Debt, Overhead and Payroll - a word of caution

With retail and hospitality spending on the increase, house prices exploding in advance of the stamp duty deadline and 1 in 5 Brits intending to holiday in amber-zone countries - YES - we have ourselves a boom!

Which means that I'm getting regular questions from clients along the lines of "the economy is expanding and it's raining patients so should I:

• open new surgeries;

• hire more people;

• invest in more equipment/technology?

• extend the building;

• open or buy a second location?"

My counsel is caution.

During my working life (which began in 1970) I have witnessed 7 boom economies, each of which was predictably followed by increasing interest rates and then 7 recessions.

Most people currently in business can remember the banking collapse of 2008 but if you ask them to go back further it gets a bit sketchy.

The benefit of longevity is memory - I can remember 1973, 1979, 1987 and the early 1990's, as well as all the peaks and troughs along the way.

Every boom was celebrated by those who predicted it would last forever and I'm always reminded of two quotes from Sir James Goldsmith:

1. "When the shoe-shine man is buying equities it's time to get out of the market;"

2. "If you can see a bandwagon - it's too late."

Don't get me wrong. I'm not saying "don't take part in the boom" - we can all enjoy a biblical 7 years of plenty and I'm encouraging my clients to get their internal marketing and patient experience systems running at full pelt.

However, one my abiding memories is that, come the "7 years of famine", the businesses that struggle are those who have committed themselves too highly to three categories of expenditure:

• Their Debt is too high as interest rates rise and the cost of servicing that debt eats in to profit and cash flow;

• Their Overheads are too high because they have too much "stuff" to pay for;

• Their Payroll costs are too high because they have too many people.

Debt, Overhead and Payroll - they feed you in a boom and they eat you in a recession.

So please, be careful. Don't avoid expansion but manage that expansion very carefully.

The Bank of England predict boom (and rising interest rates) for the next 2 to 3 years.

Thereafter the inevitable cycle turns. Do not get caught with your financial pants down in 2025.

p.s. The Coach Barrow blog is taking a break as I'll be leaving for Scotland tomorrow and beginning my second "End to End" bike ride on Sunday - John O'Groats to Lands End, Around 950 miles in 13 days with my Sheila Scott. No fund-raising or publicity, just two friends sharing a wonderful experience. I'll be back on Monday 28th June.