Managing Macroeconomic Risk

Yesterday Ben Bernanke’s statements about changing sentiment of the Federal Reserves’ Quantitative Easing program touched off a mini stock market crash. Though you took a solid hit in the value of your investment portfolio and retirement account the changing stance of the Fed will also impact the financial health and business conditions of small and mid-size businesses (SME). The days of near zero interest rates and the massive liquidity infusions by the Fed through Treasury purchase programs are coming to a close. That will effect the availability and the cost of capital for SMEs.

Macroeconomic risks are quickly becoming one of the greatest class of risk factors for SMEs. Credit availability, customer buying power, inflation, supply chain disruption, cyclical and market sector risks are growing in significance and threaten the profitability and financial health of all SMEs and their customers. Unfortunately, some businesses will not be able to surmount the acute challenges posed by these emerging economic risk factors and will find it difficult to continue as a going concern.

A difficult economy presents challenges for all businesses. SME’s require risk assessment tools to help better manage business threats and seize opportunities that fluctuating market conditions produce. Many believe that mitigating macroeconomic risk factors are difficult if not impossible for SMEs to mitigate. After all what can a small business do to immune itself to inflation or spiking interest rates? though it may seem to be an impossible task to shield a business from macroeconomic risks; executives that effectively engage to manage these type of threats Can profit from the opportunities severe market conditions produce.

Sum2’s risk assessment products help SMEs deal with the problem of rising macroeconomic risk factors. Small business managers use our SPOT application to aggregate and score all enterprise risk factors. This helps managers to focus on the most pressing risk factors that ironically have the potential to generate optimal returns on capital employed.

Credit|Redi is a series of assessment applications that help SMEs improve the company’s financial health. As a company’s credit rating improves, access to bank loans and other sources of capital become readily available at more favorable terms to the SME. This is a particularly pressing problem as SME’s have born the brunt of financial distress ignited by the Great Recession. As interest rates rise SMEs borrowing costs will increase placing further stress on profitability and financial health.

It brings us great satisfaction to place world class risk management tools in the hands of small businesses to better manage business threats . The macroeconomic risk module is one of twenty risk assessment modules offered in SPOT.

The effects of rising macroeconomic risk factors will begin to appear in an SME’s operations and target markets potentially stressing the company’s financial health. SPOT potential problems and opportunities before they emerge. SPOT and assess the current business conditions to make adjustments and initiate actions to overcome difficulties and seize opportunities the new business cycle is sure to present.

Sum2 Risk Assessment Applications

Risk: credit, inflation, market, buying power, customer risk, supply chain

Measuring SME Credit Risk

The underlying financial health of Small Mid-Size Enterprises (SME) has always been difficult to determine, hard to identify and its never been more important.

To manage risk in the credit and capital markets it is critical for lenders and credit suppliers to understand the relative financial health of counter-parties, customers and suppliers. Effective credit extension decisions cannot be made without superior analysis generated by forward-looking, unbiased tools.

The credit crisis and recession has devastated small and mid-sized businesses. Getting a bank loan or securing capital from investors is a big challenge for small businesses. Banks have become extremely cautious in lending to small businesses. To be successful in securing credit you’ll have to demonstrate that you are a good credit risk, that your company’s prospects for growth are strong and that your business model is sound.

Why Credit Score is important?The quality of your credit rating and financial health form the basis for decisions other businesses make about you. Managing your business to improve your Credit Score will improve your company’s financial health. A strong Credit Score indicates good financial health and is used by lenders, capital providers, customers and suppliers to determine:

•     How much business credit a supplier will extend to you
•     What interest rates you will pay
•     How much money lending institutions will loan you
•     How your customers view you
•     What your insurance premiums will be
•     The level of potential investor interest

Sum2 utilizes Altman’s Z Score method to determine fundamental financial health ratings.  The Z Score credit rating is valid measure of financial health for any public or privately held corporation. The Z Score rating methodology is a proven credit risk indicator that is widely used by banks, investment managers, Fortune 1000 companies and small to medium sized enterprises to determine and manage risk. Sum2’s clients use the Z Score rating products to determine financial health, remain in compliance with loan covenants, and assess credit worthiness of clients and mission critical suppliers.

Altman’s Z score method examines fundamental financial data derived from a company’s balance sheet and income statements.  A credit rating is generated by the use of ratio analysis that yields valid comparative results regardless of the currency utilized. Working capital, earnings, reinvested earnings and leverage are integrated into a composite credit rating score. The components and standards are similar to those used by traditional lenders. It is an easily understood approach that provides comprehensive financial details not available with the standard agency reports.

Click here to access Sum2’s Z Score Input Template.

Click here to access zip file of sample reports. Palm Corp Z Score Report.

We recommend supplementing the analysis with trade reports from firms like the Credit Management Association (CMA) or Experian and others for their pertinent data and services.Businesses that extend credit can determine cutoff scores needed to qualify for credit as their risk tolerance and economic conditions change. Lower scores and classifications indicate higher probabilities of default.

Credit ratings must include a careful analysis of the income statement, balance sheet, changes in financial position and key metrics along with consideration of trends, economic conditions and other available data.

Credit|Redi is a set of business assessment tools that helps businesses determine credit worthiness.  It is a critical business tool SME’s need to incorporate to better manage and assess credit risk.

More information on how to manage credit risk can be found here: Credit|Redi

ADP Employment Report: Solid Job Growth Gathers Steam

Private-sector employment increased by 217,000 from January to February on a seasonally adjusted basis, according to the latest ADP National Employment Report released today. The estimated change of employment from December 2010 to January 2011 was revised up to 189,000 from the previously reported increase of 187,000. This month’s ADP National Employment Report suggests continued solid growth of nonfarm private employment early in 2011. The recent pattern of rising employment gains since the middle of last year was reinforced by today’s report, as the average gain from December through February (217,000) is well above the average gain over the prior six months (63,000).

