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Big Data for a Small World: SMEIoT

smeiotIoT

The world is a great big database and algorithmic wizards and mad data scientists are burning the midnight oil to mine the perplexing infinities of ubiquitous data points.  Their goal is to put data to use to facilitate better governance, initiate pinpoint marketing campaigns, pursue revelatory academic research and improve the quality of service public agencies deliver to protect and serve communities. The convergence of Big Data, Cloud Computing and the Internet of Things (IoT) make this possible.

The earth is the mother of all relational databases.  It’s six billion inhabitants track many billions of real time digital footprints across the face of the globe each and every day.  Some footprints are readily apparent and easy to see.  Facebook likes, credit card transactions, name and address lists, urgent Tweets and public records sparkle like alluvial diamonds; all easily plucked by data aggregators and sold to product marketers at astonishing profit margins.  Other data points are less apparent, hidden or derived in the incessant hum of the ever listening, ever recording global cybersphere.   These are the digital touch points we knowingly and unknowingly create with our interactions with the world wide web and the machines that live there.

It is estimated that there is over 20 billion smart machines that are fully integrated into our lives.  These machines stay busy creating digital footprints; adding quantitative context to the quality of the human condition.  EZ Passes, RFID tags, cell phone records, location tracking, energy meters, odometers, auto dashboard idiot lights, self diagnostic fault tolerant machines, industrial process controls, seismographic, air and water quality apparatuses and the streaming CBOT digital blips flash the milliseconds of a day in the life of John Q. Public.  Most sentient beings pay little notice, failing to consider that someone somewhere is planting the imprints of our daily lives in mammoth disk farms.  The webmasters, data engineers and information scientists are collecting, collating, aggregating, scoring and analyzing these rich gardens of data to harvest an accurate psychographic portrait of modernity.

The IoT is the term coined to describe the new digital landscape we inhabit.  The ubiquitous nature of the internet, the continued rationalization of the digital economy into the fabric of society and the absolute dependency of daily life upon it, require deep consideration how it impacts civil liberties, governance, cultural vibrancy and economic well being.

The IoT is the next step in the development of the digital economy. By 2025 it is estimated that IoT will drive $6 Trillion in global economic activity.  This anoints data and information as the loam of the modern global economy; no less significant than the arrival of discrete manufacturing at the dawn of industrial capitalism.

The time may come when a case may be made that user generated data is a commodity and should be considered a public domain natural resource; but today it is the province of digirati  shamans entrusted to interpret the Rosetta Stones, gleaning deep understanding of the current reality while deriving high probability predictive futures.  IoT is one of the prevailing drivers of global social development.


SME

There is another critical economic and socio-political driver of the global economy.  Small Mid-Sized Enterprises (SME) are the cornerstone of job creation in developed economies.  They form the bedrock of subsistence and economic activity in lesser developed countries (LDC).  They are the dynamic element of capitalism.  SME led by courageous risk takers are the spearhead of capital formation initiatives.  Politicians, bureaucrats and business pundits extol their entrepreneurial zeal and hope to channel their youthful energy in service to local and national political aspirations.  The establishment of SME is a critical macroeconomic indicator of a country’s economic health and the wellspring of social wealth creation.

The World Bank/ IFC estimates that over 130 million registered SME inhabit the global economy. The definition of an SME varies by country. Generally an SME and MSME (Micro Small Mid Sized Enterprises)  are defined by two measures, number of employees or annual sales.  Micro enterprises are defined as employing less than 9 employees, small up to 100 employees and medium sized enterprises anywhere from 200 to 500 employees.  Defining SMEs by sales scale in a similar fashion.

Every year millions of startup businesses replace the millions that have closed.  The world’s largest economy United States boasts over 30 million SME and every year over one million  small businesses close.  The EU and OECD countries report similar statistics of the preponderance of SME and numbers of business closures.

The SME is a dynamic non homogeneous business segment.  It is highly diverse in character, culture and business model heavily colored by local influence and custom. SME is overly sensitive to macroeconomic risk factors and market cyclicality.  Risk is magnified in the SME franchise due to high concentration of risk factors.  Over reliance on a limited set of key clients or suppliers, product obsolescence, competitive pressures, force majeure events, key employee risk, change management and credit channel dependencies are glaring risk factors magnified by business scale and market geographics.

