The Winds of Change are Blowing in the Economy

2016 has already seen large moves in the stock market which have been driven by rapid changes in foreign exchange rates in China. Whilst stock markets are largely disconnected from the ‘real’ world, losses there have a way of filtering down from banks and other financial institutions to companies trying to go about their business on main-street. Funding costs increase, cash flow terms become more stringent, foreign exchange rates swing wildly – making cost and demand projections very hard to achieve at home and in foreign markets.

Today we look at why the business cycle may have turned, and we give some tips for small businesses to help weather what 2016 brings:

S&P Index

The S&P index of the US market has effectively trodden water, since June 2014. According to Robert Shiller’s cyclically adjusted price / earnings ratio, the market has only been significantly more highly valued twice in its history, in 1929 and 2000 – both before major market corrections which brought on the depression, and the dot com crash. At times like this the odds favor a change of direction rather than a continuation of the trend…

The National Federation of Independent Businesses (NFIB) survey, a quarterly survey of small business economic trends reports the following key metrics from its December survey:

Optimism Index

The overall Index gained a modest 0.4 points in December.  It now stands at 95.2, which is well below the 42-year average of 98.

Inventories and sales

“The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months was unchanged at a net negative 5 percent. Eleven percent cited weak sales as their top business problem, up 2 points”. Overall, this is not a solid sales picture.

Foreign Exchange rates

With the USD moving by almost 10% against a number of key trading partner currencies over the past 3 months, small businesses have had a rollercoaster ride to price competitively in foreign markets, and also to manage the risk of foreign exchange shortfalls in their accounting systems. With invoicing terms being stretched from 30 days to 60 and even 90 days, before this current turn in the business cycle, further stress may be put on small firm’s cash flow, on top of additional currency risk.

TIPS

1. Collect Receivables ASAP

Keep a contractual terms to a minimum where possible, and maintain a close eye on receivables, contacting customers regularly to ensure prompt payment.

2. Encourage Customers to Pay up Faster

Offer customers early payment discounts and be sure to keep credit requirements tight. Establish and document a set of standards for determining who is eligible for credit.

3. Extend Payables as Long as Possible

In contrast to your receivables, work to extend the terms on your payables as long as possible. Put a suitable process in place to ensure you pay on time though, to avoid any late payment penalties.

4. Take Advantage of Modern Technology

Sign up for services which are based in the cloud and allow you to access your data securely from anywhere. Combine international payments software with your modern accounting platform, to help you manage your overseas payments and receivables and monitor your foreign exchange risk.