The fears of a jobless recovery may be receding but the US economy has a long way to go before pre-recession employment levels are achieved. As we stated previously the economy needs to create over 200,000 jobs per month for 48 consecutive months to achieve pre-recession employment levels. The six month average of 63,000 is still well below the required rate of job creation for a robust recovery to occur.  The Unemployment Rate still exceeds 9%.

The February report is encouraging because it points to an accelerating pace of job creation. The post Christmas season employment surge represents a 30,000 job gain over January’s strong report that triples the six month moving average. The service sector accounted for over 200,000 of the job gains. The manufacturing and goods producing sector combined to create 35,000 jobs. Construction continues to mirror the moribund housing market shedding an additional 9,000 jobs during the month. The construction industry has lost over 2.1 million jobs since its peak in 2008.

The robust recovery in the service sector is welcomed but sustainable economic growth can only be achieved by a robust turn around in the goods producing and manufacturing sectors. Service sector jobs offer lower wages, tend to be highly correlated to retail consumer spending and positions are often transient in nature. Small and Mid-Sized Enterprises (SME) is where the highest concentration of service jobs are created and the employment figures bear that out with SMEs accounting for over 204,000 jobs created during the month of February.

Large businesses added 13,000 jobs during the month of February. The balance sheets of large corporations are strong. The great recession provided large corporates an opportunity to rationalize their business franchise with layoffs, consolidations and prudent cost management. Benign inflation, global presence, outsourcing, low cost of capital and strong equity markets created ideal conditions for profitability and an improved capital structure. The balance sheets of large corporations are flush with $1 trillion in cash and it appears that the large corporates are deploying this capital resource into non-job creating initiatives.

The restructuring of the economy continues. The Federal stimulus program directed massive funds to support fiscally troubled state and local government budgets. The Federal Stimulus Program was a critical factor that help to stabilize local government workforce levels. The expiration of the Federal stimulus program is forcing state and local governments into draconian measures to balance budgets. Government employment levels are being dramatically pared back to maintain fiscal stability. Public service workers unions are under severe pressure to defend employment, compensation and benefits of workers in an increasingly conservative political climate that insists on fiscal conservatism and is highly adverse to any tax increase.

The elimination of government jobs, the expiration of unemployment funds coupled with rising interest rates, energy and commodity prices will drain significant buying power from the economy and create additional headwinds for the recovery.

Macroeconomic Factors

The principal macroeconomic factors confronting the economy are the continued high unemployment rate, weakness in the housing market, tax policy and deepening fiscal crisis of state, local and federal governments. The Tea Party tax rebellion has returned congress to Republican control and will encourage the federal government to pursue fiscally conservative policies that will dramatically cut federal spending and taxes for the small businesses and the middle class. In the short term, spending cuts in federal programs will result in layoffs, and cuts in entitlement programs will remove purchasing power from the demand side of the market. It is believed that the tax cuts to businesses will provide the necessary incentive for SME’s to invest capital surpluses back into the company to stimulate job creation.

The growing uncertainty in the Middle East and North Africa is a significant political risk factor. The expansion of political instability in the Gulf Region particularly Iran, Egypt and Saudi Arabia; a protracted civil war in Libya or a reignited regional conflict involving Israel would have a dramatic impact on oil markets; sparking a rise in commodity prices and interest rates placing additional stress on economic recovery.

Political uncertainty tends to heighten risk aversion in credit markets. The financial rescue of banks with generous capital infusions and accommodating monetary policies from sovereign governments has buttressed the profitability and capital position of banks. Regulatory uncertainty of Basel III, Dodd-Frank, and the continued rationalization of the commercial banking system and continued concern about the quality of credit portfolios continue to curtail availability of credit for SME lending. Governments are encouraging banks to lend more aggressively but banks continue to exercise extreme caution in making loans to financially stressed and capital starved SMEs.

Highlights of the ADP Report for February include:

Private sector employment increased by 217,000

Employment in the service-providing sector rose 202,000

Employment in the goods-producing sector declined 15,000

Employment in the manufacturing sector declined 20,000

Construction employment declined 9,000

Large businesses with 500 or more workers declined 2,000

Medium-size businesses, defined as those with between 50 and 499 workers increased 24,000

Employment among small-size businesses with fewer than 50 workers, increased 21,000

Overview of Numbers

The 202,000 jobs created by the SME sectors represents over 90% of new job creation. Large businesses comprise approximately 20% of the private sector employment and continues to underperform SMEs in post recession job creation. The strong growth of service sector though welcomed continues to mask the under performance of the manufacturing sector. The 11 million manufacturing jobs comprise approximately 10% of the private sector US workforce. The 20 thousand jobs created during February accounted for 10% of new jobs. Considering the severely distressed condition and capacity utilization of the sector and the favorable conditions for export markets and cost of capital the job growth of the sector appears extremely weak. The US economy is still in search of a driver. The automotive manufacturers have returned to profitability due to global sales in Latin America and China with a large portion of the manufacturing done in local oversea markets.

The stock market continues to perform well. The Fed is optimistic that the QE2 initiative will allay bankers credit risk concerns and ease lending restrictions to SMEs. A projected GDP growth rate of 3% appears to be an achievable goal. The danger of a double dip recession is receding but severe geopolitical risk factors continue to keep the possibility alive.

Interest rates have been at historic lows for two years and will begin to notch upward as central bankers continue to manage growth with a mix of inflation and higher costs of capital. The stability of the euro and the EU’s sovereign debt crisis will remain a concern and put upward pressure on interest rates and the dollar.

As the price of commodities and food spikes higher the potential of civil unrest and political instability in emerging markets of Southeast Asia, Africa and Latin America grows. Some even suggest this instability may touch China.

The balance sheets of large corporate entities remain flush with cash. The availability of distressed assets and volatile markets will encourage corporate treasurers to put that capital to work to capitalize on emerging opportunities. The day of the lazy corporate balance sheet is over.