In the United States, during the banking crisis the Federal Reserve was criticized for pursuing policies that favored large banking and capital market participants while largely ignoring SME. To mitigate contagion risk, The Federal Reserve  quickly acted to pump liquidity into the banking sector to buttress the capital structure of SIFI (Systemically Important Financial Institutions). It was thought that a collateral benefit would be the stimulation of SME lending.  This never occurred as SBA backed loans nosedived. Former Treasury Secretary Timothy Geithner implemented the TARP and TALF programs to further strengthen the capital base of distressed banks as former Fed Chairman  Ben Bernanke pursued Quantitative Easing to transfer troubled mortgage backed securities onto Uncle Sams balance sheet to relieve financial institutions  of these troubled assets. Some may argue that President Obama’s The American Recovery and Reinvestment Act of 2009 (ARRA)  helped the SME sector.  The $800 billion stimulus was one third tax cuts, one third cash infusion to local governments and one third capital expenditures aimed at shovel ready infrastructure improvement projects.  The scale of the ARRA was miniscule as compared to support rendered to banks and did little to halt the deteriorating macroeconomic conditions of the collapsing housing market, ballooning unemployment and rising energy prices severely stressing SME.

The EU offered no better.  As the PIGS (Portugal, Ireland, Greece, Spain) economies collapsed the European Central Bank forced draconian austerity measures on national government expenditures undermining key SME market sensitivities.  On both sides of the Atlantic, the perception of a bifurcated central banking policy that favored TBTF Wall Street over the needs of  an atomized SME segment flourished.  The wedge between the speculative economy of Wall Street and the real economy on Main Street remains a festering wound.

In contrast to the approach of western central bankers, Asian Tigers, particularly Singapore have created a highly  supportive environment for the incubation and development of SME. Banks offer comprehensive portfolios of financial products and SME advisory services. Government legislative programs highlight incubation initiatives linked to specific industry sectors. Developed economies have much to learn from these SME friendly market leaders.

The pressing issues concerning net neutrality, ecommerce tax policies, climate change and the recognition of Bitcoin as a valid commercial specie are critical developments that goes to the heart of a healthy global SME community.  These emerging market events are benevolent business drivers for SME and concern grows that legislative initiatives are being drafted to codify advantages for politically connected larger enterprises.

Many view this as a manifestation of a broken political system, rife with protections of large well financed politically connected institutions. Undermining these entrenched corporate interests is the ascending digital paradigm promising to dramatically alter business as usual politics. Witness the role of social media in the Arab Spring, Barack Obama’s 2008 election or the decapitalization of the print media industry as clear signals of the the passing away of the old order of things.  Social networking technologies and the democratization of information breaks down the ossified monopolies of knowledge access. These archaic ramparts are being gleefully overthrown by open collaborative initiatives levelling the playing field for all market participants.

SMEIoT

This is where SMEIoT neatly converges.  To effectively serve an efficient market, transparency and a contextual understanding of its innate dynamics are critical preconditions to market participation.  The incubation of SME and the underwriting of capital formation initiatives from a myriad of providers will occur as information standards provide a level of transparency that optimally aligns risk and investment capital. SMEIoT will provide the insights to the sector for SME to grow and prosper while industry service providers engage SME within the context of a cooperative economic non-exploitative relationship.

This series will examine SME and how IoT will serve to transform and incubate the sector.  We’ll examine the typology of the SME ecosystem, its risk characteristics and features.  We’ll propose a metadata framework to model SME descriptors, attributes, risk factors and a scoring methodology.  We’ll propose an SME portal, review the mission of Big Data and its indispensable role to create cooperative economic frameworks within the SME ecosystem. Lastly we’ll review groundbreaking work social scientists, legal scholars and digital frontier activists are proposing to address best governance practices and ethical considerations of Big Data collection, the protection of privacy rights,  informed consent, proprietary content and standards of accountability.

