CIT's Effect Mostly Benign

So what does the CIT bankruptcy mean for the U.S. as well as the global economy and its hopes for a recovery? At the very least, it means that the commercial lending market, which is already almost impregnable, is going to get a lot more difficult as small businesses scramble to find alternative sources of financing. This could prove to be especially arduous for CIT's factoring customers as CIT is the largest factoring company. In addition, it could have a more far reaching affect on some of CIT’s other clients such as Dunkin’ Donuts, Eddie Bauer and various sports teams as banks are copiously cutting back on lending to small businesses.

The filing certainly did nothing to calm the nerves of the markets ahead of monetary policy decisions due this week in the U.S., Europe and Australia as well as the all-important U.S. jobs data due on Friday. However, for the most part, the markets appear to have gotten their angst out of their systems on Friday and took the CIT news in stride today. Of course the unexpected news of Ford’s earnings helped the positive movement. In general, the money markets were mixed but felt little drama as October ISM Manufacturing was up, as were September pending home sales. Perhaps we’re becoming immune to bank failures.

At the end of the day, Goldman-Sacks comes out a winner and the American taxpayers the loser. In any event, CIT will be added to the growing list of taxpayer miseries and serves as a reminder that a full-blown economic recovery is still a long way away.

Avoiding the Slow Death of Inadequate Cash Flow

The days of seemingly endless venture capital and easy credit are long over. In the current economic environment, business owners and finance executives are realizing more clearly than ever how critical it is to pay attention to the quintessential element of business: cash.

The unfortunate reality is that businesses fail. These failures can be for any number of reasons but the most common is poor cash management even when everything else is being done right. This is because so many business executives and owners place their entire focus on revenues and profit and fail to make cash management a business priority. No one will argue that revenue and profit are the ultimate goal of any business. They have little value, though, if the business cannot meet its payroll or trade obligations. Chapter 11 courtrooms are littered with profitable companies.

While the basic principles of cash management are relatively simple, the actual process of monitoring, managing and forecasting cash can be convoluted. For small businesses, the data is generally within the purview of the owner or bookeeper, for large companies, the required data must be obtained from sources outside the treasury department. While balance and transaction data are routinely available through electronic banking downloads, the activities that induce these transactions depends on sources that are sometimes less than cooperative.

Regardless of the size of the company, the bottom line is to regulate the billing, collection, payables and disburesements procedures. While the gathering of information varies and businesses will have diferent approaches, there are four key basics:

Credit Risk: Evaluating customers and assessing their level of credit risk is an important part of cash management. Unfortunately, many business owners and executives tend to shy away from these activities out of fear that requesting credit-related information will upset the customer and cause them to go elsewhere. It is never a good idea to use the extension of credit as a sales tool.

Collections: Once the customer relationship is established, the company's cash flow will be determined by how well the company manages the collections process. The elapsed time from the issuance of an invoice to receipt of the customer's check needs to be commensurate with the company’s cash requirements and adhered to. Most companies will encounter customers that are habitually slow payers. It is important to recognize these customers and either anticipate those delays and incoporate them into the forecast or discontinue credit privileges. It is seldom a good idea to use payment terms as a sales tool.

Payables: The Accounts Payable trial balance is essential to a solid cash forecast and, by extension, efficient cash management. That said, the value of the trial balance is diminished without timely entry of vendor invoices. Whenever possible, have vendors submit invoices electronically. To be valuable, the aged trial balance should reflect all upcoming payments for at least the next 30 days.

Disbursements: The payment protocal should be commensurate with industry standards but, more importantly, the company’s collections. Once the protocol is established, it must be adhered to. It is not a good idea to “play favorites” when processing payments.

Poor cash management is poor management. Be a knowledgeable manager and ensure that organizational data and information about cash requirements are organized and available for use. We help our clients develop and maintain a sound cash management system effectively using knowledge and technology adding several points to their ROI or simply keeping them from insolvency.

Could the Falling Dollar help the economy?

As the U.S. has the largest and most diversified economy, the US dollar has always been the currency of choice for other countries and currency traders. Virtually anything made anywhere in the world is made or traded in the US. Further, the dollar has historically been secure from political upheaval and state confiscation. The dollar has benefited from its function as the world's primary physical currency, used as legal tender in many foreign countries and circulating as parallel currency nearly everywhere. In 2003, about 60% of the US currency in circulation was held outside the U.S.

For the better part of the last decade, the US dollar has been loosing its value but until recently, the US had managed the dollar fairly well resisting the temptation to borrow too much and flooding the global market with too many Greenbacks and Treasury securities. However, the bursting of the credit bubble and the recession resulted in huge federal borrowing to finance the massive U.S. stimulus package and other entitlement programs heralded as the panacea for the ailing U.S. economy.