Solutions from Sum2

Credit Redi offers SMEs tools to manage financial health and improve corporate credit rating to attract and minimize the cost of capital. Credit Redi helps SMEs improve credit standing and demonstrate to bankers that you are a good credit risk.

For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.

You Tube Video: John Handy, Hard Work

Risk: unemployment, recession, recovery, SME, political

NFIB Index: Small Business Optimism Improves

The National Federation of Independent Business (NFIB) has just released the Small Business Economic Trends Report for June 2010. The report published since 1973 measures small business sentiment on numerous economic and business factors that confront small businesses.

This months report indicates that small business optimism continues to improve.  The NFIB index rose 1.6 points to 92.2 recording the highest level of the index since September of 2008.

During the month seven of the 10 index components rose, with job creation and capital expenditure plans recording minuscule increases.  The Index rose above the 90 level for the first time in 21 months ending the longest period of negative sentiment in the four decade history of the index.

Though seven of the ten index components rose, small business job creation remains weak.  The  hemorrhaging  of job losses has abated employment opportunities with small businesses is not materializing.  Employment is a critical component of the Index and is understood as an important sign of economic recovery.  During the month small businesses continued to layoff workers registering a negative .5 per respondent.   This records the weakest reading for small business employment for the past three months.  The NFIB Index corroborates employment trends recently reported by ADP’s National Employment Report and the Department of Labor.  The small business sector is not contributing to private sector employment growth.  This is a troubling concern because it is widely understood that small businesses need to be a leading driver for job creation to sustain economic recovery.  As we stated last month, historically small businesses have been the major driver in job creation following recessions.  The poor job creation reading by the index  continues to be a  contra indicator of economic recovery. Small business owners are by nature and temperament optimistic and the report indicates that small businesses are still very cautious about allocation capital for jobs to meet improving business conditions.

Highlights of the Report:

• Jobs:   9% percent of respondents reported unfilled job openings. Over the next three months, 7 % plan to reduce employment and 14 % plan to create new jobs.

• Credit:  32% of respondents looking for financing report difficulties in arranging credit.  13% reported loans harder to get than in their last attempt. Overall, 92% of the owners reported all their credit needs met.

• Profits: 17%of respondents reported higher earnings while 49% of respondents reported a decline in profits.

• Prices:   14% reported raising average selling prices, and 28% reported average price reductions.

• Capital Spending:  A net 20% of respondents planned to make a capital expenditure within the next three months, 5% planned a facilities expansion and a net 8% expect business conditions to improve over the next six months.

• Sales: 23% of all owners reported higher sales while 38% reported lower sales.

Overview of the Report

The NFIB Optimism Index records that small business sentiment and business conditions are improving  but hint that small businesses are not fully participating in a vibrant economic recovery story.  The survey indicates that small businesses remain reluctant to create new jobs.  Until this improves, demand in the larger economy and stimulation drivers for small business growth will remain weak.

Earnings and capital expenditures tend to correlate in the absence of  subdued credit channels.  More businesses are required to self fund expansion initiatives and capital expenditures.  With earnings down small businesses spending will remain weak creating yet another headwind to market demand for goods and services.

As government stimulus programs come to a close it is crucial that small and mid-sized businesses (SME) become a lead driver in the recovery.   Though the NFIB index indicates that business conditions and sentiment is improving the financial health and overall psychology of the sector seems ambivalent to its critical role in economic recovery scenarios.

About the NFIB Index

Components of the Optimism Index include: Labor Markets, Capital Spending, Inventory and Sales, Inflation, Profits and Wages and Credit Markets.  This months survey recorded the responses of 823 NFIB members and concluded May 31.

The NFIB Research Foundation has collected Small Business Economic Trends Data with Quarterly surveys since 1973 and monthly surveys since1986. The sample is drawn from the membership files of the NFIB.

The NFIB Report can be downloaded from the Sum2 website. NFIB Optimism Index

Solutions from Sum2

Sum2 offers risk management and opportunity discovery tools to SME’s.  The Profit|Optimizer helps SME’s manage risk, devise recovery strategies and make better informed capital allocation decisions.

You Tube Video: Gillespie, Rollins Stitt, On the Sunnyside of the Street

Risk: SME, small business, economic recovery, NFIB

ADP Reports Weak Job Growth

ADP has released its National Employment Report for April.   Non-farm private employment increased 32,000 during  the month on a seasonally adjusted basis.   ADP also reported an upward revision of 19,000 jobs for March.  The two consecutive net employment gains reported by ADP indicates that job loss may have bottomed and the slim increase in employment confirms a positive trend is underway.     The massive governmental intervention to recapitalize the banking sector and initiate stimulus programs have stabilized the economy.  The abatement of extreme risk aversion in the credit markets, favorable interest rates, improving consumer sentiment, low inflation and the dramatic rebound in securities markets are all positive growth drivers for the economy.

Highlights of the ADP  report include:

Estimates non-farm private employment in the service-providing sector increased by 50,000.

Employment in the goods-producing sector declined 18,000.

Employment in the manufacturing sector rose for the third consecutive month by 29,000 jobs.

Employment in the construction sector dropped by 49,000.

Large businesses with 500 or more workers  added 14,000 jobs

Medium-size businesses, defined as those with between 50 and 499 workers increased by 17,000.

Employment among small-size businesses with fewer than 50 workers, increased by 1,000 in April.

Employment in the financial services sector dropped 14,000, resulting in over three years of consecutive monthly
declines.

Overview of Numbers

The net gain of 32,000 jobs for the massive US economy is an admittedly weak gain for an economy that has shed 11 million jobs but it is an indication that the economy is stabilizing.

The correlation of the loss of jobs in construction and financial services is an indication of a US economy that continues to transition its dependency on residential and commercial real estate development.  The difficult conditions in the commercial and residential real estate market will continue as excess inventories brought on by high foreclosure rates continue to be worked off.   As the ADP report highlights construction employment has declined for thirty-nine consecutive months, bringing the total decline in construction jobs since the peak in January 2007 to 2,159,000.  Its clear that the US economy has lost two critical recovery drivers.

