The name is intriguing right? It sounds like something you might be interested in just because the words themselves evoke something within you. And you’re right. It’s an up-and-comer in the world of business management. It’s a new ‘buzz’ phrase worth looking into.

Blue Ocean strategy has been one of the more popular corporate strategies to be talked about in recent years. Exactly what does blue ocean strategy involve and how can it be effective? What is the role of the manager or leader in effectively designing and implementing blue ocean strategy?

What is it?

Industries today are overcrowded. There is a continuous, long, arduous battle to capture market share, and to keep it. Originally created and discussed in a book by W Chan Kim and Renée Mauborgne, this strategy is an effort to avoid some of the stresses of head-to-head competition… by getting around it altogether (kind of). It is a systematic approach to ditching the traditional ways of regarding your competition and in some ways, making it irrelevant.
Blue Ocean Strategy involves the creation of new market space through innovation and careful observance. It focuses on creating new factors that add value to your product and de-emphasizes the obsession with competition.

The well-known book-selling giant Barnes and Noble can illustrate this concept. Instead of focusing mostly on what types of books to sell, B&N used a more innovative approach. They took a step back and asked what consumers do, or want to do, in connection with buying a book. They want to sit in a big comfy chair and have a latte. They want to peruse magazines without feeling pressured. They want comfort and Barnes and Noble made this a hot commodity. They found a niche, a veritable “blue ocean” and capitalized on it.

This strategy shifts the perception that in order to be profitable you must out-compete the others in the market. Blue Ocean strategy serves to disprove this common belief and give organizations hope that they, too, can get ahead of the game.

Why is it successful?

This can be an extremely successful strategy because it captures under-the-surface demand and encourages the unlocking of new resources. It gives consumers new options that other competitors do not offer and can lead to substantially increased profitability.

At the Management Level:

The manager or leader plays an integral role in the implementation and design of this strategy because they should be the main driving force behind it. They are responsible for communicating with team members the need to expand their horizons and create new value rather than just trying to improve on what is currently offered. It is also their job to ensure that there is no “canyon” or misunderstandings amongst employees. In order for the strategy to work, everyone must believe in it. And if they do, it can be a powerful force!
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At the Implementation Level:

Of course this all seems overwhelming. And wouldn’t it simply take too many precious resources to put a plan like this in motion? You probably think there isn’t room in an already-stressed budget to even consider something so out-of-the-box. But the best part about Blue Ocean Strategy is that it is designed with simplicity.

As discussed in the Blue Ocean Strategy book, the two key pieces to successful implementation are leadership and fair process. In order to expend the least amount of resources during a change, an organization’s leader must capitalize on influential employees’ strengths to complete changes at a low cost. The other side of the coin is utilizing a fair process, an essential part of winning employees confidence in your project. This mitigates the possibility of negative reactions and resentment that can arise when trying to implement something as novel as Blue Ocean Strategy concept.

The book, Blue Ocean Strategy, is a fantastic resource to explore if the concept sounds like something you might like to tackle. If you’re unsure, that’s understandable. Just keep in mind that you can’t always exist comfortably in the niche you’ve created for your company or product, especially if successful. There will always be a line of competitors looking not only to replicate your success, but to exceed it entirely. Keeping your finger on the pulse of your competitors is an important practice to keep, and learning what could be done better is even more so. Nonetheless, we’re reminded that no matter what space you’ve carved out for yourself, it’s rarely permanent. Blue Ocean’s included.

How much do you know about the North American Industry Classification System (NAICS)? If you’re like a lot of business owners, chances are, not much.
Here is a short overview of the system and how to navigate it:

What is NAICS?

The North American Classification System was introduced to essentially replace the older method, Standard Industrial Classification (SIC). Developed in the 1930’s, SIC was the go-to method of industry classification. However, it has recently been overshadowed by NAICS because of frequent criticism that the SIC process has proved unable to handle the rapid current economic change.
NAICS assigns a code to a business to correspond with their economic activity. This system breaks down into twenty industry sectors. For small businesses, these codes are typically used for contracting and tax purposes.
As the SBA states on its website, a NAICS code is comprised of six digits. The first two indicating your economic sector, the third your industry subsector, the fourth corresponding to your industry group, the fifth referring to your industry and the sixth denotes if an establishment is specific to the US, Canada or Mexico.

