Who is doing the right thing in this economy?

(Hint: It's not banks!)

Lunch time learnings

Late last week I had lunch with the President and CFO of a mid-market firm. Like many firms in their situation, business is down. They have inventory, expensive inventory, to spare and lots of long-term customers that are placing few big orders.

What have these two executives done about this? First, they pared back their use of third-parties (e.g., consultants, temporaries, etc.). That’s not good news for those workers but it saves the positions of long-time employees. Second, they put everyone, management included, through a 10% pay cut that works as follows: for every 9 days you work, you are asked to not work the 10th. That policy is also preventing layoffs and conserving cash. Third, capital expenditures are being delayed/deferred until business picks up. That conserves cash, too.

And, it’s the last item that really get’s my attention as cash, specifically operating cash, is not flowing down to businesses from banks like it used to flow. This particular firm is still trying to get back to where it was before its old banker melted down (and away) in the financial crisis. Their banker vaporized about a year ago and new bankers are still acting like jerks, doling out capital with an eyedropper but only after businesses do handstands to get it. I won’t recap all of the bad business practices banks are up to today but suffice to say they:

- need new lending processes - need to find ways of asking for documentation the first time and with weeks to spare. Demanding documents within hours of a close is just bad business - will learn that their bad behavior today will adversely affect their brand long-term - aren’t seeing this as an opportunity to win market share

As a corollary, a neighbor of mine just recently re-financed his home. While Barack Obama wants Americans to re-finance their homes, he needs to get the bankers on same page. This neighbor recounted a litany of new documentation requests his banker demanded and, like the business example above, many of these requests came at the last minute.

While I’m sure bankers are still acclimating to new underwriting rules and requirements, they aren’t doing so quickly enough. The consequences of this will be felt for some time throughout our economy as businesses:

- will not make capital expenditures - will only spend money when the scarce new order comes in - will not be able to invest in their future - will not propel the economy forward

There's a certain irony in all of this. The banking industry is largely responsible for this mess and now it's exacerbating the problem but stalling the hopes of recovery.

For the consultants who read this, here is an opportunity for you and your firm to help the surviving banks win business and win the hearts of those who do business with them. What’s stopping you?