Soft conditions in the construction sector weighs heavily on small business job creation.  Most contractors are small businesses and with the anemic rate of new housing construction small business job creation will continue to be soft.

Specialty retail is another large component of the small business market.  Improving consumer sentiment will help this sector.  However small retailers have suffered massive business closures during the recession.  A robust recovery in this sector will not commence until commercial lending for start ups and business expansion becomes more readily available from the banks.

The report also indicates that the goods producing sector of small businesses shed 24,000 jobs during the month  to continue the trend in the deterioration of small manufactures.  This decline was offset by a 25,000 gain in service based jobs.  The  growth of the service sector of the US economy continues at the expense of the manufacturing sector.  The growth of small business service sector indicates that businesses continue to managed fixed costs of their business by outsourcing various services.

This ADP report is a positive indication that we may be at a bottom of the economic cycle.  Bottoms don’t mean that things are improving they indicate that conditions are not worsening.  The economic recovery is still confronted with headwinds.  The oil spill in the Gulf of Mexico, the economic and growing political instability of EU countries and the cooling off of the Chinese economy may present some challenges to a sustained and robust recovery in the United States.

Solutions from Sum2

Sum2 advocates the establishment of an SME Bank to sustain long term economic growth.  Sum2 offers SME’s the Profit|Optimizer to help them manage risk, devise recovery strategies and make better informed capital allocation decisions.

For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.

You Tube Video: Isley Brothers, Work To Do

Risk: unemployment, recession, recovery, SME

NFIB Small Business Optimism Report for April

The National Federation of Independent Business (NFIB) has just released the Small Business Economic Trends Report for April 2010. The report published since 1973 measures small business sentiment on numerous economic and business factors that confront small businesses.

This months report indicates a decline in business optimism. The NFIB index fell 1.2 points in March to 86.8 That’s up from the lows of March 2009, but has been below 90 for 18 months. The report reading is a contra indicator of economic recovery.  Small business owners are by nature and temperament optimistic and the report provides a sobering insight into the mind of US entrepreneurs and risk takers.

Highlights of the Report:

• Jobs: After a devastating period of employment reductions, employment change per firm hit the “zero line” in March, setting the stage for a resumption in job creation. Nine percent (seasonally adjusted) reported unfilled job openings, down two points, a “negative” for hope that the unemployment rate will fall. Over the next three months, seven percent plan to reduce employment (down one point), and 15 percent plan to create new jobs (up
  two points), yielding a seasonally adjusted net negative two percent of owners planning to create new jobs, weaker than February and still more firms planning to cut jobs than planning to add.

• Credit: Regular NFIB borrowers (35 percent accessing capital markets at least once a quarter) continued to report difficulties in arranging credit. A net 15 percent reported loans harder to get than in their last attempt, up three points from February. Eighty-nine (89) percent of the owners reported all their credit needs met or they did not want to borrow. Historically weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many good borrowers are simply on the sidelines, waiting for a good reason to make capital outlays and order inventory and take out the usual loans used to support these activities. Only five percent of the owners reported “finance” as their top business problem (up two points). Pre-1983, as many as 37 percent cited financing and interest rates as their top problem. What businesses need is sales, giving them a reason to hire and make capital expenditures and borrow to support those activities.

• Profits: Reports of positive profit trends worsened by four points in March, registering a net negative 43 percentage points (39 points worse than the best expansion reading reached in 2005). The persistence of this imbalance is bad news for the small business community. Profits are important for the support of capital spending. For those reporting lower earnings compared to the previous three months (58 percent, up three points), 62 percent cited weaker sales, two percent blamed rising labor costs, five percent higher materials costs, three percent higher insurance costs, and seven percent blamed lower selling prices. Five percent blamed taxes and regulatory costs. Owners continued to reduce compensation at historically high rates, with 10 percent reporting reduced worker compensation and 10 percent reporting gains. Seasonally adjusted, a net zero percent reported raising worker compensation, only two points better than February’s record low reading of negative two percent.

• Prices: The weak economy continued to put downward pressure on prices.  Seasonally adjusted, the net percent of owners raising prices was a negative 20 percent, one point better than last month. Plans to raise prices fell one point to a net seasonally adjusted nine percent of owners. On the cost side, five percent of owners cited inflation as their number one problem (e.g. costs coming in the “back door” of the business) and only three percent cited the cost of labor, so neither labor costs no r materials costs are pressuring owners.

Components of the Optimism Index include: Labor Markets, Capital Spending, Inventory and Sales, Inflation, Profits and Wages, Credit Markets

The NFIB Report can be downloaded from the Sum2 website. NFIB Optimism Index

The NFIB Research Foundation has collected Small Business Economic Trends Data with Quarterly surveys since 1973 and monthly surveys since1986. The sample is drawn from the membership files of the NFIB.

You Tube Music Video: Stevie Ray Vaughan, Couldn’t Stand the Weather

Risk: sme, small business, economic recovery

Credit Tight from SBA Lenders

Last year lending to small businesses evaporated with glaring exception of Wells Fargo which increased its lending through Small Business Administration (SBA) programs.  With bank lending to small businesses nearly frozen many small businesses are scrambling for the credit lines and loans they need to keep their companies alive.

The landscape of lenders willing to provide credit to small business is evolving.  Wells Fargo has emerged as the principal provider of credit to the small business market becoming the number-one lender through the SBA loan programs during 2009.

CIT Group, JPMorgan Chase, Banco Popular and Bank of America have cut their SBA lending by more than 70% this year.  While Wells Fargo buttressed by its acquisition of Wachovia, increased its loan volume 4%, from $583 million in 2008 to $605 million during 2009.

