Your community lender avoided the home mortgage problems of the big guys. They crow about it. But the alternative may be just as bad. If they get into financial distress on other assets they do have, your loan and livelihood is at risk. Does your CFO or accountant have a solid take on your lender? Are you prepared to consider a new relationship on your terms?
Small and mid-sized banks, those with assets less then $25 billion, have to a great extent been crowded out of the home mortgage meltdown. But not for trying. These banks were the natural home mortgage provider (taking over after the S&L meltdown of the 80's); they sat in their market, knowing the good neighborhoods and bad. The business became a big game however, where originators, many non-bankers, took over the lending portion, loosened credit standards resulting in a greatly expanded subprime home loan market. These mortgages were then sold to large administrators who managed and serviced the loans, but then packaged the assets to sell into mortgage linked investments. This new system drove out the smaller banks and forced them to seek other profitable assets.
For many banks this took the form of commercial construction and mortgage lending, as well as lending directly to home builders. These real estate assets are once removed from the direct mortgage problem the big guys have, but are now coming to roost. Signs are ominous according to the Comptroller of the Currency.
There are no hard and fast rules, but it is certainly time to examine your lender, and decide if their problems could cause them to pull the plug on your loan. Open up the dialog with those other lenders that knock on your door. Have your financial expert take a look before it's too late.
Thursday, February 28, 2008
Tuesday, February 26, 2008
Judgments - Lets Get Down to Brass Tacks
In Findings, John Tierney explores the human decision making process in the light of a new book titled "Predictably Irrational" by Dan Ariely. Tierney writes about a "leave behind your worst options" situation from ancient China:
This approach to making decisive decisions can help some stuck business owners. If we think about how a CEO makes financial decisions, it's about eliminating options to get the right one. We can apply this approach to the not-so-clear non-financial decisions.
As described by Tierney, rational subjects at MIT prove that we as humans hold on to options longer than we should. Why? Because it is painful to let go of an option, a possibility. But there are very real costs to hanging on in terms of lost focus and poor performance.
How should a business owner apply this theory. In finance theory, a rational numeric judgment is used to eliminate options. When funds are available, managers perform a Return on Investment ("ROI") analysis to eliminate poor options and determine the best one.
Return on Investment looks at the pluses and minuses of various options in monetary terms. If you have several options, you consider the expected net cash return for each to find the highest expected return. If project 1 is to purchase a new lathe with an expected ROI of 18%, project 2 is to expand the building with an ROI of 14%, and project 3 is to do nothing or invest the money at 8%, then projects 2 and 3 should be eliminated for project 1, the action with the highest return, and eliminate the others.
What about other decisions that are not subject to ROI analysis? What's the cost of firing someone versus keeping them on for awhile? What is the cost of hiring someone now or waiting until markets turn? What is the real cost of visiting your best client once a quarter versus once a month?
Many of these actions cannot be reduced to a monetary return, but you can eliminate options. If you are considering 5 good candidates for a position, think about the most important considerations and see if you can eliminate 2 and continue with the best 3. If you have limited funds and 5 businesses to support, consider whether all are strategic, if not sell the outliers. An easy rule of thumb is that strategic judgments should be made sooner rather than later. A good book on successful decision makers can be found here.
"Xiang Yu was a Chinese general in the third century B.C. who took his troops across the Yangtze River into enemy territory and performed an experiment in decision making. He crushed his troops’ cooking pots and burned their ships.He explained this was to focus them on moving forward — a motivational speech that was not appreciated by many of the soldiers watching their retreat option go up in flames. But General Xiang Yu would be vindicated, both on the battlefield and in the annals of social science research."
This approach to making decisive decisions can help some stuck business owners. If we think about how a CEO makes financial decisions, it's about eliminating options to get the right one. We can apply this approach to the not-so-clear non-financial decisions.
As described by Tierney, rational subjects at MIT prove that we as humans hold on to options longer than we should. Why? Because it is painful to let go of an option, a possibility. But there are very real costs to hanging on in terms of lost focus and poor performance.
How should a business owner apply this theory. In finance theory, a rational numeric judgment is used to eliminate options. When funds are available, managers perform a Return on Investment ("ROI") analysis to eliminate poor options and determine the best one.
