You Survived the 100 Year Flood – Now What?
5 Trillion Reasons to expect good times in 2011!
Those of you reading this article have something to tell your children and grandchildren about; you survived the worst economic meltdown since the Great Depression of 1929 – 1933. If the Great Recession was this bad one doesn’t want to think about what 1932 must have been like for the 135 million Americans.
During the past two and a half years, most companies experienced significant declines in sales, often for the first time in their operational history, and found themselves locked out of the credit markets just when they needed access to working capital the most. The result was a dedication to cost reduction (people, space, working capital, new products) unlike anything seen in many years. All but one of my clients adjusted to the new economic reality, survived the downturn, emerged with lower breakevens, tighter client focus and higher profits.
The profits, however, were generally not used to fund growth. Growth here is defined as investments in people, systems, infrastructure and new products. Profits were used to pay down debt, reduce accounts payable and build cash reserves. Anything but fund growth! Most folks exited 2010 looking in their rear view mirror and one can’t really blame them at all.
So, why should things change in 2011? The primary reasons are as follows:
1. Don’t fight the Fed!
An old truism but one that still holds. The Fed has pumped over $4 trillion into the U.S. economy over the last 30 months and by this summer will have put another $1 trillion for a total of $5 trillion to help offset the liquidity crisis, build up bank equity and keep the housing market alive. That $5 trillion will eventually have a positive impact on the economy, consumer sentiment and, most importantly, new jobs. We can see that this started, albeit slowly, in 2010 and will gain momentum in 2011.
2. Banks are lending again!
Banks have had their first profitable year in 2010 since 2007 and have in the majority repaid the funds borrowed from the Federal Government in 2008/09. Banks are now awash in cash and that cash must eventually get lent out to customers or their return on investment will drop and, along with it, the banks stock price. In 2010, commercial lending bottomed out and started back up again and the trend will accelerate in 2011.
3. $2 trillion in cash in the S&P 1000!
The largest 1000 public companies in the U.S. have accumulated an almost unfathomable $2 trillion in cash and cash equivalents. That is a lot of cash and, unless these companies intend to become banks themselves, must be put to work building sales and profits in 2011.
The goal for businesses of all size is to get ready for growth, pick their targets carefully and follow the number one rule in business; Raise the Money First. All growth uses cash (new accounts receivable, more inventory, new hires, etc.) so get your company’s financial foundation in order before you grow. If not then you’ll find the company showing increased profits but you without the cash flow to cover payroll. Money first – top line growth second.
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