Wells Fargo acquisition of Wachovia closed three months into the 2009 fiscal year allowing Wells Fargo to book only nine months of Wachovia SBA lending which totaled $742 million a decrease of  24% from aggregate SBA loans extended during 2008.   During 2009 the number two lender to small businesses was U.S. Bank which made $250  million in loans through the SBA’s lending program.

The large banking institutions that received TARP funds  used that infusion to prop up the capital ratios to improve weak balance sheets.  Little of these funds were used to fund credit programs for small businesses.  Wells Fargo’s capital ratios were healthier then its larger competitors.  This allowed Wells Fargo to take advantage of their rivals distraction from the small business market.  Indeed the bankruptcy filing by CIT, the management tremors at Bank of America, Citibank’s scramble for capital and JP Morgan Chase digestion of Bear Stearns allowed Wells Fargo to fill the large vacuum in the  neglected SBA lending market.

Wells Fargo also had the advantage of not being dependent on securitizing its SBA loans and selling them in the  secondary market.  As evidenced by CIT’s bankruptcy filing,  funding for securitized loans disappeared as the risk aversion of institutional investors grew and liquidity evaporated from the market.  These market events led Wells Fargo to develop a focused discipline on the small business lending market.  The bank was committed to closing larger 7(a) SBA loans which are held and managed in the banks loan portfolio.  Wells Fargo’s small business strategy discouraged originating SBA Express Loans that offer lower credit limits and tend to have much higher default rates.  Wells Fargo’s SBA program and business model should be studied and replicated by community banks to energize small business lending.

Small business lending and capital formation in the sector is a critical component for sustainable economic growth.  Banks need to engage the small business market with a deeper understanding of the risks associated with the market.  Small business managers must demonstrate to bankers and shareholders that they are worthy stewards of credit and equity capital by implementing sound risk management and corporate governance practices.  This assures bankers that  small business managers are a good credit risk capable of building a mutually profitable business relationship for the many years to come.

Risk: SME, SBA, credit, small business, banking, community banks

Sum2’s Hamilton Plan Getting Scholarly Attention

The following research paper on The Hamilton Plan was written by Deepak Verma, a business student at Baruch College. To our knowledge it is the first scholarly research that incorporates the Hamilton Plans theme of a focus on SME manufacturing.

ISSUES MANAGEMENT PROJECT
Prof. Michael Kirk Stauffer

DEEPAK VERMA
The Societal and Governmental Environment of Business
Baruch College, the City University of New York
December 16, 2009

Table of Content

Topic Page No
1. Executive Summary 2
2. The Issue: Shrinking Manufacturing Base 3-4
3. The Origin of the Issue and Solution 4-5
4. Small & Medium Enterprises; Catalyst of Sustainable Growth 6
5. Initiative for Development of SMEs 7-8
6. Future of SME and SMEs in USA 9
7. Appendix : References 10

EXECUTIVE SUMMARY
Living beyond means is not sustainable. One of the primary reasons of prolonged Economic and Credit Crisis in United States is its low manufacturing base and American way of consuming more than what is produced. This research paper will examine issue of shrinking manufacturing base of USA, unfair and unethical business practices adopted by countries such as China to boost export thereby causing trade deficit to USA, reasons for low manufacturing base and role of small and medium enterprise (SME) manufacturers in developing a sustainable manufacturing base of the US economy.

Prior to coming at Baruch College for pursuing MBA in finance and investments, I worked for over 10 years with Small Industries Development Bank of India (SIDBI), an apex financial institution of India engaged in the development and financing of SMEs and micro financial institutions. Having worked with this financial institution, I realized the importance of SMEs in bringing sustainable economic development and employment creation, particularly in a mixed economy like India.

The paper will discuss on public-private initiative in USA for development of SMEs, their efforts and capital investment for empowerment and financing of SMEs. Various initiatives taken by private and public sector will be analyzed. Efforts have been made to forecast future of SMEs vis a vis manufacturing sector, role of community development financial institutions (CDFIs), and flow of commercial bank credit and private equity investment in SMEs in the United States.

THE ISSUE: SHRINKING MANUFACTURING BASE
Why should shrinking manufacturing base be an issue in a market driven service oriented economy like US? Federal Reserve Chairman Ben Bernanke stated on Feb. 28, 2007, “I would say that our economy needs machines and new factories and new buildings and so forth in order for us to have a strong and growing economy.” Strong Manufacturing base is the only solution to rising trade deficit and industrial job loss. Manufacturing promotes innovation which leads to investments in equipment and people, research and development, improved products and processes and increase in productivity and higher standards of living. Increase in manufacturing leads to increase in demand for raw materials and other commercial services.

United States has transitioned from an agricultural economy to Industrial economy to a service economy. Over a period of this transition US has lost its manufacturing base substantially and has been importing goods from around the world which has resulted into huge trade deficit and industrial job losses. IMF has categorized the US current account deficit as unsustainable. Warren Buffet also once commented “The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil… Right now, the rest of the world owns $3 trillion more of us than we own of them.”

Since the United States joined the WTO, US trade deficit has risen from $150.6 billion in 1994 to $817.3 billion in 2006. US reliance on imports ranges from electronic items to apparels and other consumables. For example, electronic items sold in United States are developed by companies such as Philips, Toshiba, Sony, Hitachi, Samsung and Sharp. We have lost significant market share in Auto Industry also. Toyota has surpassed General Motors to become leading auto manufacturer in terms of global sales. Ironically, items such as clothing and apparel where USA had its dominance are also being imported from foreign countries. Over 90 percent of clothing and shoes sold in the United States are made in foreign countries. US economy has thrived on consumerism which has led to increase in demand for goods over the years but production of domestically manufactured goods has been declining, thereby giving rise to imports from foreign countries and loss of industrial jobs.