SMEIoT coalesces at the intersection of social science, commerce and technology.  History has aligned SMEIot building blocks to create the conditions for this exciting convergence.  Wide participation of government agencies, academicians, business leaders, scientists and ethicists will be required to make pursuit of  this science serve the greatest good.

 

This is the first in a series of articles on Big Data and SMEIoT . It originally appeared in Daftblogger eJournal. Next piece in series is scheduled to appear on Daftblogger eJournal within the next two weeks.

#smeiot #metasme #sum2llc #sme #office365 #mobileoffice #TARP #capitalformation #IoT #internetofthings #OECD #TBTF #Bitcoin #psychographics #smeportals #bigdata #informedconsent

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July 9, 2014 Posted by | banking, Bernanke, capitalism, commerce, credit, credit crisis, culture, economics, information technology, internet of things, legal, legislative, metasme, OECD, politics, private equity, psychology, regulatory, risk management, small business, SME, smeiot, TALF, TARP, Treasury, Uncategorized | , , , , , , , , , , , , , , , , | Leave a comment

Sustainable Economics

We have put our good mother through a lot over the past few million years. Ever since we walked out of the great rift the biospheres dominant species has really left a mark. I know that mark is but a tiny spec on the archaeological record of the earth which spans a few billion years but our impact is unmistakable.
 
I guess it started with the invention of hand tools, fire, wheels, shelter construction, water cultivation and agriculture. You can’t forget hunting in packs, weaponry, domestication of animals, speech, art and writing. A consciousness of a portfolio of skills, specialization, division of labor and the ability to discern exchange value within the community birthed a notion of governance. Our social nature was crowned with our ability to transmit craft and knowledge to successive generations, assuring continuity and cohesion with a common history and a well articulated cosmology. Put it all together and I think you got your basic modern Homo sapien.
Oh yeah, we also developed a psychology, an ego, that incorporates the primacy of ourselves and our selfish needs. It rationalizes and guides our interactions with nature, transforming the intention of our labor into a transaction that alters the conditions of the environment. It also serves as indisputable empirical evidence of the master species, elevated above all others as time marks the progress and dominion of the human race.
 
Our dominion has been codified into our sacred literature. Our creation stories and cosmic mission statements expressly state to exercise our dominion over nature, to propagate the species and to be fruitful and multiply. The screaming unencumbered id, left to its own devises, unchecked in the grand supermarket. We human’s have succeeded beyond our wildest expectations and the species continues to be fruitful and multiplying. 
 
We sojourn on, notching the ladder of history with marks of our progression through the ages. Along the way we Cro-Magnons expropriated the Neanderthals and moved into their Mediterranean digs complete with fire pits, burial chambers and the best take on modern art until Picasso came along.
 
I guess that’s the point. Our survival comes at the expense of other creatures and things. I’m no Malthusian, but Tom Friedman’s flat world is getting crowded.    And as we celebrate the 44th Earth Day a midst the greatest die off of species since mankind coronated himself as master and commander of all things earth; it may be time to consider how our dominion is hampering the well being of the lesser flora and fauna kingdoms and what we can do to begin the practice of a more sustainable economics.
 
When I look at Las Vegas, I behold a garish mecca of capitalism on steroids.  I’m overwhelmed by the banality of the the things we so highly esteem. A community venerated and propped up on the foundation of vice, hedonism and the radical pursuit of money. Unbridled development of a crystal neon city constructed in the middle of a desert, recklessly consumes water and energy resources and misdirects human capital to maintain the facade of an unsustainable economy. 
 
Phoenix poses the same paradox. Darling child of the credit boom, Phoenix is a city consuming itself. The rising threat of climate change, blistering heat, dwindling water supplies and raging haboobs would give any urban planner reason to pause. A bustling city of many millions of striving citizens consuming energy, water and human capital built on the unsustainable foundation of excessive consumption and an unrealistic valuation of the capital required to maintain it. 
 
