Surviving The Economic Crunch - - What a CFO Can Offer?

Picking up a newspaper or turning on the TV these days almost inevitably means hearing about the latest economic woes that so many of our world economies are facing. We know that our governments are putting efforts into alleviating the malaise but the likelihood is that the current recession will go on for some time yet. Let's look, then, at what this means for us and what we can do to ensure that we survive the economic crunch.

Understanding the economic crunch and its impacts:

The most devastating impact of the recent economic mess has been those mortgage holders who have been unable to meet their monthly mortgage payments and have subsequently lost their homes to the banks. Initially, the phrase sub-prime lending' was bandied around, with the view being that most of the foreclosures had come about because banks had given mortgages to people who were unsuitable for a mortgage or at an amount that was always likely to be stretching their finances too far. Losing your home must be a devastating occurrence and with job redundancies now gathering pace the danger is that this threat could extend to many people who in no way could be described as sub-prime.

The sub-prime mortgage crisis has had another consequence too. Banks have been increasingly unwilling to lend to each other, with the result that the funds needed to resource mortgages have dried up. This has been called the Credit Crunch and it means that it has become increasingly difficult for people to get a new mortgage. The result has been that the property markets have stagnated and house prices have dropped. Banks have also tightened their lending criteria so that you need an even better credit score than usual to qualify for a loan, mortgage or credit card.

The additional burden that consumers have been faced with has been increases in fuel and food prices. Such cost rises have hit people's budgets and make it more difficult to avoid going overdrawn or becoming more reliant on credit card debt. Inflation also reduces the value of the money you've carefully put away into a savings account, which is depressing at a time when share prices have also been hammered. Indeed, some shareholders have suffered large falls in the value of their stock portfolios as banks and other companies profits have been hit and, in some cases, have had to resort to Rights Issues to try to stay afloat.

What you can do to survive the economic crunch:

The biggest threats, from a severe economic downturn, include the possibility of being made redundant, the threat of defaulting on your mortgage, and the challenge of coping with rising costs. Let's look then at some of the things that you can do to mitigate these factors.

Minimising the threat of losing your job:

This is probably the most scary aspect of recessions. We are already hearing reports of redundancies and it is natural that many of us start to worry about the security of our own jobs. To a large extent, you can't influence whether or not your company feels it necessary to lay off staff but there are some things that you can do to increase your worth to the company. These include making sure that you have a good attendance record, and that you are delivering on your projects. Additionally, though, you might also benefit from undertaking training that will make you more indispensable or which will make you more attractive to potential other employers.

Budgeting:

Making sure that you only spend what you can afford is important at all times but especially so during an economic downturn. A good starting point is to look at your last three months' bank statements to see what you are currently spending your money on. It is usually possible to make quite significant cost savings by cutting out unnecessary expenses/luxuries and this can help you overcome hardships such as rising fuel and food costs.

Many consumers are switching to low cost supermarkets, or are buying own brand products rather than branded products, as a way of achieving the necessary cost savings. Another thing that can help is to make things last for longer. As an example of this, you can use one tea bag to make two cups of tea.

Savings contingency fund:

The aim of budgeting should be to ensure that you have some disposable income at the end of each month, after your regular expenses have been accounted for. Putting that disposable income into a high interest savings account will ensure that you start to earn interest on that money. It will also mean that you have a contingency fund available should you suddenly be faced with a need to meet unexpected costs. Financial advisers usually recommend that people maintain about three months' worth of your salary in a contingency fund. The idea is that if you were to lose your job, this would give you some breathing space to find a new job.

Reduce/eliminate debt:

Paying off credit card, overdraft or loan debt can be a significant drain on your finances and (with credit cards and overdrafts) there's the danger that interest rates could rise, hitting you with higher costs. Therefore, paying off (or at least reducing) such debt will be a significant help in recession-proofing your finances.

Remember, too, that if you are having difficulties with debt, then you should speak to your bank at an early stage rather than burying your head in the sand.

Look for additional income opportunities:

Writing for Helium is a good example of how you can earn some additional income to supplement your main income source. However, there are lots of ways that you can bring in extra money. Maybe you might want to take on a weekend job, or sell craftwork that you've made or sell stuff that you don't need on ebay. Whilst these may only bring in a little extra money, it may still be very useful in helping you meet your monthly costs.

Make sure you have appropriate insurance (including mortgage insurance):
The biggest risk to your mortgages house is probably the threat of you being made redundant. Therefore, it's crucial that you have insurance in place to protect you should that eventuality happen. During the good times insurance may seem like an unnecessary expense but it's when things go wrong that its value really shines through. Other types of insurance that may be important to have include critical illness insurance and life insurance.

Summary:

Hopefully the current economic malaise won't be too prolonged. There is no doubt, however, that its effects are already being felt by many people and that we are in for a further period of pain. We may feel that we are helpless when faced with this macro economic train wreck, however we do have the opportunity to be proactive and do things that will help safeguard us from the worst effects of the credit crunch. The financial principles that we use to do so are ones that we should be familiar with anyway but their importance just becomes more pronounced than they were during the good times.