Why is it Relevant to You?

Potential applications of the NAICS knowledge include:

• Statistical analysis
• Risk assessment for insurance
• Tax incentives
• B2B
• Benchmarking
The NAICS is can play a substantial role in the life of a small business. One application of these codes is by the government to generate statistics for analysis to aid research. When applying for business insurance, an agency will likely use your NAICS code when assessing risk and generating rates. High-risk industries require different action. In addition, some federal and state agencies require an establishment to have a NAICS code for tax reasons and occasionally tax breaks are given to businesses in specific industries. If you work with a company that has B2B (business to business) arrangement with other companies, you can use the NAICS code to glean important information about prospective customers. In short, it is a system of industry categorization that could be used for a wide range of analytical purposes. Take benchmarking for instance; as a business owner, you may be interested in determining how your financial statements compare with that of your peers. It is important to at least have a marginal understanding of the NAICS code system before setting out on your benchmarking quest.

How can you place your company within NAICS?

For instance, you run a software publishing firm and need to determine your NAICS code. Publishing is within the “Information” economic sector, thus NAICS 51. This economic sector includes Publishing Industries (NAICS 511), but also includes Motion Picture and Sound Recording Industries (NAICS 512), Broadcasting (NAICS 515), Telecommunications (NAICS 51), Internet Service Providers (NAICS 518), and more. If benchmarking and looking for financial data and trends from firms in our example industry, we need to refine our NAICS code to the six-digit level. Let us follow the three-digit Industry Subsector of NAICS 511 for Publishing Industries.
Within Publishing Industries, the four-digit Industry Group reveals two industries: Newspaper, Periodical, Book, and Directory Publishers (NAICS 5111), and Software Publishers (NAICS 5112). This particular industry does not break down into any further segments so the five-digit Industry code takes on a single “one” showing NAICS 51121. Likewise, if there were several types of Software Publishers within the NAICS code system, they would correspond with a fifth digit as 1, 2, 3, and so on. Lastly, the six-digit U.S. National Industry code for our sample industry is NAICS 511210 Software Publishers, as no further breakdowns exist.

Learn more

A wonderful source for searching NAICS codes and learning their structure and descriptions is the U.S. Census Bureau’s NAICS website at http://www.census.gov/eos/www/naics/. In addition, FINTEL offers its own resource for researching the NAICS system linked with its Industry Metrics tool. Happy searching!

Just when the economic outlook seems very bleak to us in the US, as well as abroad of course, there is some hope for selling a company. Obviously, it’s extremely tough to sell a business and it is not for the feint of heart. Buyers want positive cash flows, profit growth etc etc etc. You have heard it a million times. But fortunately there seems to be a light at the end of the tunnel. Investors overseas, particularly in the massive force that is China, are dying for ways to get an “in” into the American market without paying the high price tag.

So you want to know the approximate worth of your interest in a business. You want to pin down the exact economic value you have spent innumerable hours perfecting. How do you even begin to get a clue about this? If you are looking to sell, would you have the remotest idea about a legitimate selling price? Lets go over some of the most basic concepts of business valuation to give you an idea.

Defining your Motives and Describing Your Environment

First and foremost you must define why you are constructing a business valuation. What are the reasons for and circumstances surrounding your decision to conduct this analysis?
Next, you need to describe the conditions of the economic world surrounding the deal. It’s important to research the vitality of your industry currently as well as the more basic local and regional economic conditions.

Comparable Transactions

Another good initial step toward putting a value on your enterprise is looking to your peers. Find a similarly structured transaction to your proposed financing deal structure. This means finding a company with the following criteria:
• Comparable in size of
o Market
o Number of employees
o Product type
o Industry
• Similar life stage
• Geographic proximity
Looking at a business that somewhat mirrors yours is a good way to project some things for yourself. It is also good to investigate how the deals went for both parties and what percent ownership investors acquired in proxy transactions.