Return on Investment looks at the pluses and minuses of various options in monetary terms. If you have several options, you consider the expected net cash return for each to find the highest expected return. If project 1 is to purchase a new lathe with an expected ROI of 18%, project 2 is to expand the building with an ROI of 14%, and project 3 is to do nothing or invest the money at 8%, then projects 2 and 3 should be eliminated for project 1, the action with the highest return, and eliminate the others.
What about other decisions that are not subject to ROI analysis? What's the cost of firing someone versus keeping them on for awhile? What is the cost of hiring someone now or waiting until markets turn? What is the real cost of visiting your best client once a quarter versus once a month?
Many of these actions cannot be reduced to a monetary return, but you can eliminate options. If you are considering 5 good candidates for a position, think about the most important considerations and see if you can eliminate 2 and continue with the best 3. If you have limited funds and 5 businesses to support, consider whether all are strategic, if not sell the outliers. An easy rule of thumb is that strategic judgments should be made sooner rather than later. A good book on successful decision makers can be found here.
Monday, February 25, 2008
Doing it All Online
Microsoft recently joined Yahoo in another battle for control. It has stepped up its online solutions platform for small business. Microsoft recently upgraded Office Live Small Business "OLSB" (poorly named, it has little to do with the MS Office product set) to give small businesses online solutions they can put up without needing outside technical help.
According to the National Federation of Independent Businesses, only 35% of small businesses have a website, half have a high speed connection, and only 57% use the internet for business purposes. Microsoft and Yahoo are trying to bridge this gap. Microsoft's OLSB provides the following:
This offering is a 2.0 version, much better than the original, and presumably it will keep getting better. Yahoo's services are similar, and I would be surprised if we don't see a few more entrants (Google, etc.).
If you've been waiting to go, market, or sell online, because of cost or complexity, these solutions make it much easier and cost efficient. The minimum hurdle has been lowered significantly.
According to the National Federation of Independent Businesses, only 35% of small businesses have a website, half have a high speed connection, and only 57% use the internet for business purposes. Microsoft and Yahoo are trying to bridge this gap. Microsoft's OLSB provides the following:
- A private domain website with 100 email accounts and 5G storage (free for the first year)
- A contact manager with Outlook synchronization
- A document manager for version control, sharing, and rights management.
- Online workspaces and a Project Manager solution.
- It even works with the Firefox browser (so even Mac users can apply)!!
This offering is a 2.0 version, much better than the original, and presumably it will keep getting better. Yahoo's services are similar, and I would be surprised if we don't see a few more entrants (Google, etc.).
If you've been waiting to go, market, or sell online, because of cost or complexity, these solutions make it much easier and cost efficient. The minimum hurdle has been lowered significantly.
Thursday, February 21, 2008
Stagflation and Recession, Neither a Good Day
Ooh, the stagflation concept has come up now, remember the late 70's or early 80's? No, you missed some bad times. The problem is it's hard to keep up with inflation now.
Last year 3 month LIBOR was at 5.36%, and the CPI from Jan 2007 to Jan 2008 was high at 4.3%, but you could still make money. Now with inflation looking like it will be at the same rate, and LIBOR at 3.09%, the investor is in a negative situation.
It is helpful for the overall economy that the Fed has the reduced the interest rates, but for investors and buyers of small company products, they have less money. A negative real interest rate is bad for the investor.
I would be worried, very worried now, if I had products or solutions to sell, look for a period of suffering - if you can keep raising prices to keep up with inflation it won't be so bad - but more likely the demand curve will fall off and we head for something worse, a recession.
Last year 3 month LIBOR was at 5.36%, and the CPI from Jan 2007 to Jan 2008 was high at 4.3%, but you could still make money. Now with inflation looking like it will be at the same rate, and LIBOR at 3.09%, the investor is in a negative situation.
It is helpful for the overall economy that the Fed has the reduced the interest rates, but for investors and buyers of small company products, they have less money. A negative real interest rate is bad for the investor.
I would be worried, very worried now, if I had products or solutions to sell, look for a period of suffering - if you can keep raising prices to keep up with inflation it won't be so bad - but more likely the demand curve will fall off and we head for something worse, a recession.
