Small
Business Environment
We have observed
solid performance of small businesses so far this year. Generally
speaking, revenues have grown and gross profit margins have stabilized
(low compared to prior years, but stable). This is good news! So why
are so many small business owners so stressed or frustrated?
One reason might
be cash flow. Cash flow from operations is stable; however, cash flow
to owners is lower. The forced process by financial institutions for
small businesses to deleverage is mandating cash flow profits to reduce
debts. The small business is left with profits, taxable income and
minimal cash. The financial institutions don't understand these decrees
are draining the very working capital and liquidity their borrowers
need in order to begin to grow once again. Although it is easy to point
the figure at the financial institutions, the business owners must take
final responsibility and must learn from the past few year in order not
to over leverage in the future. Let's not allow history to repeat
itself again.
Potential
Global Manufacturing Shift
The more I have
learned about farming over my life the more respect I have for farmers.
The planning and patience which is required is not found in the modern
urban life of quick and massive amounts of communication. Briefly, the
farmer must prepare the land, till the soil, plant the seed, weed and
care for the crop, harvest and then take the final outcome to the
market. This is a lot of hard work and it takes time. Patience is a
virtue!
Businesses are
the same with concept to market products and services. A great
allocation of time and resources are used to develop the next
generation of products and concepts. A large corporation can spend
hundreds of millions (if not billions) of dollars on these next
generation productions. Generally speaking, these concepts are
initially conceived in the United States and other western countries
which believe in intellectual property rights (i.e. patents). Then the
product is manufactured in a different country with much lower wages. Usually
the manufacturing takes place in Asia with the most popular example
being China. Even with the cost of transporting and distributing the
product from overseas the arrangement is profitable.
However, a few
variables in the equation are changing. First, companies are finding
out very quickly the country they are producing their goods in are not
enforcing intellectual property rights. Companies are waking up to the
fact that they have invested hundreds of millions (or billions)
developing a product transferring knowledge to a factory to find out
within two years the same factory is now their main competitor.
Second, wage
rates in the Asian manufacturing countries have risen during the past
several years. Compared to stagnant to lower wages in the Western
counties has resulted in minimal wage difference. This may be due to an
increase in overseas standard of living, a decline of the currency
value of western countries or a combination of both.
Third, investors
have not become fully aware of loss of intellectual property situation
and are not calculating it into valuations. However, as profit margins
begin to come under pressure investors will demand net profit growth.
Activist shareholders may grow more influential in the future. A quick
way to boost profits might be to stop giving away your knowledge free
to your future competitor in lieu of short-term savings in labor costs.
Fourth, the cost
of energy and transportation will continue to rise. To transfer massive
amounts of goods across the seas or across continents requires fossil
fuels. There are no solar powered freight trains or wind pushed ocean
liners. The power of these resources is oil. Most economists and
experts expect oil to increase in the future.
These issues and
concerns are on a collision course and will result in a major shift of
where high-end manufacturing takes place globally. The United States
currently has excess capacity as well as excess work force. The United
States also protects intellectual property rights. At the Georgia Society
of CPA Real Estate Conference in June 2011 several commercial real
estate brokers and agents mentioned seeing the signs of selective
manufacturing returning to the United States. Additionally, the
whispers of and the scouting trips by companies has increased. Of
course, the same individuals all signed confidentiality agreements and
could not mention names, dates or anything specific.
When I receive
these data points I am led to believe the return of high-end and
sensitive manufacturing will return to the United State within three to
four years. This return will fuel jobs and housing along with other
sectors of our economy. Small businesses will feed off of this new
energy. The return may also increase global competition by increasing
intellectual property rights and contractual agreements in counties
which currently do not do so.
It is too early
to get too excited. From aforementioned farming example, the land is
prepared (via United States excess manufacturing capacity and
employment) and the field is tilled (the whispers and scouting trips).
Now our economy needs for these companies to plant their seeds!
I have been told
that my views on this are "great for daydreams" and a
"great what if" for the future. I am not trying to stir false
hope. The questions remain for small business: how do they survive
until then? How do they strengthen their financial position?