Valuation Techniques

Book Value

This is the simplest way to define what you are worth. The numbers. The book value is, simply put, the value an asset carries on a balance sheet. This is calculated for a company by subtracting intangible assets and liabilities from total assets. The book value is helpful in one of the most basic ways- it is a tangible starting point for evaluation. It gives you something to base other analyses off of. Of course it is important to note that accounting practices have a significant effect on book value and should be taken into consideration.

Adjusted Book Value

The adjusted book value is designed to reflect fair market value. This is done by considering the book value but also subtracting off balance sheet liabilities. The ABV is able to adjust for large discrepancies between the book and actual market value of tangible assets. It also adjusts intangible assets to zero, which is an often criticized part of the method. This can be a good way to showcase the equity of a company but is not often accepted as a trustworthy valuation technique.

Liquidation Value

This particular practice is not usually of any importance to a buyer or seller but it can be constructive as a “floor value.” This estimates the value that could be made from a quick sale but is merely an indication rather than a concrete estimate to base decisions off of.

Market Multiples

A market multiples analysis, also referred to as a comparison analysis, uses comparable businesses in your industry to assess value. It uses averages to produce more broad-range, but accurate results. One of the most praised parts of the market multiples approach is its ease of use. There is no need to compute discounted cash flows and it is a relatively easy to understand. Components/ ratios of this approach are:
• Price to Earnings Multiple
• Price to Sales Multiple
• Price to Invested Capital
• Price to Book Value

Net Present Value/Discounted Cash Flows

This is difference between the present value of cash inflows and cash outflows. It is a cash flow summary designed to reflect the time value of money. A company’s cash flows are discounted back to the present value using a market-adjusted discount rate.

Art and a Science

There is no doubt that valuations are much more complex than the basic methods outlined here, and this list is not exhaustive. However, these methods do fall into one of the traditional categories of valuation: assessment of business assets & liabilities (Asset Approach), historical earnings, future earnings (Income Approach), and industry or market-specific trends and multiples (Market Approach). In reality, a combination of several methods is generally applied for a more comprehensive approach to business valuations.

How does one determine the appropriate combination? For values achieved by each complementary method, how is a weighted average applied to arrive at an appropriate value? Defining your motives and describing your geographic, economic and competitive environment all play a role in this complex decision. It is this facet of valuation that leads many Business Appraisers to refer to their trade as more of an art than a science.

Solutions

Considering the complexity involved in any serious business valuation, we suggest hiring an experienced Business Appraiser. However, to get a “ball-park” perspective on what your firm may be worth, there are plenty of tools on the market. Business Owners may consider several of the Financial Calculators available online, like those available at http://www.dinkytown.net for instance.
For Business Coaches with a need to analyze existing and pro-forma statements for clients, the FINTEL Business Analyzer provides a great solution to quick and powerful business valuations, using methods including Book Value, Earnings Capitalized, Capitalization of Current Earnings, Average and Top Quartile P/E Ratios, and Operating Income Multiple showing values for each method with a weighted average considering all methods for a more comprehensive approach.

Food for Thought

Whether business owner, business coach, or prospective entrepreneur - it pays to learn more about this very complex topic of business valuation. Why, you ask? Why not just leave the valuations to the experienced Business Appraiser as suggested? Consider, the financial and operational decisions that have been made, currently applied, and prospectively planned within a company all impact its current and future value. Thus, a more complete understanding of valuation allows decision-makers to maximize value-enhancing strategies and minimize value-reducing mishaps with this perspective in mind.

