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Planning for doomsday – a blog by Philip King

8 May 2014

It didn’t receive a huge amount of media coverage but The Times reported last week that the Bank of England had asked seven large banks and the Nationwide Building Society to check whether they could withstand a doomsday scenario. In this scenario, the number of unemployed soars to almost four million (12%), Bank of England base rate goes up eightfold to 4%, house prices would collapse by 35%, while commercial property values and the pound would sink by 30%. I found it slightly worrying that Mark Carney felt the need to point out that the scenario of 12 per cent unemployment was not a forecast and was “highly unlikely”.

These stress tests are part of a capital adequacy exercise that will be applied before the end of the year. Banks failing them may have to raise new capital or take other measures.

Applying ‘what if’ scenarios is always useful in predicting the impact of future negative events and preparing to deal with them effectively and this set me thinking about smaller businesses. We often see organisations that fail because they don’t have sufficient cashflow to survive, or who suffer at the hands of a single large customer which imposes unfair contract terms. Expanding too quickly (good old overtrading in credit management terminology), or being over-reliant on one customer for a significant proportion of turnover are common pitfalls seen in failed businesses. Hindsight is a wonderful thing and, all too often, it shows what could have been avoided with a little more forward planning.

While this blog is being published I’ll be speaking at the Annual Conference of the Insolvency Practitioners Association where I’m particularly looking forward to meeting the BBC’s Steph McGovern who’ll be speaking about the economic outlook. Also attending will be many insolvency practitioners who will have war stories and experiences of companies that have failed to adequately consider the impact of accepting more and more business from one customer, or under-estimated the cash necessary for expansion. And they’ll have seen the consequences on people’s lives and well-being.

What if every business thought a bit more about ‘what if’ before reaching business critical decisions? How much misery might be avoided?

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