for submitted discussion]


Do the words "global financial meltdown" sound familiar? News reports are full of gloom, but how will this impact on you, if things really get bad?

Here we supply two views on the issue: the first is a recent newsletter article by Dave Robertson of Koch Industries. Dave is the Chief Operating Officer and President of the largest private company in the world and though it might seem implausible that such a big concern might have insights that could help small businesses and independent contractors, there is much in it---suitably scaled down---that might help us all.

The second is an opinion piece, by Ken Phillips, Executive Director of Independent Contractors of Australia, which we first put on the site in October last year as food for thought for independent contractors and anyone running a small business---particularly during hard times.

Do you have views and comments on either of these articles? Have you had personal experiences you can share? Send us your contributions and we'll include them on a dedicated discussion page. E-mail your thoughts to us at: discussarticle@contractworld.com.au.


Surviving the Financial Meltdown, Mark II (February 2009)

Click here to access the Koch Industries newsletter newsletter, Discovery and go to pages 11 and 12 for Dave Robertson's piece "Maintaining Balance".


Surviving the Financial Meltdown (October 2008)
by Ken Phillips

A simple understanding of the global picture
Every economy goes through booms and busts. All the indicators suggest that this global bust is the biggest since the end of World War 2 and probably since the Great Depression.

The primary trigger for this collapse is the crash of the bloated US housing market.

For some time, housing loans have been made in the USA on a massive scale (now estimated in excess of $US1.5 trillion) to people who had low, or no income or assets. The loans created a boom and then a bubble in US housing activity. The start-up interest rates on the loans were low, but rolled over to higher rates after a few years. About a third of the loans rolled over in the first half of 2008. These poor people with the low-interest loans can't afford the new, higher interest rates. They have been defaulting on their mortgages, walking away from their homes and creating huge losses for the financial institutions who held the loans. The US housing bubble has burst. But this was just the first phase of the financial turmoil witnessed during the first part of 2008.

What has complicated the situation is that the businesses that made the loans to the 'no income' people on-sold the mortgages to others. These dud mortgages have been traded throughout the global financial system in such a way that most banks, financial companies and even governments were not aware that the loans were duds and destined to fail. As the loans have failed, financial institutions have discovered that they hold worthless mortgages and the financial companies have collapsed. Because no bank or financial institution knows which bank or other financial institution holds the worthless mortgages, banks and financial institutions have stopped lending money to each other. It's caused a credit crisis. No-one will lend money to anyone.

The second stage of the meltdown is happening now as the remaining two-thirds of the bad loans roll over to higher interest rates. These loan roll-overs do not finish until around mid-2009 it seems. This second and bigger whammy of realized losses is having an impact across the global financial system. Credit has dried up. The financial speculators who borrowed big to play the international stock and commodity markets have to sell at any price to repay their loans. Global stock markets are crashing at an historic rate.

There's now a downward, uncontrolled recession spiral that central banks and governments around the world are frantically trying to control---with little success. The outcome is that banks and businesses across the globe are collapsing. A deep recession is developing in the USA. Ford and GM look set to go under. Singapore, Japan, New Zealand, the UK and most of Europe are in recession. Iceland appears to be bankrupt.

What about Australia?
Australia has a lot of positives which other countries don't have. Over the last decade, the Federal government eliminated its debt, ran surplus budgets and created large cash reserves. The Federal government has acted as our 'rainy day' piggy bank. China is supposed to be holding up our commodities export boom. Our big banks have low exposure to the US dud mortgages and have strong asset bases.

On the negative side, State governments have actual and planned cash budget deficits---particularly NSW. Japan still strongly beats China as our biggest export market and Japan appears to be at the start of a recession. Even though we don't have the USA-style dud mortgage situation, we have a housing price bubble. Private household debt is at massively high historic levels. We all owe a lot of money!

On balance, it's hard to conceive that Australia will avoid the impact of the global financial collapse. Because of our stronger national position we appear to have a stay before the global impact hits us. But reports are already in which indicate that housing prices are heading south in western Sydney, and the Gold Coast is in trouble. Major investment projects can't get finance and are being put on hold. This month, Australia's unemployment increased. Bad news is unfolding fast!