Monday, February 18, 2008
$168 Billion Stimulus Bill Gives Direct Assistance to Small Businesses
Last week's $168 billion stimulus bill signing did garner some good news for small businesses, witness the NY Times post by Mickey Meece. He notes that the bill gives two gifts to small businesses,
1) A bonus depreciation increase of 50% of the cost of a tangible asset for immediate expensing, (an overall tax savings estimated to cost the government close to $44 billion over the next two years); and
2) An increase in the amount allowed for Section 179 (movable assets) expensing to $250,000 for 2008, up from $128,000.
These inclusions will encourage investment in both fixed and movable assets. Limitations are in place for SUV's among other assets, so be sure to consult your accountant for particulars.
At the end of the day, this will induce increased spending where the spender is seeking to reduce their overall tax liability.
1) A bonus depreciation increase of 50% of the cost of a tangible asset for immediate expensing, (an overall tax savings estimated to cost the government close to $44 billion over the next two years); and
2) An increase in the amount allowed for Section 179 (movable assets) expensing to $250,000 for 2008, up from $128,000.
These inclusions will encourage investment in both fixed and movable assets. Limitations are in place for SUV's among other assets, so be sure to consult your accountant for particulars.
At the end of the day, this will induce increased spending where the spender is seeking to reduce their overall tax liability.
Thursday, February 14, 2008
Lending Money to Employees -- a Good Thing?
The Inc.com blog Boss School throws out an interesting thought on lending your employees money. In the December 18, 2007 post entitled "This Company is not a Bank -- Or Is It?" the author suggests that it is good employee relations for the boss to lend valued employees emergency money. His example is one of an hourly employee driver who gets in trouble with the DMV. He lends the driver $5,200 to pay off the fines.
Where would this behavior fall under the concept of best-practices HR? Further, if this is a good practice, how does it fit (where, for who, in what situation, etc.)?
Under the broadest definition of employee rewards for continuing performance, we find:
-- monetary compensation, or wages and bonuses (current or near current)
-- risk based compensation, or options, phantom stock (equity or near equity schemes)
-- retirement benefit plans, like 401Ks, defined benefit plans
-- health plans, including doctor, hospital, and dental coverage
-- other benefits (vacation, group life and disability insurance, education assistance, etc.)
source: The Employee Benefit Research Institute.
I'm going to say that since the lending CEO or CFO makes an employee loan with the full intention to get back the money, and get it back promptly at that, then this is an "other benefit", akin to subsidizing a mortgage or MBA. As such it's a fourth or fifth level offering, crucial to certain employees, meaningless to others. The likeliest users would be hourly employees, and younger ones who have fewer resources amassed.
Would lending your employees money fall under a must-have offering? Certainly, especially in a small business where you have an employee base with above characteristics. I wouldn't consider it a higher target than offering group health care or some variation thereof, but many workers might value this benefit more than a 401K - where the dollars seem way far off. Afterall, you value, know, and trust these folks, why not help in a pinch?
Good reason to hold a wad of hundys in the back pocket or secret drawer, yes indeed.
Where would this behavior fall under the concept of best-practices HR? Further, if this is a good practice, how does it fit (where, for who, in what situation, etc.)?
Under the broadest definition of employee rewards for continuing performance, we find:
-- monetary compensation, or wages and bonuses (current or near current)
-- risk based compensation, or options, phantom stock (equity or near equity schemes)
-- retirement benefit plans, like 401Ks, defined benefit plans
-- health plans, including doctor, hospital, and dental coverage
-- other benefits (vacation, group life and disability insurance, education assistance, etc.)
source: The Employee Benefit Research Institute.
I'm going to say that since the lending CEO or CFO makes an employee loan with the full intention to get back the money, and get it back promptly at that, then this is an "other benefit", akin to subsidizing a mortgage or MBA. As such it's a fourth or fifth level offering, crucial to certain employees, meaningless to others. The likeliest users would be hourly employees, and younger ones who have fewer resources amassed.
Would lending your employees money fall under a must-have offering? Certainly, especially in a small business where you have an employee base with above characteristics. I wouldn't consider it a higher target than offering group health care or some variation thereof, but many workers might value this benefit more than a 401K - where the dollars seem way far off. Afterall, you value, know, and trust these folks, why not help in a pinch?
Good reason to hold a wad of hundys in the back pocket or secret drawer, yes indeed.
Monday, February 11, 2008
The Fight for Immigration Reform
Thinking about the differences between big business and small businesses on the immigration issue (the latter against and the former for "amnesty"), it comes down to naked economic self interest. An examination of their membership and the economic position relating to immigration tell the story.