The explosion of fracking natural gas deposits in the Marcellus Shale formation is another example of sacrificing long term sustainability for the immediacy of shareholder returns. The Marcellus Deposit has proven reserves that only last a decade. As evidenced by the hyper development occurring in North Dakota,  economies tied to resource extraction are prone to experience classic boom bust cycles. During boom times all is well. But the good times don’t last all that long and communities are left in the wake of the bust cycle to deal with the aftermath. 
 
The Keystone XL Pipeline and the rapid expansion of the LNG extraction industries are being touted as the foundation of American energy independence. But this energy resource extracts a high cost on the land and its natural bounty. It poses significant risk to water aquifers, air quality, wildlife and the storage of waste-water byproducts will present long term remediation challenges to communities for many decades after the last well is capped.
 
Our new found fortune of LNG comes with a significant opportunity cost to develop alternative energy sources as it continues to tether our economic dependence on a dwindling supply of fossil fuels. Perpetuating this dependence also requires us to expend huge sums of money on the military. The political arrhythmia in the Ukraine and the keen interest of the United States has much to do with the changing political economy of fossil fuels and the protection and accession of markets.
 
Sustainability requires a new approach to the emerging realities of the global political economy. Recognition that competing interests bring important capital to the table, and that all must be recognized and fully valued in the new algorithms of sustainability is the keystone and pipeline of sustainability. The practice of unfettered development is unsustainable. Regulation, arbitration and revitalization cannot be sacrificed at the altar of laissez-faire politics that only serves to widen the wealth gap at tremendous social cost. The politicization of economic policy cannot continue to be beholden to rampant monetization. Sustainability is the creation of long term value for a diverse community of stakeholders. It needs to become our guiding mantra as the global population approaches 8 billion souls. 

Happy Earth Day.

Music Selection:

Risk: fracking, political, water, air, war, opportunity cost, renewal clean energy, climate change

April 23, 2014 Posted by | business continuity, commodities, compliance, economics, environment, military, political risk, politics, psychology, regulatory, risk management, social unrest | , , , , , , , | Leave a comment

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

June 21, 2013 Posted by | Bernanke, credit, Credit Redi, inflation, recession, risk management, small business, SME | , , , , , , , , , , | Leave a comment

Corporate Governance and Financial Health

16414033-abstract-word-cloud-for-corporate-governance-with-related-tags-and-termsThree years ago I did some work for an independent credit rating agency utilizing a quantitative methodology to determine financial health of corporations.  Dr. Patrick Caragata founder of the firm conducted a study of 200 TSX listed firms with high CGI ratings (Governance Metrics International).   Dr. Caragata was seeking to determine the correlation of Corporate Governance (CG) and financial health.  His findings revealed that “CG ratings failed to indicate when a company was in poor health 75% of the time.  In fact, they wrongly identified 32% of weak companies as being highly rated on GMI.”

Dr. Caragata also extended his model to use financial health score as an early warning signal for a listed company’s share price.  KMV, established ratings agencies, Altman’s Z Score were also determined as lagging predictors of share price.  Dr. Caragata’s research on bond pricing and CDS where better predictors of financial health momentum and ultimate predictors of share price but still failed to correlate financial health score as an early warning signal for share prices.  The problem that the model continually encountered was that valuation always exhibited a bias towards share price (market momentum)  not financial health score.  The determination of a “fair value” based on historical spreads of financial health score and share price was overly and overtly price sensitive. Perhaps a signal of an inefficient market?  This was particularly true for bubble stock anomalies and commodity sensitive equities.

Purveyors of Business Process Management (BPM) suggest that listed practitioner’s of BPM trade at a 15% premium to non-practitioners.  I wonder if its marketing boast.  Though BPM is not CG;  it does speak to having CG excellence in the corporate DNA.   A cultural commitment   to sound practices create valuation premiums and sustainable business models.  That’s the message well managed companies consistently deliver as a central theme of their value proposition.  Integrating sound practices and CG excellence into the corporate culture does create valuation premiums because it suggests an intentionality of business process deeply wedded to the enterprise mission.