It would be wise to assume that 2009 will be tough! Businesses will go bust! If this is the case, how do you prepare for it?

Independent contractors/small businesses and recessions
First, understand how a recession can affect you. Here's the pessimistic picture. There are two major processes during a normal downturn:
  • Steady, progressive reduction in your income. At first, you'll think it's temporary, but then it keeps dropping and, if it's a bad downturn, income will drop to low levels you may not have thought possible.
  • Sudden bankruptcy of a client who owes you money.
Whether you run a shop, are a subbie in the construction sector, have a franchise business or are an IT or other contractor/consultant, for example, either or both of these processes can hit you.

There is a real third prospect which, if it occurs, will mean really bad times.
  • This is a credit crunch and it last happened in Australia in the 1960s. Few people have a living memory of this. It means that if you go to the bank for a loan, they literally don't have the money to lend you, even if they wanted to. There are some early signs that this is occurring. If it becomes truly bad, banks may require you to reduce your existing loan, even if you don't have the money to pay them back.
What to do?
When you are in business for yourself, your business and personal life become intertwined. So the guidelines for independent contractors and small businesses differ somewhat from those for large businesses. There are some simple business and personal rules to consider:
  • Don't panic: Stay focused on your core business. Look after your clients. Do a really good job of servicing people.
  • Invoice promptly: Cash is king! Make sure you issue bills and invoices quickly and regularly.
  • No credit: A client that doesn't pay you is not a client, but a debt. You're not a bank. Don't let people use you as a bank and a source of cheap loans. Unfortunately, this means knowing when to walk away from a client who doesn't pay you. This is frequently hard---particularly when the client might be a friend. But you'll look after your friendship more if you ensure you are paid on time.
  • Pay your bills quickly: Some people think it's smart business to fund your business by using other peoples' money and paying bills slowly. In a recession this makes you vulnerable to bankruptcy. Paying bills on time simplifies your administration, gives you a clearer understanding of your financial situation and helps you confront reality.
  • Manage your loans: Wherever possible, reduce your loans. The less debt you have, the safer you are.
  • Manage your expenses: Be cautious and prudent with both your business and personal expenses.
What to do if you're in financial trouble?
As indicated above, trouble can come slowly (steady drop in income) or suddenly (client becomes bankrupt). The first impact, which most people are usually slow to recognize, is the psychological and emotional trauma it causes. This is natural and should be expected. But it's not easy. Financial problems knock around your sense of self-worth and your relationships with the people closest to you. Consider these guidelines:
  • Confront reality early: Don't run from the problem but assess it as quickly and honestly as you can. Understanding the truth of your financial situation is the first step to finding solutions. Seek help to do this if necessary.
  • Be upfront with the people to whom you owe money: The earlier you talk to your bank, the ATO and anyone else to whom you owe money, the better. But be prepared. Go to them with your honest assessment of your situation and seek their help and guidance. If they see that you are being upfront, realistic and honest, this raises their confidence in you. They will be more likely to assist.
  • Be aware of your emotions: You will have emotional and psychological reactions, even if these don't seem obvious. If you can work these through independently, that's good. But talking with confidants and family is usually essential. Sometimes professional psychologists can help you enormously to shift things into perspective if this is needed. Be alert to the potential for depression. Organisations such as Beyond Blue can help. The reality is that, particularly in hard economic times, personal financial problems are not a reflection on your self-worth but an outcome of circumstances
  • Prepare for the long haul: Economic downturns usually have a 1-2 year cycle. This downturn displays signs that it could last longer. Better times will return. In a downturn you can lay the foundations for better financial times.
  • Personal priorities: Downturns often cause us to reassess our life priorities. Family, friends and relationships will sustain you through financial hard times.

Would you like to contribute to the discussion? Have you had personal experiences you can share? E-mail your thoughts to us at: discussarticle@contractworld.com.au.