While the size of the immigration issue is really tied to the 12 million or so estimated contributing illegal workers, it would seem that all businesses need or are currently using these workers. But that view would be wrong, according to the NSBA (National Small Business Association). A 2007 survey of members revealed that a lack of qualified workers polled at 23%, or the 6th highest concern on the challenges measure, behind taxes and health care reform among others. Why is this issue of qualified workers so low?? Partly because small businesses hire immigrants at a much lower rate than their larger competitors. One measure comes from the NFIB (National Federation of Independent Business) in it's 2006 Member survey on Immigration. One finding was that a mere, "Seven percent of NFIB members have hired one or more guest workers within the last two years." The resultant positions by the NSBA and NFIB on immigration emphasize rational changes that don't impose additional expense on employers. Considerations of amnesty are discouraged.
On the contrary, if small businesses aren't hiring these folks, then it must be that large businesses are the ones. And as the economist community would say, these folks may be taking a small percentage of American jobs at the very low end, but on the whole they are contributing greatly to the American economy. Because the large business community needs these workers and needs them to stay, the US Chamber of Commerce supports immigration reform including, "...providing a way to earn legal status for undocumented workers who have been supporting our economy for the last decade or more." Notice no mention of amnesty, but that's what it would be.
While the size of the immigration issue is really tied to the 12 million or so estimated contributing illegal workers, it would seem that all businesses need or are currently using these workers. But that view would be wrong, according to the NSBA (National Small Business Association). A 2007 survey of members revealed that a lack of qualified workers polled at 23%, or the 6th highest concern on the challenges measure, behind taxes and health care reform among others. Why is this issue of qualified workers so low?? Partly because small businesses hire immigrants at a much lower rate than their larger competitors. One measure comes from the NFIB (National Federation of Independent Business) in it's 2006 Member survey on Immigration. One finding was that a mere, "Seven percent of NFIB members have hired one or more guest workers within the last two years." The resultant positions by the NSBA and NFIB on immigration emphasize rational changes that don't impose additional expense on employers. Considerations of amnesty are discouraged.
On the contrary, if small businesses aren't hiring these folks, then it must be that large businesses are the ones. And as the economist community would say, these folks may be taking a small percentage of American jobs at the very low end, but on the whole they are contributing greatly to the American economy. Because the large business community needs these workers and needs them to stay, the US Chamber of Commerce supports immigration reform including, "...providing a way to earn legal status for undocumented workers who have been supporting our economy for the last decade or more." Notice no mention of amnesty, but that's what it would be.
Thursday, February 7, 2008
Educated Professions Make the Most Profitable Businesses
It should come as no surprise that the most profitable small businesses include professional services firms including Accountants, Dentists, and Legal services. So says Maureen Farrell @ Forbes.com in a January 18 article entitled "The Most and Least Profitable Businesses to Start" (look for the article at lower left). Also high on the profitability list, Specialized Health services, Industrial and Graphic designers, and Insurance Brokers. These high performers were drawn from a list of 100,000 private business, most with less than $10 million of revenue per year. The pre-tax profit margins within this group ranged from a high of 25% to a low of 13%.
The worst performing businesses included commodity providers like bakeries, beverage manufacturers, and hotels. Their margins ranged from a low of -7.2% to 0.12%.
Economies of scale do come into play, that is covering overhead becomes easier once revenues clear the $3 million level, and further still over $10 million.
Interestingly, she writes that the profitability characteristics of these business groups tend to hold throughout the globe. Ergo education is the key to higher profitability. It makes for some deep strategic thinking when investing your time and money in a new or existing business, as bankers and CFO's can well attest.
The worst performing businesses included commodity providers like bakeries, beverage manufacturers, and hotels. Their margins ranged from a low of -7.2% to 0.12%.
Economies of scale do come into play, that is covering overhead becomes easier once revenues clear the $3 million level, and further still over $10 million.
Interestingly, she writes that the profitability characteristics of these business groups tend to hold throughout the globe. Ergo education is the key to higher profitability. It makes for some deep strategic thinking when investing your time and money in a new or existing business, as bankers and CFO's can well attest.
Tuesday, February 5, 2008
Small businesses suffering under the current healthcare system
While large firms (those with 200 or more employees) unanimously provide health benefits to employees, not so for smaller companies. The reason is cost. As a result, it is time for small firms to add their voice to change the system.
