One cannot open the newspaper or watch television these days without learning of yet another major financial setback in the U.S. economy. And yesterday's issue of The Wall Street Journal reported the spread of financial crisis to international banks as well. So … the American woes are now pervading the global economy.
Here’s just a few of the recent facts. Bear Stearns collapsed earlier this year. Indy Mac Bank was seized in July. Washington Mutual just went under. Mortgage giants Fannie and Freddie need a bailout. Goldman Sachs and Morgan Stanley failed as investment banks and were allowed to change their charters to bank holding companies to operate as commercial banks as well. The DJIA precipitously dropped 777 points yesterday – the biggest single-day point drop ever – as a result of our lawmakers failing to approve a $700 billion bailout plan. The bailout is aimed at releasing the chokehold in the U.S. economy and to get credit moving freely again.
“So what does this all have to do with me?” you may ask.
We are all touched by the events that are occurring in the economy. Perhaps we are a businesswoman whose credit line was just cut and cannot obtain the necessary commercial credit to spur business investment. Others may be counting on home equity lines to help fund college education. But in light of bad mortgages made earlier by many banks, there is a recession in the housing industry that has caused housing prices to drop and equities to vanish. Now, some of us are faced with the situation of owing more on our houses than our houses are worth.
The good news is that the economy and the market will come back – they always do because the economy is cyclical. All we have to do to look for assurance is turn to our history books. Those who stand to gain the most will be the ones with available cash to invest – our prudent counterparts. Remember that you’ll be able to buy more shares on the way up as the stock market recovers. For example, say you have $100 to invest in a particular stock each month. When a stock price is selling for $100/share, you can purchase one share of that stock. Now say that stock price falls to $25/share. If you have the cash – and cash is king – you can now purchase four shares of that same stock. We stand to gain more when the market is on the rise because that same $100 is buying more shares at lower prices and as the market rises, those larger number of shares gain momentum. Why else would Warren Buffett have infused $5 billion of Berkshire Hathaway’s capital into Morgan Stanley last week? Indisputably he is an astute investor and stands to make a handsome profit when Morgan Stanley lands on its feet again.
Some personal tips to consider during these times:
· Don’t purchase items with credit cards if you don’t have the cash to pay for them. Live within or – better yet – below your means. Stick to a personal budget. Really ask yourself if you need a particular item before you purchase it.
· Don’t withdraw cash out of your bank account only to stuff it into your mattress. Deposits are FDIC insured – fully backed by the faith and backing of our federal government up to $100,000. However, by all means, do calculate accrued interest on the principal and move any funds in excess of $100,000 to another financial institution in order to protect your money.
If you own a business, you may want to consider the following points:
· Offer to take credit cards for your customers. By offering your customer the opportunity to pay with a credit card, you have just increased his or her company’s cash flow cycle another 30 days while still being paid on time. Some companies’ cycles are extremely tight and this payment method helps ease their burden a bit. Remember, their bank may just have cancelled or reduced their working capital line of credit or imposed new loan covenants, and they are looking for some temporary relief to help them get through.
· Offer a discount for early remittance. As cash flow cycles lengthen, some companies will be unable to take advantage of discounts. But for those with shorter cycles or excellent cash management policies in place, these companies may take you up on taking the discount, paying you in 10 days instead of 30.
· Work with your customer. Relax your normal terms and even waive interest and penalties, if necessary. Offer to work out a payment plan that is reasonable to both parties if a loyal customer is honest with you and is doing his or her best to meet their obligations.
· Be careful with your purchasing levels. The terms for accounts payable are typically 30 days. Your vendor is counting on your prompt payment to keep his cash flow cycle level and predictable. Calculate your needs so you purchase the appropriate (inventory) levels so as not to bloat the balance sheet.
Amidst all this turmoil, let’s not forget the good news from yesterday. The market is correcting and while crude oil futures have been fluctuating from highs of $145/barrel in July to lower levels more recently, they landed at just over $96/barrel yesterday. Pump prices should start to ease in response.
Laura Glennon is the principal of Greater Boston Bookkeeping and Financial Services. She has been helping businesses and individuals with their financial needs for the past seven years in the Greater Boston area. Please visit www.greaterbostonbookkeeping.com for more information on the services she provides. She may be reached at 978.251.2500 or via email at laura@greaterbostonbookkeeping.com.
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