Quite often, we see that new dreams and new businesses do not sustain beyond the take-off stage due to a small error in management. For instance, a miscalculation of the operating expenses that in business parlance is called ‘Working Capital’ can be catastrophic.
In some cases, an entrepreneur might have done a reasonably good assessment of the operational expenses but may have simply failed to incorporate the debt payment as a key component of working capital. Or maybe, a crisis situation was not provided for by way of contingency funds. One false step, and it triggers a chain of events that lead to a situation like a boulder hurtling down a hill wherein one has no choice but to wait for the boulder to damage everything on its way down and then come to a standstill. And, of course, it is too late by then.

The short-term decisions of a company can be grouped under the heading ‘Working Capital Management’. This deals with the short-term balance of current assets and current liabilities, the focus being on management of cash, inventories, and short-term borrowing and lending.

By definition, Working Capital is simply the excess of current assets over the current liabilities. Short-term assets denote the cash and all such assets that can be converted to cash within a year like marketable securities, accounts receivables, short-term notes receivables, inventory and pre-paid expenses. The short-term liabilities comprise cash expenses within a year like accounts payable, short-term debts such as credit lines, short-term components of long-term debts, accrued expenses.

All small and mid-sized companies consider Working Capital management as the most important management activity because of the significant financial impact it has on the overall organization’s health, not just the financial health. The availability of liquid cash or the ability to generate liquid cash at short-notice through current assets can go a long way in sustaining smooth operations of your business. It is critical to business, and hence, the optimal utilization and constant effort at improvement of Working Capital management are of utmost importance. Else, it hits at the very core of such businesses.

So, what should be considered as adequate Working Capital for a company in a specific industry and, of a specific size? What are the key components of working capital? How should the working Capital for your specific business be financed? What are the various methods required to manage the working capital? For example, excess of cash is also a sign of operating inefficiency. Perhaps, this surplus cash could be better utilized towards growth. An analysis of the cash conversion cycle is a good indicator of this. And yes, one cannot forget to consider external factors like legal requirements, business environment, and internal factors like the organizational structure and internal information communication system, that can impact working capital management.

What has been discussed here is just a basic introduction to the topic. A real-life scenario will have many more complex components and aspects to it. FINTEL is a leading provider of industry data and financial management tools, including it proprietary concept of Net Balance Position developed by the company’s co-founder, Dr. Robert W. Pricer. Empirical testing has shown that this is by far a more effective tool than the traditional liquidity ratios to map a company’s liquidity situation.

Just like an agile sportsperson has to sustain his competitive edge with regular exercises, the wheels of business can keep churning only if they are well greased all the time with excellent Working Capital management.

Here’s wishing you Happy Working of your Capital!

The market-oriented economy of the United States of America is the largest and most technologically powerful in the world. With technological predominance over the years, there has been a gradual development towards a ‘two-tier labor market’ wherein those at the bottom do not have the requisite education and/or relevant professional or technical skills as those at the top. Hence, those in the former category remain deprived of a comparable rise in pay rate, health insurance coverage and other such benefits. Since 1975, practically all gains have gone to the top 20% of households.

The Iraq war in 2003 and the rising prices of oil between 2005 and 2008 have drained the national resources extensively. Other issues like inadequate investment in economic infrastructure, rising medical and pensions costs for an aging population , trade and budget deficits, and stagnation of family income for low income groups have further stunted economic growth. Of course, the mortgage crisis, the failure of big financial institutions and credit rating agencies are also being looked into.

Loss of jobs led to defaults on home loan repayments. Thus, unemployment and homelessness have been the two major fallouts of the present financial crisis that have adversely affected the lives of millions of Americans. Unemployment peaked at 10.2 % in October 2009. In May 2010, it was at 9.7 % with 15 million unemployed. The recent improvement in employment is largely due to large scale temporary hiring by the government to conduct the 2010 Census. Private Sector hiring has barely changed.

Factories are producing more but prices are falling. The manufacturing-led recovery is not generating inflation. This should help in further growth. Rebuilding their inventories, meeting increasing overseas demand and investing in new equipments is keeping the manufacturing sector in the driver’s seat in this phase of recovery. Manufacturers employed 29,000 workers in May. Working hours have increased and overtime hours are at their highest in two years. Increase in global demand for agricultural commodities, housing and infrastructure is also helping facilitate the rebound in the manufacturing sector. It is the domestic home-construction sector that remains unimpressive. April saw work begin on 672,000 houses and this was down to 648,000 in May. The deadline for tax credit for first-time home buyers ended in June and this will further cool sales and construction in the latter half of this year.

