If you are like us and are trying to gather the best information to determine where our economy is going, given that we are late in a growth cycle, so that we can manage investments, forecast our businesses' growth rates and consider actions to minimize our risk for when a downturn does come about, we would like to offer to you the best resource we know. Ray Dalio spoke to CNBC this morning about our economy's likely future performance and where we are in the cycle.
Who is Ray Dalio and why do we put him forth as one of the best resource about whom we know?
- Ray has built a unique organization that has developed tools, methods and algorithms that give his organization a competitive advantage.
- Ray's firm, Bridgewater Associates is the world's largest Hedge Fund at over $160 Billion under management.
- Bridgewater received a lot of attention when it was learned that it was one of very few firms who saw the 2008 Great Recession coming about and had their clients in the right kinds of investments for such a downturn.
Where does Ray believe we are in this economic cycle and what will happen when interest rates tick up? Let's drill down further to gain economic perspective from maybe the brightest mind today in investments and macro economics, coming to us from Davos, Switzerland, while attending the World Economic Forum, 6 minutes with Ray Dalio - click here.
For CEO's, here is the question, what adjustments do we need to make between now and the next downturn? It sounds like Ray believes we have one or two more years before an economic downturn might come about, hopefully longer. In order to wring out risk in our enterprise, it is important that we act on specific risk factors one or two years ahead of the downturn.
What can we learn from the 2008 Great Recession?
During the Great Recession, while some companies only lost 10% of revenues, many companies lost as much as 30% of revenues before beginning to build back and companies in certain industries such as those reliant on advertising or those that are considered luxury items fell by 50% or more. While there were plenty that did not make it through this, many weathered operating losses. It was the companies that also had a larger accounts receivable balance or two or three of smaller but in total the same as one larger account that later became a bankrupt company that caused an additional hit to equity and crushed those companies, causing them to fail or quickly be sold for cents on the dollar compared to what the market thought they were worth before the crash.
- know your larger customers and the type of credit risk they represent.
- Ask for full financial statements and analyze the strength in the balance sheet (low or reasonable debt to equity (below 2:1) and the amount of liquidity on hand (5 to 10% of the balance sheet, or more) to weather such downturns
- Utilize the resources and reports that Dunn & Bradstreet makes available for most established enterprises
- If we stress test a customer's financial position against a downturn and are concerned they would struggle, we have to ask if we can continue to take accounts receivable risk or we may need to invite the customer to their future elsewhere.
- Liquidity is king in a downturn. Between now and the next downturn, each one of us would be wise to increase our liquid assets available to fund for the unexpected or the cost to operate through a recession.
- What is the financial position of some of the winners? Learn from the Corporate Finance for Leaders Pillar that Elevate has developed for our members and clients. You can see how some of the best in the world operate, margin-wise, leverage-wise and liquidity wise.
If Corporate Finance is not a topic you have had the opportunity to develop your knowledge and expertise around, be on the lookout for and enroll into one of Elevate's 2 hour workshops on Corporate Finance for Leaders to be held later this year.
We help leaders Elevate Performance. How can we serve you? Schedule a free 30 minute session to learn how we work with our clients and members by contacting Pear@ceoforums.us.