Risk Rap

Rapping About a World at Risk

The Yin and Yang of Inflation

inflationpicInflation like all risk is a double edge sword. Its negative nature will upset the apple cart and pose uncomfortable challenges for SME managers that have grown accustomed to the status quo.

It will force managers to reconsider their well conceived business plans and perhaps more closely scrutinize this quarters P&L or the company balance sheet. It will present serious challenges for businesses supply chain and client relationships. It may raise the eyebrows of your shareholders and credit providers perhaps provoking some pointed questions concerning your management skills and the validity of your business model.

That said inflation does have an upside. Like all risk factors it has the potential to create opportunities. Inflation will drastically alter market conditions. It will reveal inefficiencies that nimble SME can actively engage and manage to turn those market conditions to their advantage. The key operative words are management, intentionality and active engagement.

Inflation is a silent killer. It stalks all SME threatening to gobble up product margins, revenue opportunities and bottom line profits. It diminishes customer buying power and may threaten the solvency of large customers and suppliers. It drives up the cost of capital, making credit more expensive while it forces state and local governments to raise taxes and fees.

The inflation bogey man lurks in the profit and loss statements of all businesses with SME being particularly vulnerable to its effect. Inflation dramatically shows itself on the expense side of the ledger in the increases for basic materials, energy, delivery services, T&E, administrative expenses and employee benefits. Inflation also affects the income side of the profit loss statement. It erodes the buying power of your customers and threatens collection of receivables by extending days outstanding, increased write offs or the sale of uncollected debt for pennies on the dollar.

SME profitability is particularly sensitive to the effects of inflation because of economies of scale, concentration of risk factors and lack of pricing power.

Many SME lack pricing power. Pricing power suggests that if price of a product rises to a certain level demand for that product will not diminish. For a SME to have pricing power it must offer value add product to dependent buyers. Its product or service cannot be easily replicated or widely available from other sources.

While pricing power escapes most SME numerous factors inhibit their ability to become low cost producers. They deliver product or service differentiation to their customers by other means then low price. Inflation erodes consumer purchasing power driving buyers to seek low cost producers. In this environment SME may suffer when buyers trade down to low cost providers. Key customers may compel SME to lower prices to be more in line with lower cost producers. This is a major threat to SME.

SME tend to have greater risk concentration in their business model. Heightened risk concentrations are most pronounced in small businesses due to a limited product line, geographical risk, market cyclicality and in client and supply chain relationships. Consider a small manufacturer of finished steel products for the home construction industry. Generally, manufactures profitability is highly correlated to the price it pays for basic commodities and has an extremely high concentration of supply chain and product risk. Small businesses may not be able to recover or adjust its product prices to cover increased commodity prices due to existing contractual agreements with customers or its lack of pricing power. The abatement of market demand due to a recession may provoke larger customers to demand price concessions by threatening to move their business to lower cost producers. The pressure on this small manufacturer is compounded by a spike of smaller account losses and moribund demand due to weak cyclical market conditions in its target market.

It’s almost a perfect storm of negative business conditions. Small businesses managers need to understand how inflation touches all aspects of their business and must manage its impact to maintain profitability and sustainable growth.

Managing Inflation Risk with a WIN Campaign

SME can meet the challenge of inflation head on by implementing a Whip Inflation Now (WIN) program that engages the numerous risks inflation poses. In deference to our former President Gerald Ford, business managers can initiate WIN Programs and actions to temper the impact of inflation and to seize opportunities that rapidly changing market conditions create. Small businesses must be extra vigilant and proactive in managing all classes of business risks.

Some small businesses will cave into the demands of their large accounts to cut prices to prevent them from going to a lower cost provider. This is very dangerous for small businesses and can result in “death by a thousand cuts.” Managers should not wait for their largest account to approach them seeking price concessions. Now is the perfect time to go on the offensive and alter the value proposition that only your firm can uniquely deliver to key accounts. Remember your largest accounts are experiencing the negative effects of inflation as well. Go to them and propose a WIN Campaign.

A company’s WIN Campaign can offer a joint marketing program using advanced web enabled technologies. Your WIN Campaign can implement an expanded training and support program tied to a business development program or supply chain rationalization. You may suggest a partnership to develop a new product or put in place a customer loyalty program. Your job is to create a unique value proposition that adds value to your product and convey it to your customer so they cannot commoditize your product. Together you and your clients can WIN the fight against inflation and turn it into a business development initiative. Your clients will appreciate the fact that you are thinking about their business success.