In the U.S., market analysts are projecting 2010 to end with a 9.7 % unemployment rate with a significant drop to 8 % by 2011.

In the United Kingdom, the number of people claiming Jobseeker’s Allowance (JSA) decreased by 30,900 between April and May 2010 to 1.49 million. It is for the first time that the claimant count has come down below 1.5 million since March 2009. The number of vacancies between March and May, 2010, has increased by 7,000 to 492,000.

Japan recorded a 5.10 % unemployment rate in April 2010 after peaking at 5.6 % in July 2009. Even though layoffs are not happening, employers are still reluctant to hire afresh.

Germany seems to be driving the European economy and is set to expand by 3-4 % this quarter. Positive trends have been forecasted for employment as well as consumer spending and manufacturing, according to Wall Street Journal. Unemployment fell by 45,000 in May,2010, with the unemployment rate down to 7.7 %, lowest since December 2008. There were 3.24 million Germans unemployed in May 2010. Experts do warn against exposure of German banks to debt-ridden Euro countries like Greece, Portugal and Ireland.

Fiscal and financial responsibility is the need of the hour across the board. Ben Bernanke, the central bank chief of USA said, “Minimizing the risk of future financial crisis will require tougher prudential standards for financial firms, especially systemically important financial firms, as well as more intensive supervision”.

So, you have been running your business on your own steam for the last few years and you are dreaming bigger now. Business expansion plan is what is on your mind.
Does that mean more staff, more time at this juncture? Not necessarily.
Does that mean more information on product/service, funds, competition, etc and more funds? Certainly.
Here are a few basic tips that you would certainly need to expand upon. It will work as a trigger point that you can take off from.
Define your Business as it is today:
Before you venture further into your business expansion plan, you must have a formal report card of your present business: the Product, Market Position, Financial Health, laws and regulations, compliance, strengths, opportunities for growth, the challenges ahead.
Ensure that you have applied correct, effective and useful management tools for this purpose. There are key business metrics used to understand and gauge a business. These are very sophisticated indicators of the present health of your business. They help you and your business associates to gain insight into your business from a common perspective. This reduces the risk of difference of opinions on many crucial issues.
For this purpose, the data collated of your business must be accurate. Ensure you have the right technology, tools and staff for this purpose. An honest and comprehensive database of all aspects of your business is imperative. This is essential for building strategy and planning ahead.
Shape up your business expansion plan:
While the very idea of taking off on your next big venture is exciting, you know there are multiple challenges ahead. You must be absolutely sure that you are on secure ground before you even begin to execute your next big dream.
If you are expanding just to survive or to beat competition, then this is not a profit-oriented growth plan. This should be identified as a contingency business plan. Be honest with yourself for all the right reasons. The present economic shakedown should be an adequate lesson for all of us.
Well, since you are going ahead with your business expansion plan now, you need to prepare your project report. There is a plethora of software available to plan out and shape up your reports. All you need is accurate, comprehensive and concise information of the market, competitors, technologies and funds available, etc. The challenge here is to source dependable information that you can base your decisions upon. You can outsource this information from external bodies. Do not ever think that you will be able to collate all this information on your own in this time and age of information explosion. There are a few dependable organizations doing just this job for you, it is their business, after all. For instance, you might want to check out FINTEL for current and reliable financial information related to privately-held companies.
For any such business expansion plan, funds are the propellers. If your basic project report is accurate, you have won more than half the battle. And in these times of recession, while institutes are wary, they are also looking for business. It is here that your reputation and ethics come in handy. The challenge is to convey it to the person across that you are worth trusting. Simple, you should live your ethics day in and day out.
Good Luck !