Critics of the argument say it is the increase in production efficiencies, resulted from technological innovation and advancement that has resulted in loss of jobs. Additionally, it is the increase in consumption which is the root cause of import deficit rather than shrinking manufacturing base. Undoubtedly long term data indicates an increase in US manufacturing, but the way we are loosing our manufacturing share from last 2 decades and if we continue shrinking, we will soon have no choice but to consume whatever is dumped in our market and will be on the mercy of foreign imported goods. Increase in manufacturing has not kept pace with global growth in manufacturing in USA. Since 2000 global manufacturing growth has been 47%, whereas USA has recorded a growth rate of only 19%.

ORIGIN OF THE ISSUE & SOLUTION
What is causing shrinking manufacturing base in the United States? Is it purely competitive and cheaper products manufactured in Asia and Europe or some other factors are also responsible? Undoubtedly competitive global business environment has severely affected domestic production in the United States, this crisis in large arises due to unfair and unethical business practices adopted by its trading partners mainly China. Some of those practices are significant government subsidies, currency manipulation, large-scale dumping in the U.S. market, and other market-distorting practices. Additionally, unfavorable govt. policies, tax structure, increase in cost involved in healthcare, litigation, and regulation has significantly affected the bottom line. Increase in cost and strict regulation forced manufacturing units to move their facilities to other countries where companies do not face those kinds of impediments. Companies operating in the U.S. started outsourcing low-value tasks like simple assembly or circuit-board stuffing, but lower cost of outsourcing and shrinking margin lured them to continue outsourcing sophisticated engineering and manufacturing capabilities that are crucial for innovation in a wide range of products. As a result, the U.S. has lost or is in the process of losing the knowledge, skilled people, and supplier infrastructure needed to manufacture many of the cutting-edge products it invented.

Is there any way to bring back our manufacturing base?
The view that the U.S. should focus on R&D and services is completely flawed. Manufacturing is part of the innovation process and United States has to expand its manufacturing base to remain a world leader.

Following may be suggested to address the issue:

(1) Increase the tariffs on foreign goods so that they are more expensive than domestic goods.
(2) Demand the same level of quality in all foreign goods as American goods.
(3) Diplomatic measures should be taken to create pressure on foreign countries particularly China to stop manipulating their currencies.

Efforts should be made to open up foreign consumption markets adequately to U.S. producers so as to increase export and minimize trade deficit and should endeavor to combat predatory foreign trade practices aimed at undermining U.S. producers in their home market. Next big step is to promote small and medium enterprises to set-up manufacturing units.

SMALL & MEDIUM ENTERPRISES (SMEs); CATALYST OF SUSTAINABLE GROWTH
The issue of shrinking manufacturing base in the United States has been discussed by economist, policymakers, industrialists, and think tanks since economic integration and various measures to improve domestic manufacturing base have been suggested. But considering our free market dominance no sincere efforts were made to expand manufacturing base. Alarming rise in trade deficit and current economic and credit crisis which resulted in to massive industrial job loss has called for immediate intervention of private-public participation to protect and develop domestic manufacturing base for long term sustainable economic growth of United States. It is this time only that the role of SME manufacturers was felt inevitable to address this alarming issue.

President Obama during an interview said “We’ve got to make sure that we’re cultivating small businesses and entrepreneurs who are going to be driving employment growth,” the President said, “so that 20 years from now we can look back and we can say, ‘This was the pivot point, this is where we started to turn the corner.”

US need to change course at this point of time and need to develop a network of small and medium enterprises focusing on cleaner and green technology. The U.S. can explore strategies used in emerging markets for development of SMEs. According to Hau L. Lee, a professor at Stanford Graduate School of Business, “America needs large industrial zones devoted to specific industries–similar to zones in Taiwan, Singapore, Malaysia, and much of China. Such areas offer tax breaks, cheap or free land, workforce training, plenty of water and power, and agencies that serve as one-stop shops for all of the necessary permits and regulatory approvals.” A national level specialized financial institution may be created to provide low cost credit to newly setup SMEs in the manufacturing sector. US strength lies in high end technology, innovation, R&D, robust infrastructure, and know-how.

INITIATIVE FOR DEVELOPMENT OF SMEs

US govt. runs a number of programs for providing technological know-how, contracting opportunities, counseling and assistance, financing, and R&D facilities to small and medium enterprises. Some of the prominent programs run by US department of commerce are Manufacturing Extension Program, Advanced Technology Program, Technology Transfer, and Small Business Innovation Research (SBIR) Program. State govt. and number of govt. agencies are deployed for implementation of these schemes across the United States. SBA provides technical and financial assistance to SMEs through its partner lending institutions.

On November 17, 2009 The Goldman Sachs Group, Inc. launched 10,000 Small Businesses — a $500 million initiative for development of 10,000 small businesses across the United States. The plan envisaged to provide greater access to business education, mentors and networks, and financial capital to small businesses. Lloyd C. Blankfein, Chairman and CEO of Goldman Sachs quoted “Small businesses play a vital role in creating jobs and growth in America’s economy.” Warren Buffett, CEO of Berkshire Hathaway also mentioned “Our recovery is dependent on hard working small business owners across America who will create the jobs that America needs. I’m proud to be a part of this innovative program which provides greater access to know-how and capital – two ingredients critical to success.”

Sum2 LLC, a firm which assists SMEs in implementing sound business practices by offering a series of programs and products, announced The Hamilton Plan on Labor Day. The Hamilton Plan is a ten point program to foster the development of manufacturing in the United States by tapping the entrepreneurial energy of small and mid-size enterprises (SME). The Hamilton Plan requires concerted focus of investment capital to fund development and establishment of an SME Development Bank (SDB) which will focus, manage and administer capital formation initiatives to incubate and develop SME manufactures.