The shrinking dollar should have a positive impact on trade. American consumers should buy fewer imports if imports become more expensive and American exporters should sell more to markets abroad if U.S.-produced goods get cheaper. Foreigners should become more inclined to visit the U. S., and Americans should become less inclined to travel abroad. This should even out the trade flows, and stabilize the currency markets. All things being equal, this should spur job growth in the American manufacturing sector as worldwide consumers flock to purchase these cheap American products and discounted hotels and restaurants. We saw this in 1997 which is the last time the greenback’s purchasing power was this low. At that time, though, the dollar was rebounding from its low in the mid-1980s so the trend was positive. Also, it was easier then to make changes in the trade numbers because the price of oil ranged from $22 to $26 a barrel, and China's exports were tiny.

However, China has undervalued their currency (yaun) for years by selling huge amounts of yuan for dollars to currency traders. The undervalued yuan makes Chinese exports artificially cheap and foreign products too expensive in Chinese markets creating huge trade surpluses and double-digit growth for China. From 2006 to 2008, the US trade deficit went from 1% to 4% of GDP. This should have created a shortage of demand for U.S. goods and services and resulted in a recession. However, as the largest US lender, China used it’s undervalued yuan to purchase U.S. securities which it in turn loaned to U.S. consumers against their homes and on credit cards, keeping the U.S. economy going…….temporarily.

Well, there is some good news; the stock market is up about 50% from it’s March low. The not so good news is that as the dollar falls against the euro, yen and other major currencies, that gain becomes about 30%.. Additionally, when the US ended the convertibility of the dollar into gold, it provided the opportunity for other countries to manipulate the system to gain competitive trade advantages. An opportunity that China has fully exploited.

Americans have a strong appetite for Japanese cars, Chinese clothing and electronics and French wines and don’t seem to be slowing their consumption much. Additionally, the unwillingness of the U.S. government to allow domestic drilling coupled with a compulsory demand for fuel seriously lessens the positive impact that the shrinking currency should have on trade. The impact of the devaluing dollar depends upon the adjustability of the demand for exports and imports. So far, the demand has not been very adjustable, so an increase in the price of imports has not reduced the value to any significant extent. Sometimes a devaluation has a lagging effect so it’s possible that the devaluation may still produce some boost to the U.S. economy . However, if the U.S. housing market continues to decline, and unemployment continues to rise, consumer spending will continue to fall and there will be no authentic recovery, In this case, any positive impact of a devaluing dollar will be limited.

Pay now or pay later

Hard to believe but there was a time when most people actually opted not to buy things that they couldn’t afford and, for those that did get themselves into debt, they got themselves out of it. Interesting enough, that was back before 1974 when the intragovernmental debt was around $6 million (excluding the Vietnam war period) and the total national debt was less than $500 million

The Outstanding Public Debt as of today is $11.2 trillion. Of that, about $6 trillion is held by the public and another $5.2 trillion is held by government accounts. From January 2000 to January 2008 , the national debt grew about $4.9 trillion or about $1.7 billion every day. From January 2009, the national debt has grown about $5.8 billion per day. Though there’s a legal limit to the national debt, every time Congress needs more it just votes to raise the limit.

Despite the Treasury’s purported goal of a strong dollar, and the Fed’s goal of low inflation, the enormous burden of federal debt is making those goals increasingly difficult to achieve. Heavy borrowing by Uncle Sam on both sides of the isle has exacerbated the dollar's decline. This has created concern among investors who pay with other currencies as they worry that they may not get all their money back. Freddie Mac and Fannie Mae notwithstanding, this usually results in investors demanding higher interest rates to compensate for the loss in value from the weakening currency. As Uncle Sam’s creditors demand higher interest or decide to stop lending, the US Treasury will need to print more money. This will inevitably cause inflation as the economy improves. Of course, there is a silver lining for the government as, oddly enough, higher inflation and/or a weaker dollar may allow the U.S. Treasury to pay back borrowed money with cheaper funds. Unfortunately, however, higher inflation also destroys domestic savings for Americans.

At the end of the day, this is really not completely in the hands of the Fed…..though they generally act like it is. As our economy is driven by consumer spending, all that they can do is adjust interest rates to try to manipulate spending. This presupposes that everyone is spending on credit which is, of course, a good presupposition.The real solution is for Americans to get back to saving and investing. There’s no need to stop buying. It just means saving up and paying as they go instead of leveraging their futures by buying now and paying later…..or never and then expecting the government to save them from the imminent consequences. But then, what do we expect? The push for massive government has successfully advanced the illusion that the government is our parents and that they are to solve all of our problems. All I can say is, if they are going to play this role then they should do what every good parent should do and start setting a good example.

The nation is addicted to debt and as long as Americans and the government rely on others to subsidize their spending, it’s going to be tough to even slow this runaway debt, let alone reverse it. History tells us that there will be a day or reckoning and until the U.S. gets its financial act together, we’re living on both borrowed money and borrowed time