Milton Friedman, the American economist and Nobel Memorial prize winner for Economics had said, “The most important single central fact about a free market is that no exchange takes place unless both parties benefit.” So, while I may be drawing a salary as an employee, I have to render services to my employer for that salary. If I am a consultant, I will barter my expertise for a fee. If I am in the business of business, I have to make products or render services to my customers. Only then can I justify the profits as my earnings. It is this profit which, beyond sustenance, provides for growth of the business, helps counter competition in the marketplace, provides for contingencies, etc. Hence, the concept of ‘maximizing’ profit.

So when ‘profitability’ has to be sustained, all profit-making entities must standardize and benchmark ‘profitability’ first. The ‘standardization’ is for the purpose of a common and clear understanding of profit in the context of a given business entity. The ‘benchmarking’ is to gauge performance in the marketplace.

A profitability index, also referred to as a profit investment ratio or a value investment ratio, is a method for discerning the relationship between the costs and benefits of investing in a project. Many companies and investors use the profitabilityindexas a way of ranking a group of potential projects.

Broadly, there are several commonly used and important Profitability Ratios including:

Gross Profit Margin is gross profit as a percentage of sales revenue.
i.e., (Revenue- Cost of Sales)/ Revenue
Cost of Sales includes variable costs and fixed costs directly linked to sale such as material and labor for a manufacturer. It does not include indirect fixed costs like office expenses, rent, etc. Hence, higher gross margins show greater efficiency in turning raw materials into income.

For a retailer, on the other hand, it is the markup over wholesale. Hence, retailers can measure their profit by using two basic methods, markup and margin. A markup is the percentage of profit as a retailer’s cost for the product. The margin reflects profit as a percentage of the retailer’s sales price for the product. Both yield different results but are valid descriptions of the retailer’s profit.

Operating Margin is the ratio of operating income divided by net sales. Operating income is the difference between operating revenues and operating expenses. This is also called Earnings before Interest and Taxes (EBIT or Sales) or operating profit. Thus, it is a measure of the revenue surplus before taxes and other indirect costs like rent, interest, etc. Essentially, a good operating margin is required to provide for fixed costs like interest on debt, etc.

Net Profit Margin or Return on Sales indicates profitability after all costs have been accounted for.
i.e., Net Profit Margin = Net Profit (After Taxes) / Revenue
A low profit margin indicates a higher risk that a decline in sales will lead to net loss. It is also an indicator of a company’s pricing policy and the ability to control costs.

However, the business entity’s financing and operating arrangements have to be taken into account first. To overcome the potential confusions created by these considerations, FINTEL uses a measure called Return on Asset Investment. It is calculated using earnings before interest and taxes and provides a direct measure of the earnings ability of the company. The earnings ability is related to the investment in assets using both debt and equity. The ROAI calculation allows you to see whether an adequate return is being earned on the assets that have been purchased for use in your business regardless of the amount of debt that is carried by the firm.

There are a host of other profitability ratios like Return on Equity (ROE), Rate of Return (ROI), Return on Assets (ROA), and others. All these measurements have their own unique applications and usefulness but they function like an eagle’s eye on your business. Rather than go into the specifics of these ratios theoretically, it is better to identify the ratios appropriate for your business and purpose initially.

FINTEL (www.fintel.us) provides the financial intelligence needed to make sense of the various profitability performance situations including in light of the relevant industry. So, whether you are viewing it from an investment perspective or to study a particular industry, you can get an insight into the financial profiles and performance of privately-held companies.Or,you may just want to check out the profitability quotient of your company.

Business Performance Measurement is concerned with measuring performance relative to some benchmark, be it a competitor’s performance or a preset target. A typical performance measurement helps businesses in periodically setting goals and then providing feedback to managers on progress towards these goals. The time span for these goals is normally a year or less for short-term goals and may extend up to several years for long-term goals. Hence, specifically, business performance measurements are formal, information-based routines and procedures managers use to maintain or alter procedures and practices in organizational activities.