I believe the radical reconfiguration of Wall Street offers a telling example of incongruity of good CG practitioners and financial health.  It was always a self evident truth that Wall Street firms that folded or transformed into commercial banks were probably some of the best rated CG enterprises.  CG excellence can do nothing to save an enterprise with a structurally flawed business model.  Though CG excellence does presuppose a board of directors in tune with the vicissitudes of the market; who would have thought that we would be looking at the extinction of the global investment banking business?  Merrill Lynch, Morgan Stanley, Lehman Brothers, Bear Stearns and the mighty Goldman Sachs were walking dinosaurs with flawed unsustainable business models?  All either folded, were acquired or became FDIC insured commercial banks.  I still can’t believe it but it’s true.  The world is being turned upside down.

Sum2 is a firm believer in coupling quantitative and qualitative risk measures to maintain operational excellence to build a healthy sustainable enterprise.  Effective CG alone cannot assure financial health.  It  must be a critical pillar of the governance, risk and compliance (GRC) triad.

When we speak about the principles of good governance, how about the original dissertation on the ideal of governance excellence.  Seemingly an insistence on an honest evaluation of reality to determine what is good is all it takes.  Its really that simple.

Visit the blog Risk Rap and the Allegory of the Cave post on FAS 157:

Sum2 welcomes the opportunity to speak with partners who share our passion for GRC excellence.

originally published 6/12/13

June 12, 2013 Posted by | Bear Stearns, business continuity, credit crisis, Credit Redi, culture, FASB, operations, risk management, sound practices, sustainability | , , , , , , , , , , , , , , , , , | Leave a comment

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

March 3, 2011 Posted by | ADP, banking, Basel II, commercial, commodities, credit, Credit Redi, economics, government, labor relations, manufacturing, political risk, politics, recession, regulatory, risk management, small business, SME, social unrest, Sum2, Treasury, unemployment, unions, US dollar | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

SMEs Still Starved for Credit

Greenwich Associates highly regarded Market Pulse Study on SME credit availability reports that two-thirds of small businesses and 55% of middle market companies indicate that banks are failing to meet the needs of creditworthy companies.  Half of the 221 small businesses participating in the latest Greenwich Market Pulse Study say it is harder to secure credit today than it was at this time last year including roughly 33% of businesses that say it is much harder to obtain loans today.

The Small Business Lending Fund (SBLF) a $30 billion program established by the Treasury Department to encourage Community Banks to step up lending to SMEs is still trying to get some traction in the marketplace.  The SBLF injects capital into community banks that demonstrate an active SME lending  program will take another quarter to determine its effectiveness.

Community Banks are still transitioning its small business lending focus from an over dependency on real estate development.  SMEs seeking loans for capital improvements, fund operations or business expansion must provide lenders some added assurances about the financial health of the business.

SMEs can take steps to improve their credit standing and get approvals from lenders for loans and expansion for credit.  SMEs must demonstrate they have an excellent understanding of the condition of their firm’s financial health, what they must do to improve profitability and how they will use the credit extended by lenders to produce an acceptable return.

Credit Redi helps SME’s demonstrate the condition of the firms financial health, the risks and opportunities that SMEs must address to improve the firms financial health and identify the initiatives that need to be  funded to achieve desired profitability and growth.  These are the keys bankers look for on applications for loans.  Being able to demonstrate credit worthiness with an industry standard rating methodology determines weather a lender will grant you a loan, what rates you will pay and how much lending institutions will lend.

Since 2002, Sum2 has been helping SME’s manage risk and seize opportunities to grow and prosper under the most competitive market conditions.  Credit Redit is the latest addition to Sum2’s series of SME risk management products.

To determine the condition of your company’s financial health click here: 

Risk: credit, SME, capital allocation, credit rating

January 13, 2011 Posted by | banking, credit, Credit Redi, government, risk management, Small Business Lending Fund, Sum2, Treasury | , , , , , , , , , , | Leave a comment

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

June 9, 2010 Posted by | economics, NFIB, Profit|Optimizer, recession, risk management, small business, SME, unemployment | , , , , , , , , , , , , | 1 Comment

ADP Reports Third Consecutive Month of Job Gains

ADP has released its National Employment Report for May.   Non-farm private employment increased 55,000 during  the month on a seasonally adjusted basis.   ADP also reported an upward revision of 33,000 jobs for March, bringing the number of new jobs created during the month to 65,000.  The three consecutive net employment gains reported by ADP indicates that while the number of new job creation remains modest, positive momentum is developing.