According to the annual Kaiser Health Survey for 2007 (available at Kaiser Family Foundation) 99% of large firms provide coverage, and of those 95% cover at least 50% of the premium cost for families. With small firms (3-199 employees) coverage is provided by only 59% of the firms, and for those that do provide coverage they only cover 63% of premiums. Why is this discrepancy happening?? Cost increases are the obvious reason. From the Kaiser Survey we see that since the Spring of 2000 health premiums have risen more than 80% in total, or more than 10% annually, well out-pacing inflation and employee earnings.
What is this doing to small businesses? It is forcing them to drop coverage in increasing numbers. It is also pushing creative solutions including funding health costs outside of traditional programs. In many cases employees are forced into individual high deductible plans, which are fine for healthy consumers, but devastating for health challenged workers. In either event, these issues help make these firms look unattractive to new workers when compared to larger firms.
Would a national health plan fix this discrepancy, yes, but only if the overall costs per capita are the same or lower. More study is needed, but it looks like small businesses should be looking for a change in policy compared to their larger competitors.
As I have argued before, we cannot keep paying the increasing costs of the broken US health care system, and we can now see that it's finally time for small companies break with the US Chamber of Commerce, which advocates augmenting the current system, and add their voice to the Physicians for a National Health Program.
According to the annual Kaiser Health Survey for 2007 (available at Kaiser Family Foundation) 99% of large firms provide coverage, and of those 95% cover at least 50% of the premium cost for families. With small firms (3-199 employees) coverage is provided by only 59% of the firms, and for those that do provide coverage they only cover 63% of premiums. Why is this discrepancy happening?? Cost increases are the obvious reason. From the Kaiser Survey we see that since the Spring of 2000 health premiums have risen more than 80% in total, or more than 10% annually, well out-pacing inflation and employee earnings.
What is this doing to small businesses? It is forcing them to drop coverage in increasing numbers. It is also pushing creative solutions including funding health costs outside of traditional programs. In many cases employees are forced into individual high deductible plans, which are fine for healthy consumers, but devastating for health challenged workers. In either event, these issues help make these firms look unattractive to new workers when compared to larger firms.
Would a national health plan fix this discrepancy, yes, but only if the overall costs per capita are the same or lower. More study is needed, but it looks like small businesses should be looking for a change in policy compared to their larger competitors.
As I have argued before, we cannot keep paying the increasing costs of the broken US health care system, and we can now see that it's finally time for small companies break with the US Chamber of Commerce, which advocates augmenting the current system, and add their voice to the Physicians for a National Health Program.
Monday, February 4, 2008
Bush not a friend to Small Business
The figures from the Bush 2009 budget are stark; despite a solid reputation as a friend to small businesses, the figures say otherwise.
As the budget describes it, discretionary spending from 2001-2009 (the latter year as proposed) increased by an annual average rate of 5.5%, well out-pacing inflation which has averaged 2.7% since 2001, for a total increase of 53.4% over the period.
Meanwhile, the Small Business Administration budget has declined by 3.9% annually, or a full 27.0% over that time. It was the biggest percentage decline of any Agency.
Now, I get the free market and all, big fan, and the Administration's cuts at Labor and the EPA were not a surprise, but where is the love for small business, got to find your success on your own I guess. While the big tuna's like Agriculture continue to increase and bring in big bucks, not to mention the big cahuna Defence, the SBA is on it's own.
This will not change much this year, but stay tuned for what the Dems will do in this final Bush year to set things up for the new guy/gal whoever that might be.
As the budget describes it, discretionary spending from 2001-2009 (the latter year as proposed) increased by an annual average rate of 5.5%, well out-pacing inflation which has averaged 2.7% since 2001, for a total increase of 53.4% over the period.
Meanwhile, the Small Business Administration budget has declined by 3.9% annually, or a full 27.0% over that time. It was the biggest percentage decline of any Agency.
Now, I get the free market and all, big fan, and the Administration's cuts at Labor and the EPA were not a surprise, but where is the love for small business, got to find your success on your own I guess. While the big tuna's like Agriculture continue to increase and bring in big bucks, not to mention the big cahuna Defence, the SBA is on it's own.
This will not change much this year, but stay tuned for what the Dems will do in this final Bush year to set things up for the new guy/gal whoever that might be.
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