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Recovering From Recession 23 June 2010

Recent changes to UK growth forecasts issued by the Office for Budget Responsibility ("OBR") suggest that the recovery from recession will be much slower than the previous government predicted.  Forecast growth of 2.6% for next year is 0.65% less than previously claimed, and probably of more concern is that the OBR report suggested that the previous government significantly overestimated growth in the next four years.  OBR forecast growth is 2.6% next year, rising to 2.8% in 2012 and 2013 (previously 3.5%) and then reducing to 2.6% in 2014. The "Emergency" Budget on 22 June subsequently revised these UK growth estimates to 1.2% this year, 2.3% next year, 2.8% in 2012, 2.9% in 2013 and 2.7% in both 2014 and 2015.

Generally, recovery remains uncertain, unpredictable and subject to many threats including major fiscal tightening and the Eurozone debt crisis.

In Scotland, growth is expected to be lower and also to lag the UK figures, principally as a result of the weak manufacturing base, thereby reducing the ability for export led growth, and a larger public sector.  Capital investment has declined, as have construction and commercial development.

Whilst UK interest rates have been held at 0.5% for a record 15th month in a row (since March 2009) and are expected to remain at such levels for at least the rest of this year, latest jobless figures suggest that Scotland is more vulnerable to recession that the rest of the UK, with another rise in Scottish unemployment.

Peter Sargent, President or R3, stated that "The country went into recession sharply but it will come out of it through a long slow drag".

Indeed, it is generally accepted that the worst time for corporate failures may be during the recovery phase, and this may be exacerbated this time due to the low interest rate environment and the HMRC "Time-to-Pay" initiative which has allowed many struggling companies to survive the recession.

As growth is experienced, many companies may require additional working capital, which may not be available or may have been left too late to look for.

First quarter insolvency statistics for Scotland appear to bear this out with an increase of 29% over the previous quarter, a trend that many experts expect to continue.

Media commentary suggests that banks are not lending which could also have an impact.  Whilst this may be true to a certain extent, the experience of CR Corporate Solutions is that renewal and extension of facilities is generally received if the company has a well thought out strategy and the management team to implement it.  Why should the banks lend to poor management teams with no strategy and who intend to muddle on as before?

The key to success in the current environment appears to be developing an effective strategy that focuses on the company's key strengths and ensures that there are adequate resources to implement the strategy – focusing in particular on an effective management team, strong financial information and sufficient financial resources.

This may involve restructuring the business (and indeed the business model) to meet changing expectations, adapting to market changes, seizing opportunities, and adopting a proactive and flexible approach.

CR Corporate Solutions provides a range of services to Owner Managed Businesses and their Financial Stakeholders, and is able to assist in all of these areas.  Working together in such a way should produce sustainable long-term improvements in profitability, cash flow and shareholder value.

We would be delighted to have an informal discussion to explore areas where we may be able to assist Owner Managed Businesses in these areas.

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