A stabilized labor market is a key ingredient to a sustained economic recovery.  The economy lost over 9 million jobs during the recession and recovery will require the creation of 200,000 new jobs per month for the next 4 years to get back to pre-recession employment levels.  Last years massive Federal stimulus programs directed funds to state and local governments to help stem layoffs. The expiration of those programs will force fiscally challenged local governments to resort to austerity measures that will require the public sector to trim jobs.

Macroeconomic factors continue to be challenging the economic recovery.  The sovereign fiscal crisis in Europe, slowing growth in China, tepid credit markets and political uncertainty counterbalance the positive effects of a stabilizing housing market, low interest rates and benign  inflation.

The economic impact of the Gulf oil spill will not be confined to the region. The local aqua-cultural industries, fishing and tourism to the region has been immediately impacted by the spill.  A prolonged duration of the event will have a profound impact on the economies of the entire Caribbean. The economies and fiscal stability of American cities such as Pensacola, Mobile, Tampa,  New Orleans and Key West are directly threatened by the unfolding events.  Cities and regions along the Texas Coast and Mexico also remain remain at risk and share the unfortunate distinction of being in the probability cross hairs of suffering extreme toxic damage as a result of a hurricane.  Shipping lanes and the closure of ports due to oil contamination could impact America’s vital agricultural industry.  The moratorium on deep water drilling has placed pressure on the oils services sector and may impact the industries long term financial health.   The impact on the price of oil and refined petroleum products remains to be seen.

Highlights of the ADP  report include:

Estimates non-farm private employment in the service-providing sector increased by 55,000.

Employment in the goods-producing sector declined 23,000

Employment in the manufacturing sector rose 15,000

Employment in the services sector rose 78,000.

Large businesses with 500 or more workers  added 3,000 jobs

Medium-size businesses, defined as those with between 50 and 499 workers increased by 39,000

Employment among small-size businesses with fewer than 50 workers, increased by 13,000

Overview of Numbers

The net gain of 52,000 jobs in the small and mid-sized enterprise (SME) sector, compared to the creation of 3,000 jobs in large enterprises is a telling statistic about the changing topology of the US job market.   During the past decade, a large proportion of job growth occurred in the public and small mid-size enterprises (SME) sector.  Large businesses have led the way in implementing lean enterprises and have outsourced and off shored many jobs and business functions to accomplish this. Job creation by SME’s during the past month represented over 90% of new job creation.  America’s reinvention and economic renaissance must be led by the SME sector.  It is vital that capital formation initiatives and credit availability is positioned to foster the growth and development of the SME sector.

This months ADP report is an indication that the US economy continues at the bottom of an extreme down economic cycle.  The danger of a double dip recession unfortunately still lurks as a possibility.  The oil spill in the Gulf of Mexico, the potential of market contagion from EU credit distress, China’s slowdown and the anemic rate of job creation in the wake of massive government expenditures and budget deficits presents continuing challenges to a sustained and robust recovery in the United States.

Solutions from Sum2

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: Monty Python, Silly Job Interview

Risk: unemployment, recession, recovery, SME

June 3, 2010 Posted by | ADP, Profit|Optimizer, risk management, Sum2, unemployment | , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Commercial Loans: Be Prepared

The tough conditions in the credit markets require small businesses to communicate and demonstrate their credit worthiness to satisfy exacting credit risk requirements of lenders. Credit channels are open and loans are being made but strict federal regulations and heightened risk aversion by lenders places additional burdens on borrowers to demonstrate they are a good credit risk.

“You have to be prepared,” said Robert Seiwert, a senior vice president with the American Bankers Association. “If you have a viable business model and the banker feels that this business model is going to work in this new economy, you have a very good chance of getting financing. But you have to be ready to show that it will work.”