Another common knee jerk reaction to fight rising business costs is to reduce expenses by cutting expenditures on areas that do not support the mission critical functions of the business. Capital is allocated to maintain funding to support sales, production and product delivery. This is coupled with a lean administrative management structure and this model is seen as a recipe for economic survival. Being good stewards of corporate capital is essential during these times. Capital leakage is always a threat to business profitability and needs to be even more diligently managed during times of economic duress. But this strategy is a subsistence survival strategy. It is based on investing the barest minimum of capital to address fluctuating market conditions. This strategy may limit small businesses ability to literally capitalize on opportunities that changing market conditions present.

Cutting expenses for marketing is usually another budget casualty when businesses look to cut costs. This will reduce your current expense line for this quarter and will certainly help bottom line profitability; but skipping this year’s trade show will not help you to locate that new customer who is looking for a supplier because his current provider is struggling with product quality issues. Cutting this expense won’t provide you with the critical insights you need to stay competitive and ahead of new market entrants that are attending trade shows. Who by the way are also aggressively courting your largest account to get just a tiny slice of your business to demonstrate their “superior value proposition.”

Employee benefits and training is another area that is often the focus of budgetary cutbacks. Many SME need to closely consider the gains they will realize by cutting back on benefits offered to its employees. Cutting benefits could increase employee turnover. Training and hiring new employees are an expensive proposition for SME. The loss of key employees can potentially devastate a small business. Expertise, intellectual capital and critical business intelligence leaves the organization when a key employee walks out the door. This is doubly true if some key employees leave the firm and walk some major client relationships out the door with them.

SME can also try to employ risk transfer strategies. Insurance purchases may help in some areas but to fight inflation small businesses can use financial instruments (capital permitting) to hedge against rising prices. The purchase of TIPs, FX forward contracts, commodity or energy futures can help to offset the negative effects of key inflation business threats. As the price of oil rose this summer a modest equity position in oil or other energy company would have helped to offset the increase in energy expenses.

Thankfully adverse economic conditions will force SME to take an honest look at their product lines and business model. Economic adversity provides an opportunity for management to make hard decisions concerning product lines. This is an ideal time to focus and fund the development of products that offer the greatest potential for long term profitability and sustainable growth.

Inflation is a significant problem for small businesses but it is a problem that can be managed. Changing economic conditions alter the landscape for all businesses that accelerate and starkly reveal market inefficiencies. These inefficiencies create market anomalies and opportunities that astute small business owners and managers can capitalize on through an intentional practice of a risk management and opportunity discovery program.

Sum2’s objective is to assist clients to implement corporate sound practices that enhance profitability and sustainable growth. Sum2’s offers a wide stable of risk management apps for SME. The Macroeconomic Risk Assessment App helps managers review macroeconomic and event risks to better manage its potential effect on their business. Sum2 offers a Macroeconomic Risk App and can be downloaded from Google Play or by visiting http://www.sum2.com or by calling us at 973.287.7535.

risk: #sme, #inflation, #macroeconomic, #supplychain #office365, #mobileoffice, #metasme, #smeiot #eventrisk, #marketrisk, #WIN, #sum2

July 21, 2014 Posted by | banking, customer risk, economics, inflation, SME | , , , , , , , , , | Leave a comment

Prognostications and Expostulations

We’re going out on a limb with this one or given thats its winter we’ll say we’re walking on thin ice. We’ll gaze into the crystal ball and pontificate on eleven subject areas for 2010. With some we hope we will be wrong. With some we hope we will be right.

1. Stock Market: Buoyed by well managed earnings by the large multinational companies in the DOW, principally as a result of cost reduction initiatives and exposure to global markets the Index will finish up 6% and close at 11, 011 on the last trading day of 2010. Given an inflation rate of 4% investors will realize a 2% gain on equity investments in DOW constituents. S&P 500 and NASDAQ will be flat gaining 2% for the year.

2. Iraq War: The war in Iraq will continue to wind down. America will scale down its military presence in the country. Troop levels in the country will approximate 85,000 by the close of 2010. Though direct American military involvement in conflicts will decline, Iraq will experience civil unrest as Kurd nationalists, Shiite and Sunni Muslims seek to protect their political and economic interests.