I contacted James McCallum, CEO of Sum2llc to discuss the issue of shrinking manufacturing base and how SMEs can help in restoring manufacturing base in the United States. In response to my comment here is what he stated “It is pretty amazing that the United States has not done more to specifically encourage and address the unique needs of this critical economic driver. Many Asian countries are miles ahead of the US in SME banking and capital formation. These banks have extensive portfolios of finance products and technical assistance they provide to SME’s. The reasons that the US lacks focus in this area are many. US commitment to free market forces has badly warped our economic infrastructure. SMEs in the US have primarily relied on community banks for financing. Most of which went for real estate and construction projects. SME manufactures have just about disappeared from the economic landscape of the US. The credit crash and the economic malaise are awakening our understanding of the critical nature of SMEs and our need to manufacture products. Goldman’s 10,000 Businesses Initiative coalesces nicely with the Hamilton Plan we developed in 2008.”

USA MANUFACTURING & SMEs IN YEAR 2030

With the concerted government efforts for promotion and development of SMEs and private sector initiatives such as “10,000 Small Businesses plan” by Goldman, SMEs will be largely benefited having access to innovative financial products and services from a network of financial institutions. Ten point program suggested in Hamilton plan, if implemented, will bring cluster based development of SME manufacturers. Cleaner and green technology will drive long term sustainable growth, increase national income and result in employment creation. Healthy SMEs will be focusing on export of goods thereby reducing the trade deficit and offer a new market for commercial banking sector. High-tech growth oriented SMEs will also have access to private equity investments and will offer a new avenue of diversification to private equity industry.

But the task of SME development is a challenging task and requires strong will on the part of different stakeholders. SMEs are considered to be the riskiest segment of borrowers from a financial institution’s perspective and thus struggle for timely and adequate credit. Access to technical and market information, financial assistance and trained and educated workers is the biggest challenge for SMEs. Future SMEs require sound business practices such as corporate governance, risk management, stakeholder communications and regulatory compliance.

I believe that SMEs are sine qua non for manufacturing sector & I can foresee a bigger space for SMEs in next 20 years from now. I am so intrigued with the idea of SMEs development and their contribution in the economic growth that in the long run I wish to work as a freelancer offering consultancy and advisory services on financial and strategic matters to SMEs. I would work with a network of financial institutions, venture capitalists, engineers, environmentalists, social workers, suppliers, and policy makers so as to offer SMEs a comprehensive set of services.

APPENDIX: REFERENCES

U.S. Needs to Return to Its Manufacturing Base
http://seekingalpha.com/article/119136-u-s-needs-to-return-to-its-manufacturing-base

Securing America’s Future: The Case for a Strong Manufacturing Base, A Study by Joel Popkin and Company, Washington, D.C. June 2003, Prepared for the NAM Council of Manufacturing Associations

http://www.pmihome.org/Popkin_Study_3-03.pdf

President predicts it will take decades to revive declining U.S. manufacturing base?

http://www.sodahead.com/united-states/president-predicts-it-will-take-decades-to-revive-declining-us-manufacturing-base/question-637119/

Manufacturing & Investment Around The World: An International Survey Of Factors Affecting Growth & Performance, ISR Publications, revised 2nd edition, 2002. ISBN 978-0-906321-25-6.

Economy Watch: Economy, Investment & Finance Report

http://www.economywatch.com/world_economy/usa/export-import.html

USA Manufacturing output continues to increase (over the long run), Curious cat, Investing and economics blog

http://investing.curiouscatblog.net/2008/12/02/usa-manufacturing-output-continues-to-increase-over-the-long-term/

Alliance for American Manufacturers http://www.americanmanufacturing.org/issues/manufacturing/the-us-manufacturing-crisis-and-its-disproportionate-effects-on-minorities/

Can the future be built in America? http://proquest.umi.com.remote.baruch.cuny.edu/pqdweb?index=28&did=1860761601&SrchMode=1&sid=2&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1259505905&clientId=8851

TO SAVE AMERICAN MANUFACTURING: USBIC’S PLAN FOR AMERICAN INDUSTRIAL RENEWAL BY Kevin L. Kearns, Alan Tonelson, and William Hawkins

http://americaneconomicalert.org/USBIC_Save_American_Manufacturing_Jobs_Plan.pdf

Goldman Sachs Launches 10,000 Small Businesses Initiative

http://www2.goldmansachs.com/our-firm/press/press-releases/current/10-k-business.html

Goldman Sachs as Social Entrepreneur https://sum2llc.wordpress.com/

Hamilton Plan by Sum2llc https://sum2llc.wordpress.com/2008/09/03/sme-development-bank/

You Tube Video: Isley Brothers, Work to Do

Risk: SME, manufacturing, economic revitalization, social wealth

NFIB Reports Decline in Small Business Optimism

The National Federation of Independent Business (NFIB) has just released the Small Business Economic Trends Report for January 2010.  The report published since 1973 measures small business sentiment on numerous economic and business factors that confront small businesses.

This months report indicates a decline in business optimism.  The NFIB index fell 0.3 points in December to 88. That’s up from the lows of March 2009, but has been below 90 for 15 months. “Optimism has clearly stalled in spite of the improvements in the economy,” the NFIB said.

Highlights Reported by Forbes Digital:

• Jobs: 10% of the owners increased employment (the highest reading of 2009), but 22% reduced employment (seasonally adjusted). Over the next three months, 15% plan to reduce employment (down two points), and 8% plan to create new jobs (up one point), yielding a seasonally adjusted net-negative 2% of owners planning to create new jobs, a one-point improvement from November.

• Credit: Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. A net 15% reported loans harder to get than in their last attempt, unchanged from November. Although “that is not nearly as severe as the financial distress reported in the pre-1983 period, 24 months of recession have sapped the financial strength of many small firms,” Dunkelberg said. Eight percent of all owners reported that their borrowing needs were not satisfied, down two points from November. The remaining 92% of all owners either obtained the credit they wanted or were not interested in borrowing.  Only 4% of the owners reported finance as their number one business problem (down one point).

• Profits: 54% reported lower earnings compared to the previous three months. Of those, 65% cited weaker sales, 4% each blamed rising labor costs, higher materials costs and higher insurance costs, while 6% blamed lower selling prices. Poor real sales and price cuts are responsible for much of the weakness in profits.

