Next year's economy will be hostage to the scary Euro crisis and towering debts at home. Here's how to get your business ready for a tough year.
Your business environment will depend a lot on how German chancellor Merkel and French President Sarkozy play their cards in 2012
As a business owner, you need to know the truth about what type of economy you might face in 2012. I recommend you prepare for one of two scenarios: 1) if we’re lucky, a weak economy; and 2) if we’re not, quite possibly a bleak economy. That means you should get your financial house in order so that you’ve got staying power for another tough year.
Now, I know you prefer to maintain an optimistic outlook. It’s one of the defining traits of entrepreneurs. But don’t confuse faith in yourself and your business with optimism about the global economy. The truth is, the more realistic you are about today’s environment, the greater the chance that your business will succeed. Why? Because you’ll take the steps necessary to position yourself for survival.
What are the basics? For starters, stockpile some extra cash. Cash is king in a crisis, and as an entrepreneur, you can never have enough cash. If you’ve got a line of credit, make sure you’ve got a margin of safety, meaning that the outstanding balance is well below the credit limit. Develop a list of non-critical business expenses you could cut if necessary to meet cash flow needs, and rank them by what you would trim first. These should be expenses that are helpful but not critical to operating the business. You can always add them back later.
So why do I think we’re in for a weak or bleak economy? For one thing, the eurozone is a smoldering wildfire. If politicians can’t contain it, watch out. Mohamed El-Erian, the Co-CIO of PIMCO and one of the world’s leading authorities on credit markets, puts the odds of a full-blown eurozone crisis at 1 in 3. If the eurozone implodes, all bets are off on the global economy.
As a business owner, anytime you’re facing a 33 percent chance of a global economic calamity, you’d better get prepared. It’s better to brace for a crisis and experience unexpected good times, than to prepare for good times and experience a crisis. The first scenario you’ll survive, the second one you won’t.
If the eurozone crisis is the bleak scenario, then what’s the weak one? That’s where European leaders put a big Band-Aid on the Euro debt crisis and bail out their banks and spendthrift countries. They basically print their own money to buy their own debt, and push the problem out several years.
The odds of a Band-Aid solution are 2 out of 3, which is pretty good. If European leaders hold the eurozone together for the time being, that means the U.S. economy will probably grow in the 1.5 percent to 3 percent range, which would be considered a weak economic environment. But all in all, not bad for the challenges we face.
It’s unlikely the U.S. could grow significantly faster than that for the entire year because of our own structural problems. First, wages aren’t growing, which means workers don’t have a lot of extra cash to spend. And since consumer spending is about 70 percent of the economy, it’s hard to get big growth without consumers feeling flush. Second, the consumer borrowing game is over. In previous recessions, consumers could just borrow more to keep the party going even when their wages were stagnant. But now most consumers are maxed out on debt and have little to no ability to artificially boost spending.
So then you have the government, which is the white knight of spending when all else fails. But this time, our government is also running out of room to borrow. There’s broad-based pressure on federal, state and local governments to cut spending. If you put a damper on both consumer and government spending, you’ve pretty much shut down the entire ball game in the U.S. That’s how we get to the weak economy.
With an outlook like this, it just makes sense to get your business positioned for a rough patch. Many large U.S. companies posted very good financial results over the last few years because they got in front of the recession and took the necessary steps to maintain their profits. You should do the same.
Now, we might get lucky and catch an economic tailwind that boosts the economy more than expected; and if so, great. But that’s the least likely economic scenario and the easiest one to handle. As a business owner, you should plan for the difficult parts of the cycle. And one of those just happens to be the most likely outcome for next year.
CHARLES FARRELL is a principal with Denver-based Northstar Investment Advisors and the author of the book Your Money Ratios: 8 Simple Tools for Financial Security. The Wall Street Journal called it “one of the best financial books to cross our desks.”