3. Afghanistan War: The escalation of America’s military presence in Afghanistan will move the theater of war further into Pakistan. The Taliban will be satisfied to harass US forces by engaging in a guerrilla war. Taliban and Al-Qaeda supporters will use the opportunity to increase the level of urban terrorist attacks in the large cities of Pakistan. Al-Qaeda confederates will seek to reestablish base of support in Somalia, Yemen and ties will begin to emerge in Latin American narco-terror states.

4. Iran: The political situation in Iran will continue to deteriorate. This is a positive development for regional stability because it will force the ruling regime to cede its nuclear program development initiatives. Iran will not be able to capitalize on the US draw down in Iraq. It will become increasingly isolated as Hezbollah and Hamas pursue actions that are less confrontational to Israel in Palestine and Lebanon. The ruling Caliphate position will weaken due to internal political dissent and external economic pressures.

5. China: It will be a year of ultra-nationalism in China. Its stimulus program that is targeted to internal development will sustain a GDP growth rate of 8%. China will use this opportunity to strengthen the ideological support of its citizens to fall in line with the national development initiative. Globally China will continue to expand its interests in Africa and will cull deeper relationships with its Pacific Rim club member Latin America. China will continue to use US preoccupation with its wars in Afghanistan, Iraq and skirmishes in Yemen and Somalia as an opportunity to expand its global presence with a message of peace and cooperation.

5. US Mid Term Elections: Republicans will gain a number of seats in Congress. The continued soft economic conditions, state and local government fiscal crisis, war weariness and cut back in services and rising expenses will make this a bad year for incumbents and the party in power, namely the democrats. Sarah Palin will play a large role in supporting anti-government candidates drooling over the prospect of winning a seat in government.

6. Recession: Though the recession may be officially over, high unemployment, home foreclosures and spiking interest rates will hamper a robust recovery. The end of large government stimulus programs and the continued decrease in real estate values also present strong headwinds to recovery. We predict a GDP growth rate of 2% for the US economy. Outsourcing will abate and a move to reintroduce SME manufacturing will commence.

7. Technology: The new green technology will focus on the development of nuclear power plants.  The clash of the titan’s between Google’s Droid and Apple’s I Phone will dominate tech news during the year.  Lesser skirmishes  between Smart Phones makers or the war of the clones will continue to explode altering the home PC market and continue to change the market paradigm for old line firms like DELL, Microsoft and HP.   SaaS or cloud computing will gain on the back of lean business process initiatives and smart phone application development and processing infrastructure will encourage cottage industries fueling the cloud and making for some new millionaires. The tension between the creators of content and search and delivery will begin to tilt back toward the content providers. Litigation involving social networking sites will be filed to create safeguards against its use as a tool to control and manipulate behaviors thus threatening civil liberties and privacy rights.

8. Culture: The Googlization of civilization will allow individuals to embrace more corporatism as a pillar to add efficiency and order to their lives. Multiculturalism will continue to grow in the US. However a growing political backlash against it will become more of a prominent theme as Teabaggers agitate for a return to the true values of America. Electronic arts will make major leaps and bounds as commodification continues to be a driving force in the world of art. Printed words like books and newspapers will continue to dramatically decline. Writing, drawing and playing musical instruments skills will ebb as people prefer to develop digital skill sets. Texting and Tweeting make for poor practice for extended compositions.

9. Latin America: Instability will grow in Latin America as narcodollars continue to undermine political stability in Columbia, Venezuela, Mexico and Panama. The US will increasingly become involved in the conflicts between petro and narcodollars. Mexico’s stability will be increasingly undermined by the power and corruptible influence of the drug trade. China’s influence on the continent will grow.

10. European Union: The EU will continue to manage itself for stability. It will yearn to return to its aristocratic roots and will become increasingly conservative. It will continue to have a complex relationship with the expanding Muslim community. A call to deeper nationalism will arise out of a growing influence of Islam and the inefficiencies of EC bureaucrats in Belgium. The EU will continue its union of expediency to counterbalance their distrust of Russia and their distaste for America.

