To keep your growing company on track during a volatile economic period, you should know the answers to these six basic questions.
The Inc. Economy
No doubt about it, predictions about the economy are all over the map. But knowing the answers to six basic questions can help you chart your company's course
SPECIAL REPORT
How do I look at capital markets these days?
Differently. While financing opportunities still exist for good growth companies, the rules of the marketplace are shifting--and will continue to redefine themselves as the various capital markets adjust to current, and seemingly unpredictable, problems around the globe.
Call it the domino effect. Seesawing stocks help dry up the market for initial public offerings, which increases the anxiety level of potential investors who can no longer count on a quick exit strategy if they buy into an entrepreneurial venture. That's what's happening now. But Ben Boissevain, managing director of E Technologies Associates LLC, an investment-banking and consulting firm in New York City, expects the situation to worsen as the angel community becomes more strapped for funds. "One source of money--all those Wall Streeters looking to invest big bonuses--is decreasing," he says. "And all those entrepreneurs who would have gone public and then invested some of their proceeds in other private companies won't have the money, since they won't be able to carry off an IPO any time soon."
The situation among venture capitalists and other private-equity firms is more of a mixed bag. The firms that have already raised funds (either from investors or through recent IPOs) have money that needs to be invested, so they'll certainly remain on the hunt. But the groups that are cash poor, at least comparatively speaking, will have a hard time raising new funds for deals under current uncertain conditions. If the IPO slump is prolonged, expect this source of capital to get tighter and tighter.
Gayle Veber, managing partner of the investment-banking firm Veber Partners LLC, in Portland, Ore., sees no cause for alarm, at least not yet. "The markets aren't closed, except to low-quality, high-risk deals. What I see happening now is that maybe 10% of private deals aren't getting done. The remaining 90% of financings are happening, just at lower valuations." Probably the only type of investor who isn't negotiating for lower deal valuations these days is an entrepreneur's mother (and even friends and relatives may be wising up if they read the newspapers).
There's the rub: with fewer financing options, most business owners have no choice but to value their equity at a lower price than they might have as recently as last summer. And that's not all. "We're seeing much more attention being paid by investors to the way deals are structured," notes Boissevain. "Everyone is concerned about safety. So people are insisting on guarantees that will increase their equity stake automatically if the company fails to meet certain targets." Or they may build a layer of debt into an equity deal as another type of safety net. Are those trends all bad? No, says Boissevain. "With less money to go around, people will have to concentrate on making money, not just raising it," he says. --Jill Andresky Fraser
What are the key financial indicators I should be watching?
That, as they say, is the $64,000 question. Unfortunately, in an economic environment that's as basically unpredictable as this one appears to be, there's not much agreement on which sets of numbers or financial results can help any of us predict what's coming next.
"We're in pretty uncharted waters," says Barbara Grogan, president of Western Industrial Contractors, a $10 million company in Denver. "In terms of the old charts, the old indicators, I'll be damned if I know what holds the answers for us. I'm just glad that I'm not an economics professor trying to make sense of all this right now."
Grogan, whose rÉsumÉ includes a six-year stint as the board chairman of the Federal Reserve Bank's Denver branch, confides that although she reads the business press carefully and takes note of various statistics and market trends, "I don't know if I'm actually making business decisions right now by paying attention to any particular ones. What they do is help reinforce this holistic sense I've got that we're in a new business environment that's unlike anything we've ever seen. After all, we've got companies with hundreds of millions of dollars of market capitalization but no receivables. We've got people who are willing to invest $20 million, $40 million, $100 million or more in companies with no revenues. We've got new industries arriving daily. And we've got plenty of companies that still look strong, even with this conflagration going on in much of the world around us."
Bert Ely, a financial and monetary-policy consultant in Alexandria, Va., agrees that it's tough to try to make sense out of a few key numbers, especially on a day-to-day basis. "We're in a transitional environment in which markets are unwinding themselves from past excesses. Given the volatility we're seeing in foreign-exchange rates, stock prices, and interest rates, you can go nuts trying to figure things out on a daily basis."
Dan Laufenberg, the chief U.S. economist for American Express Financial Advisors, agrees. "You have to try very hard not to get caught up in the day-to-day noise of different statistics, which are probably telling you a range of different and conflicting things. It's the trends that matter. And incidentally, I think those trends are still fairly positive for U.S. businesses." While Laufenberg emphasizes that he never follows one single shortlist of key numbers, he does confide that the unemployment rate and industrial production are at the top of his list.
The best piece of advice for business owners: think of large market trends as background information, but don't focus too closely on them. Instead, as Ely recommends, "keep your eyes on the same measures of real economic activity that directly affect and are particularly relevant for your company and industry." Those might include order rates, inventory turnover, changes in consumer-debt levels, or--closer to home--the aging of your own company's accounts receivable and payable. After all, although the marketplace may be changing, the fundamental rules of running your business haven't changed at all. --J. A. F.
How should I think about debt?
Let's talk about your own company's leverage first. If you borrowed too much when the good times were rolling, you're going to need to rethink your growth strategy pretty fast. What's too much? It's any debt load that your company's cash flow can barely support. After all, unless you and your customers are completely immune to all overseas problems, as well as to those downturns on Wall Street and elsewhere closer to home, you may find it difficult to keep up with principal and interest payments. That kind of situation can spiral downward very quickly.