“Small and medium-sized businesses are the lifeblood of the U.S. economy.  Their ability to prosper and grow is key to job creation to help our nation recover from the economic slowdown. But with the number of bad loans mushrooming in recent years because of the economic downturn, federal regulators have put in more stringent guidelines for qualifying for financing.”, stated Ken Lewis CEO of Bank of America.

Communication with Lenders is Key

Maintaining an open line of communication with your credit providers is key.  During times of prosperity the lines of communication are open; but during times when businesses face adversity the phone stops ringing and lenders start to get nervous.  When business conditions get difficult businesses need to communicate with greater frequency and openness with their lenders.  Bankers don’t like surprises.

Reason to Communicate: Risk Assessment

The entrepreneurial nature of small business owners make them natural risk takers.  They have an unshakable belief in the fail safe nature of their ideas and have strong ego identification with their business.  This often makes them blind to the risks lingering within the business enterprise.  Their innate optimism may also cloud an ability to objectively analyze business risks and prevent them from seizing opportunities as a result of poor assessment capabilities.

Conducting a disciplined risk assessment and opportunity discovery exercise will uncover the risks and opportunities present in the enterprise and in the markets that the business serves.  This risk assessment is a great opportunity to communicate to lenders and credit providers that business management are capable risk managers and are a worthy credit risk.  Lenders will be impressed by the transparency of your risk governance practice and will be more disposed to provide financing for projects and opportunities that will propel future growth

Banks are looking for businesses that are prepared with their financial and business plans. Business owners must present a clear purpose for the loan tied to clearly defined business objectives.   The risk assessment exercise is a vital tool that assists in the construction of a business plan that builds  lender’s confidence in your business.  The assessment will reveal the largest risk factors confronting your business and outline clearly defined opportunities that promises optimal returns on loan capital.

Its music to a bankers ears that clients are managing risk well and have identified the most promising opportunities  for business investments.  It is usually a recipe for success and that will allow you and your banker to develop a trusted business relationship based on honesty and transparency.

Sum2’s Profit|Optimizer

Sum2 publishes the Profit|Optimizer.  The Profit|Optimizer is a risk assessment and opportunity discovery tool for small and mid-sized businesses.  It assists managers to identify and manage risk factors confronting their business. The goal of the Profit|Optimizer is to help business mangers demonstrate creditworthiness to lenders and make make informed capital allocation decisions.

Sum2 boasts a worldwide clientele of small and mid-sized business managers, bankers, CPA’s and risk management consultants that utilize the Profit|Optimizer to help their clients raise capital with effective risk governance.  Subscribe to The Profit|Optimizer here: Profit|Optimizer

Risk: small business, SME, credit, bank,

May 3, 2010 Posted by | banking, credit, Profit|Optimizer, risk management, small business, SME, Sum2 | , , , , , , , , , , , , | 1 Comment

How Deep is the Ocean?

The crisis in the credit markets is creating some new American superheroes. Fed Chairman Bernanke and Treasury Secretary Geithner are today’s dynamic duo engaged in a titanic struggle with the evil forces of inflation, stagflation, a weak dollar and dysfunctional credit markets. Their mission is to keep the specter of a recession from reappearing again.

Their weapon of choice is a high octane capital swap, low interest generator and paper guarantee machine. The machine produces accelerated capital flows by pumping liquidity into credit channels faster than water surging through the Hoover Dam at the height of a Rocky Mountain snow melt.

Just as the great Colorado River brings life and growth to the parched deserts of the American southwest so to is liquidity the essential condition to sustain the economic viability of a corporate enterprise.

Liquidity concerns grow particularly close to the bone of small businesses. Liquidity is their bread of life and small businesses must master the fine art of liquidity management. Unlike large corporations and governments, the ability of small businesses to print money, tap commercial paper markets, leverage or sell assets or engage in other forms of exotic balance sheet alchemy is limited. So at the end of the day, when the payroll is due, a key supplier is waiting by the receptionist for a check and your best sales person is doing her best to close that huge new deal your anxiety grows a bit as you ponder your cash position and begin to project the next three months.