11. Environmental Justice: Though awareness continues to grow concerning the need to mount and implement large scale solutions to halt the problem of global climate change; the political will and resources required to drastically alter the planets current trajectory in growth of carbon emissions from the burning of fossil fuels remains unaltered. Social responsible enterprises, small businesses and individuals continue to make a difference. Eco friendly small businesses, urban farming, capital formation initiatives around renewable energy businesses are hopeful signs of a market response to the pressing problem. China is investing heavily in becoming a market leader out of business savvy and environmental necessity. Until the great powers of the world can come to some collective agreement on how to limit , cap or trade carbon credits we’ll have to be content to separate the trash and recycle, reuse and reduce.

You Tube Music Video: Donald Byrd, Stepping Into Tomorrow

Risk: unfulfilled predictions will make me look bad

January 5, 2010 Posted by | business, China, commerce, corporate social responsibility, culture, ecological, government, inflation, unemployment, war | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Charge of The Light Brigade

When can their glory fade?
O the wild charge they made!

All the world wondered.

Honor the charge they made,

Honor the Light Brigade,

Noble six hundred.

Charge of the Light Brigade
Alfred Tennyson, 1870

Today the Department of Treasury is sending out its economic stimulus checks to the US taxpayers. Each taxpayer will receive a tax rebate of $600 with additional amounts of $300 paid for each household dependent.

As a taxpayer I welcome the small relief from the burden of excessive taxation. As a business owner, I welcome the infusion of money into the economy with the hope that some of the dollars will find themselves into our corporate coffers. Though many deride the amount as just a small token, (after all what can one do with $600?) when viewed in the aggregate we are taking about a major cash infusion into the slowing US economy.

Sounds great but these types of financial gymnastics of our “managed economy” can in the long run produce some ill effects that will prolong and deepen economic malaise that we are all looking to avoid at any cost. In classic economics, pumping money into an economy is highly inflationary. Lots of money chasing goods drives prices up. This is happening on a global scale. In the case of the US dollar, more dollars in circulation will put additional pressure on the value of the dollar and may drive it lower.

This could be the Treasury Departments objective. The package will help to reset market driven interest rates, stimulate consumer demand at home and make US exports more attractive because of a cheap dollar. This might work but some think the cure is worse then the illness. The fear that the economic stimulus will spark an acceleration of inflation and add to the massive budget deficit of the Federal Government is real. Many critics are suggesting that the stimulus package is borne more from political expediency that does not address the systemic and structural issues that lie at the root of the countries current economic problems like shrinking manufacturing, crumbling infrastructure, wasteful spending, unfunded budgetary commitments and misplaced investment priorities.

So as Americans eagerly wait for the merry mailman to arm them in the current war against recession, General Paulson will be watching to see how his armies perform on the battlefields of the Malls of America.

Apple iPods to the left of me…
Sony Hi Def TV’s to the right

Life Good GPS in front of me

Black berries in the rear..
Rode on the $600…

Risk: inflation, behavioral, consumerism, deficit spending, interest rates

April 28, 2008 Posted by | commerce, inflation, Paulson, poetry, recession | , , , , , , , , , , , , | 1 Comment

The Demobilization of America

As the price of gas hits $3.50 a gallon and sure to climb near $4.00 as the summer driving season gets into full swing, Henry Ford’s and Robert Moses’ worst nightmare is coming to life, American’s can’t drive their cars because they can’t afford to pay for gas.

That’s ok, some will say, American’s can cash their economic stimulus check at the local MSB, hop a plane and head to Europe. But the weak dollar even makes a Tijuana taxi ride just out of the reach of most Gringos so travel to exotic far out places just won’t happen.

The rising price of gas and diesel will tend to keep people closer to their home barbecues. People staying home will hurt the nation’s tourism industry and popular destinations may experience sparse attendance. The tourism and entertainment industry is a major component of our economy (we offshored our manufacturing) so if tourism does take a hit this will stoke recessionary pressures in the economy.

With less American’s traveling abroad America’s cultural and psychological isolation will grow. This isolation compounded by a building resentment toward the foreign oil Cartels and the belief that they continue to hold America hostage by manipulating oil markets is a dangerous combination that may spur mobilization sentiments as the summer of 2008 chugs along.

You Tube Video: The Cadillacs, Speedo

Risk: oil, energy, military, tourism; xenophobia

April 25, 2008 Posted by | commodities, inflation, pop, recession | , , , , , | Leave a comment

On Your Marx

The Original Marxist

I can’t help but think that we are again in the midst of a new kind of enclosure movement.

Karl Marx in his classic tome on capitalist economics, Das Kapital, wrote extensively on the enclosure movement in England and the role it played on the formation of the urban proletarian class.