• Prices: 10% of the owners reported raising average selling prices, but 33% reported price reductions yielding a net-negative 22% (seasonally adjusted) of owners who cut prices in December. Plans to raise prices fell one point to a seasonally adjusted net 3% of owners, 35 points below the July 2008 reading. “The weak economy continued to put downward pressure on prices,” said Dunkelberg. “Widespread price cutting contributed to the reports of lower nominal sales.”

• Costs: On the cost side, the percent of owners citing inflation as their number one problem (e.g. costs coming in the “back door” of the business) fell two points to 2%, and only 3% cited the cost of labor.

Components of the Optimism Index include: Labor Markets, Capital Spending, Inventory and Sales, Inflation, Profits and Wages, Credit Markets

The NFIB Report can be downloaded from the Sum2 website.  NFIB Optimism Index

The NFIB Research Foundation has collected Small Business Economic Trends Data with Quarterly surveys since 1973 and monthly surveys since1986. The sample is drawn from the membership files of the NFIB.

You Tube Music Video: Louis Armstrong, Sunny Side of the Street

Sum2 Announces Business Alliance with CreditAides

Sum2, LLC is pleased to announce that they will begin to offer the corporate rating products of CreditAides. CreditAides is an independent corporate rating and research firm that provides financial health assessment reports and credit risk analysis ratings on companies using the Z-Score methodology. The CreditAides reporting system is a predictive tool that helps managers gain insights into the financial health of a company.  The insights help managers identify a company’s ability to remain competitive and financially sound while measuring the impact of business initiatives to achieve profitability and growth.

James McCallum, the President of Sum2 stated, “The CreditAides quantitative assessment tool is a wonderful compliment to the qualitative risk assessment applications offered in the Profit|Optimizer.  Now our clients have a recognized standard to measure the financial impact and returns on capital allocation decisions they implemented as a result of a Profit|Optimizer review.  The challenging business cycle requires that managers allocate capital to a few select initiatives.  It is critical that managers fund initiatives that mitigate the greatest risk and provide the potential of optimal returns.  The combination of CreditAides reports with the Profit|Optimizer will provide our clients with the ability to discern the optimal initiatives to fund and measure the effectiveness of their capital allocation decisions.”

The Profit|Optimizer guides business managers through an thorough enterprise risk assessment.   Uncovering the risks and opportunities associated with products and markets, business functions,  numerous macro risks and critical success factors are key components of  effective enterprise risk management (ERM).  ERM requires the assessment and aggregation of hundreds of risk factors.  The Profit|Optimizer helps managers identify the key initiatives that will  help to maintain profitability and sustainable growth.  The use of CreditAides provides an important measurement tool to affirm and validate that managers have made correct bets on capital allocation decisions.

Z-Score Financial Analysis Tool

The Z-Score formula for predicting bankruptcy was developed by Edward I. Altman a Professor of Finance at New York University.  The Z-Score is used to assess the financial health of companies and the probability of  bankruptcy.   The Z-score uses multiple corporate income and balance sheet values to score  the financial health of a company. The use of  Z-scores is a strategic tool managers use to measure and validate the effectiveness of their business strategy.

Risk Assessment and Opportunity Discovery

The recession has created macroeconomic conditions that are causing widespread business failures.  Small and mid-size business enterprises (SME) require effective risk management tools to effectively manage business threats to survive extreme business downturns.  Assessing, measuring, aggregating, prioritizing, pricing and initiating actions are the tactical means risk managers use to support the business objectives of the enterprise.  Sound risk management practices are central to a healthy corporate governance culture and are central to maintaining profitability and long term sustainable growth for the business enterprise.

The Profit|Optimizer

Profit|Optimizer helps managers assess risk factors and uncover opportunities that are always present in the business environment. The product is based on Basel II working group recommendations that outline optimal risk profiles of SMEs.  The Profit|Optimizer incorporates four focus areas.

1.) product and market dynamics (products, clients, competition, supply chain, market segments)

2.) business functions (management, sales and marketing, operations, facilities, IT, HR, accounting)

3.) critical success factors (generic and specific)

4.) macro risk factors (macroeconomic, STEEPLE, SWOT, segment benchmarks, business plan optimization)

SME’s lack of agility and reluctance to change has made it difficult for these businesses to survive severe market conditions. There are tremendous market forces at work in the current business environment that are creating dangers and opportunities for SMEs if they can effectively assess and adapt.  Business managers must be astute and exacting how they allocate the precious capital resources required to achieve business objectives.  The Profit|Optimizer helps managers make better capital allocation decisions.  CreditAides provides fiscal metrics to validate or adjust business strategy and initiatives.   Sum2’s risk assessment products coupled with the measurement tools provided by CreditAides creates a leading edge solution for SME risk management.  The ease of use and superior value proposition  of the combined solution is unsurpassed in the market.

About CreditAides

CreditAides (www.creditaides.com) online business analysis and credit assessment portal provides business managers with important insights into the financial health of their company. Automated financial analysis improves efficiency of the business enterprise.  CreditAides reports are used to assess the financial health of clients, supply chain and used to demonstrate financial health and credit worthiness to credit and equity providers.

True underlying financial health of companies has never been harder to identify and never been of greater importance. Across both equity and credit markets, understanding relative financial strengths of companies is paramount for effective business decisions.  Good decisions cannot be made without good quality information generated by incisive tools.

About Sum2, LLC

Sum2 (www.sum2.com) was founded in 2002 to promote the commercial application of corporate sound practices. Sum2 manufactures, aggregates, packages and distributes innovative sound practice digital content products to select channels and market segments. Sum2’s sound practice products address risk management, corporate governance, shareholder communications and regulatory compliance. Sum2’s objective is to assist businesses and industries to implement sound practices to create value for company stakeholders and demonstrate corporate governance excellence to assure profitability and long term sustainable growth.

You Tube Video: Ella Fitzgerald, A-Tisket A-Tasket

Risk: bankruptcy, default, market, credit