The primary reasons that may be attributed to this exercise of Business Performance Measurement are to synergize profit and growth, and, consequently, decide upon extents of control to be exercised for favorable and justified outcomes. This will also enable you in measuring and redefining your short-term and long-term goals by offsetting them against opportunities and capabilities as you move along. These strategic goals and plans then peter down to operations, human resources and other day-to-day management practices. As an ongoing exercise, it will ensure monitoring and control to drive growth and improvement.

Obviously, to achieve this, a business has to spell out the parameters and subsequently, the scores or ratings to gauge performance vis-à-vis these parameters. The outcomes of such collated data will be very strong indicators of the business health of your enterprise. And this, will, no doubt, reflect on the performance of the top management which mainly drives such business activities. As an entrepreneur, you can then have a holistic view of your business. Such data-based information will empower you with indices with which you can fast-forward your business towards betterment and growth. But do make sure the data are honest and dependable. Check out the IT support practices and tools which collate this data and generate reports as it can make or break your strategic decisions. And always remember that efficiency and effectiveness are central to your business performance measurement, the challenge being to strike the right balance between them.

You can now review performance at all levels, identify improvement areas, set new benchmarks for improvement and then again review the impact of these actions. And, not to forget, reward excellent performance to sustain motivation which always runs the risk of falling by the wayside if ignored. This is what shouldering responsibility is all about, after all.

As an entrepreneur, you must be aware that these parameters of business are being continually researched upon and these indicators have evolved over the years to suit the needs of the present times and different natures of businesses and industries. And even within a business entity, there are various indicators for different aspects of business, including the financial perspective, the manufacturing/operations perspective, the customer perspective, etc. For small enterprises, the financial perspective by itself is crucial. A balanced business scorecard will help you to study and gauge the financial framework of your organization.

FINTEL can be helpful in the process of gauging and managing business performance by providing tools and data designed just for that purpose, including reliable and insightful industry comparisons and trends.

The iconic Brazilian soccer player of the 1960s and 1970s, Edson Pele, was once caught smoking by his father when he was a child. His father advised, “ Listen, if you want to play sport, you have to be in good health”.

This applies to your businesses’ health too. Check out what you need to smoke out! Go, get the barometer.

The National Federation of Independent Business (NFIB) came out with a Small Business Optimism report as recently as in mid-April. Its chief economist, Bill Dunkelberg, said in an accompanying written statement, “Something isn’t sitting well with small business owners. He attributed it to “poor sales and uncertainty” that “continue to overwhelm any other good news about the economy.”

Everyone agrees with the trend towards recovery, but small business owners are extra cautious and rightly so. The recovery is treading ever so haltingly that even a die-hard optimist must surely be wondering as to when he will experience its impact on his own business. Around 950 business owners were surveyed by NFIB. They acknowledge that job cuts have slowed and a few businesses do plan to hire in the next three months. But sales are still weak, credit is hard to find and, not surprisingly, capital expenditure is abysmally low. The general sentiment is not optimistic for the near future.

Hence, businesses which generate jobs are still leaning towards freelance or part-time help as they would rather cut costs. So, while job cuts are tapering off, fresh hiring is not yet on their minds. Caution is in the air. This wariness has rubbed off on the credit markets too. While large and small community lending entities want to lend more to small businesses, they are wary in identifying qualified borrowers. Thus, business owners are finding it increasingly difficult to meet the even more stringent guidelines for securing loans for their businesses.

True, not many pink slips are being handed out. But there is a huge backlog of those millions of jobs lost. The job market has prompted many to become self-employed. Small business owners need the confidence that extra staff will contribute to their bottom line.

Will Draper, a veterinarian of ten years with an entrepreneurial spirit, opened his first veterinary office in 2001. He soon began to expand, opening several more offices over the short span of just 6 years. In 2007, Draper envisioned a state of-the-art animal hospital with an emergency room involving three times the space. After speaking to many lenders, he opted for Live Oaks for their no-nonsense approach and because he was impressed with their knowledge of vets. He then learnt they were into niche lending to veterinarians only! He got a Small Business Administration-backed loan.
Soon, his business grew 40% and in the process of keeping pace with it, his expenses mounted. He needed to hire more people. He called Live Oaks again. They agreed to help him again before the problem got out of hand. He got the loan with free coaching on how to work the payroll and other expenses. They even guided him on how to avoid his mistakes in future. Said Draper, “They never made me feel bad about approaching them again, but instead made me feel that they really want me to successful.”