The enclosure movement forced rural peasantry from agricultural based production. This was done because the owners of land could receive a better return on the land by raising sheep. Sheep was in high demand because wool was a crucial commodity necessary for the burgeoning textile industry in Manchester.

The enclosure movement of the 16th century is analogous to the conversion of human food producing arable land to an agriculture that supports the production of biofuels and animal husbandry.

The rise in the price of basic commodities is also being exacerbated by the Federal Reserves policy to cut interest rates to pump liquidity into ailing credit markets.

This is creating a type of economic perfect storm for the under and lesser developed partners in the global economy. The rice riots will continue until a concerted effort is made to fight inflation and curb efforts to use bio fuels to supplement our fossil fuel based economies.

This is also another political justification for an accelerated program for the construction of nuclear power plants in the US. Site selection for the construction of a new atomic energy plant may soon be under consideration for a town near you.

You Tube Music Video: Judy Garland, How Ya Keep Em Down on the Farm

Risk: Inflation, Commodity, Environmental, Political, Social

April 14, 2008 Posted by | inflation, social unrest | , , , , , , , , , | Leave a comment

The Price of Rice in Haiti

Rice Riots in Haiti

Another entry in our ongoing series about the rise in rice prices.

Today we were confronted with images of food riots in Port Au Prince arguably the most impoverished city in the western hemisphere. UN Peacekeeping forces were straining to maintain the rule of law and prevent a total collapse of civil order.

Its startling to consider that people in the underdeveloped world pay up to 80% of their incomes for a subsistence ration of food. Here in the United States we spend approximately 10% of our income on food. An interesting metric in how to measure the spread of the difference between the developed and underdeveloped world.

I can’t help but think of the butterfly effect.

It goes something like if a butterfly flaps its wings in Beijing in May it will produce a Hurricane off the Outerbanks in August.

Haiti may be this years butterfly. It may yet remind us of how connected our world is to the seemingly disconnected events and risk factors in the global community.

Risk: inflation, commodities, political, moral

You Tube Video: Port-Au-Prince

April 12, 2008 Posted by | inflation, social unrest | , , , , , , , | Leave a comment

General Tso and the Price of Rice in America

General Tso

I love Chinese food. And apparently so do many of my fellow Americans. You can’t walk down a main street in this country or roll into a strip mall without spotting a little Chinese takeout joint.

My favorite is Tommy Cheng’s. I probably stop there about once a week to pick up a takeout order to bring home to my family. I’ll spend about 50 bucks for my order and my family and I look forward to being together enjoying our weekly repast.

Being creatures of habit I usually get the same dishes. And I am growing concerned about rising rice prices and how it will boost the cost of my quart of roast pork fried rice? If the price of rice doubles I’ll have to pay almost $12.00 for my fried rice! OUCH!

Come to think of it, I’m wondering if Tommy Cheng will continue to throw in a quart of white rice with my order of General Tso’s Chicken.

We’ll have to consult the tea leaves on this one.

Risk: Inflation, retail, commodities, entertainment, fast food, small business

You Tube Video: Louis Jordan, Ain’t Nobody Here But Us Chickens

April 9, 2008 Posted by | commodities, inflation | , , , , , , | Leave a comment

Price of Rice in China

Fears grow over rice supplies the FT Weekend reports on a front page story.

The price of rice has risen 50% in the past two weeks. Speculators and hoarding are fattening the pockets of profiteers and are heightening concerns about political instability and social unrest. Consider the implications of a rice starved Philippines, Thailand and Myanmar or dare we say China? What will be the political impact of an acute rice shortage in North Korea? How will this regime react if it feels it’s not getting sufficient attention and relief from the global community? Will it stoke up its atomic reactors and aim a nuclear missile at the worlds head to hold it hostage until it extorts its fair share from the worlds dwindling rice bowl?

This is a chilling threat to global stability and peace. We submit that the power elites of the new world order need to focus its talents and treasure to address this potential powder keg. As Americans, we would like to suggest to our President Mr. Bush that these types of problems and issues are more worthy of your attention then spending a considerable amount of political capital to maneuver ICBMs into former Warsaw Pact counties.

You Tube Music: The Dragons Backbone

Risk: Political, Economic, Inflation, Commodities

April 8, 2008 Posted by | China, inflation | , , , , , , | Leave a comment