You call your local banker. You are a long standing and valued customer but “risk aversion” continues to creep into the discussion and they tell you that their funding sources have grown “risk averse” due to losses in the sub-prime mortgage market and finding new funding sources have been difficult. So for now at least the expansion of a credit facility with them is not an option.

You keep getting calls from those merchant finance companies that are offering short term loans but the prospect of paying usurious rates of 18%-30% on future credit card receivables will put a major dent in your profit margins. That makes this credit channel’s cost of operating capital prohibitively expensive.

That’s where risk management comes in. Many small business owners are masters at risk management. They are skilled entrepreneurs that put personal capital at risk. They got major skin into the game and that motivates them to continually evaluate how to protect their assets and maximize returns. Many small business owners are extremely gifted at leveraging assets to address opportunities. Assets such as monetary capital, people, intellectual capital, suppliers, facilities and products are routinely utilized to enhance and extend liquidity. But as credit markets tighten all small businesses need to become more aware of preserving liquidity. This can be accomplished by incorporating a few simple risk management practices.

A good place to start is to make sure your systems and business processes are optimized to support efficiencies. Many of the traditional cash management techniques are well known. Small business accounting software and the availability of internet banking tools are a great help to small businesses. These tools help to extend and manage payment cycles, match assets to liabilities and a good banker will help you develop specific strategies and practices to address these issues and improve your cash position.

Another area to consider is to arbitrage credit providers. Obviously this tactic works great during times of enhanced liquidity but credit channels are still vibrant and the market is crowed with numerous providers and products. Though it is true that as more participants enter markets they tend to become more efficient resulting in small spreads the volatility of the credit markets can work to your advantage. If you can replace a line of merchant finance credit with a bank offered facility you will increase your margins by the spread of the savings.

Sources of capital leakage from the company are a major threat to liquidity. Small business managers must be aware of how to assess this risk factor and how to minimize potential damage it can cause. By “leakage” of enterprise capital we mean to suggest that capital invested by the business did not create an acceptable rate of return. A concerted approach to assessing and managing risk factors preserves liquidity, builds equity and a strong balance sheet.

The principal villains that contribute to capital leakage are poor cash management and inappropriate, non-prioritized or misdirected capital allocation initiatives. These initiatives are acquisitions or projects requiring the investment of time, money, personal energy and corporate resource that do not produce an optimal rate of return.

Small businesses need to incorporate opportunity cost in determining ROI on business initiatives. This is because a small business must limit the number of projects it can engage. It must be certain that current projects will build greater value for the business then the project it declined to pursue. An understanding of value at risk (VaR) is also a useful metric to determine what initiative or project will mitigate the greatest risk and produce the greatest return on capital expenditures.

Risk assessment is a powerful opportunity discovery exercise that requires intentionality and discipline. Many small business owners do these assessments in their head and make decisions based on gut feeling or intuition. An opportunity discovery methodology that walks you through an objective assessment of risk factors is a wonderful complement to the fine tuned business instinct of the small business owner.

Lastly, small businesses need to focus on their most profitable products, best clients and key suppliers within their most promising markets. This may seem obvious but many businesses are reluctant to alter their business models to accommodate this blatant reality. Inertia, culture and ego are the principle culprits and ironically clients, products, suppliers and markets pose some of the greatest risks to small businesses.

It is true that a rising tide lifts all boats. We have just experienced one of the greatest economic expansions in the history of the global economy. It’s been a great run. But the party is over. The era of an unending flow of easy credit and cheap capital is over for now. Until happy days return again we must adapt and protect our solvency through effective liquidity management practices. During times of economic uncertainty and distress it’s a great opportunity to build financial health through effective risk management because when the tide goes out the rudderless businesses captained by poor stewards will crash upon the rocks and get beached on unforeseen shoals or sink into the depths of the unforgiving briny deep.

You Tube Music Video:  Billie Holiday,  How Deep is the Ocean?

Risk: credit, small business,  SME, recession, liquidity

April 29, 2010 Posted by | banking, credit crisis, risk management, small business, SME | , , , , , | 1 Comment