The CEO of Live Oaks says this is their competitive advantage in wooing borrowers. Business has doubled for them and they have hired in a period when others were laying off staff! They are a 100% ahead of their projections.

I know such real-life stories are rare and far between in these hard times. Let’s hope to ‘multiplicate’ them, if I may be allowed to coin a new word!

In the year 1994, subprime mortgages amounted to 5% of the total mortgages. By 2005, this figure had shot up to 20%. In 2006, 22% of all subprime loan payments in arrears of 60 days or more occurred in Jackson, Mississippi; while Detroit, Boston and California figured at 24.6%, 15% and 14% respectively.
Previously, it was the commercial banks that offered mortgages at fixed rates only. With changes brought about in the banking system, mortgage finance companies and mortgage brokers were now competing with the traditional banks.

The consumer was offered loan repayment options at low interest rates for a longer period of time with the actual prices of property having shot up. Thus the consumer now had more choices to get his mortgage serviced. Subprime loans took care of defaults on payments resulting in an even longer repayment span.

It was in 2005 that interest rates started to inch up again after a long spell of stability. Consequently, there was a gradual slowdown in demand for new homes. It was then that the prices of houses also started coming down. Mortgage defaulters were increasing. Home owners with subprime mortgages were neither able to deal with increase in payments nor were they able to sell their homes at their previous value. As home values and prices had dwindled rapidly, homeowners had difficulty selling at a price that would cover their mortgages. In California, the houses were overvalued by as much as 77%.

The total mortgage debt outstanding was $12,063,864 million in 2005. This went up to $14,607,840 million in the fourth quarter of 2008. With federal government aid, this figure had edged down to $14,287,340 in the fourth quarter of 2009.

This has resulted in homelessness of Americans on a massive scale. Approximately 170,000 families needed shelter in 2009, up from 159,000 in 2008, according to an annual survey by the Department of Housing and Urban Development. Forty-two percent of the homeless were on the streets in 2008. In 2009, twenty-nine percent of adults were staying with relatives. $1.5 billion of stimulus money has been allotted for the homelessness prevention program. Short and medium-term rental assistance (ranging from 3 to 18 months) will be provided to individuals and families. These funds will also be allocated for utility deposits, utility payments, moving-cost assistance and hotel vouchers.

An estimated 2.5 million foreclosures were completed between 2007 and 2009. Another 5.7 million foreclosures seem unavoidable, given that mortgages have become too expensive. The Home Affordable Modification Program modifies the loans but beyond that, those who do not get support by the Federal Government are expected to default again within 12 months. These customers are increasingly burdened by credit card debt, auto loans and other expenses. Re-default rates are expected to go up from 40% to 60 % on modified mortgages. People are being advised to opt for short sale over foreclosures and thereby avail of the cash incentive. As many as 7 million houses are vacant and not currently for sale. The inventory must be cleared before the industry rebounds. Further complicating matters, the costs of new homes may increase due to restrictions imposed by the Environment Protection Agency, tightening requirements for builders to better handle storm-water runoff. The National Association of Home Builders is soon expected to enact these regulations.

First-time buyers accounted for nearly half of the homes purchased in April, 2010. This is attributed to historically low mortgage rates and lenient lending standards. The head of the Federal Housing Administration, David Stevens, calls this “a market purely on life support” and in addition, lending is expected to tighten. Also, the European debt crisis could compel a hike in prime lending rates of banks. So even if the mortgage rates currently remain low, a number of factors may shape the future of the American housing market. Unemployment trends will also contribute towards how the real estate industry rebounds in the immediate future.

The uncertainty is not going to end in a hurry.