The end of the 2014 season is approaching. Believe it or not. Now is time to start thinking for next year. Paramount in most contractors’ mind is what will 2015 bring?  Two questions plague us;
- Will the economy be OK?
- Will the weather cooperate?
Well, weather is beyond me. And so is the economy, but economic matters have indicators and plenty of people trying to decipher them.  Let’s look at some economic thoughts;
Economics
Stock Market
Recently the S&P hit a record high. The market has done well for 3-4 years. Which leads many to say they see sign the market is in need of a correction.
Stock valuations do appear to be a little rich and stock market participation seems to be a little light. Â Â Usually a sustainable market is driven by increasing participation, in other words a growing number of people investing money.
Thus the bears are getting wound up. Feelings that a market drop is coming are all over the financial press. Robert Shiller of Business Insider is one of those people. But Schiller says the correction may not involve a drop in stock pricing at all, just a period where stock prices stay the same but corporate earnings keep rising, thus throwing the valuations back in line.
U.S. Economic Growth
We have gone 4 years now with growth in the 2% range. Which by all historic measures is pathetic. Expectations for 2014 say we’ll be the same. Not exactly a happy thing, but not too sad.  At least we have a foundation and can make plans.
Our pathetic growth rate is hurting us by depressing wages and thwarting growth plans. Most of the new jobs being created are either low paying and/or part time. We must have a faster growth rate so the economic throttle can be opened up allowing all people, not just the elite class, to benefit.
We are approaching an interesting point. Many industries have or soon will reach a tipping point in capacity. Many are already at or above historic levels. Which means those industries cannot produce more without expanding their infrastructure.
If companies decide it’s time to expand then real jobs will be created and more value will be produced.
If they choose to sit their cash on the sideline then we’ll see shortages, higher prices, and margin pressures.
But there is also the specter of mild inflation. The Fed is letting it be known they do not yet see inflation as a problem.  But we are getting close to when Fed Chairman Yellon will have to start raising interest rates. Drivers of inflation will be asset values, energy, demand, wages, and raw materials.
Construction
Housing saw a marked cooling in new construction of residential properties this year. Many expect residential housing to remain rather flat through 2015 with accelerating construction rates resuming in sometime in 2016.
Commercial construction is hit or miss depending on the area you are in. However, while there has been a shift to more private property construction and less public money construction, the overall volume is experiencing slow growth.
Business Operations
Cash Flow vs Working Capital
Cash flow is the generation of money coming into your business (what you collect from sales) minus the money going out to pay bills.
Working Capital is the money you keep inside your business. Easy definition is Current Assets minus Current Liabilities.
Both are important signs of the health of your company. But they are different.
If you have plenty of capital (positive current assets) you can act more strategically and plan for growth. If capital is tight, you will need more cash flow to pay bills.  The decision of how you manage your company is based on how much risk you will take.
Conservative
Such an owner will maintain higher levels of working capital, primarily in the form of cash and inventory. Meeting short term liabilities is less of a concern and handling a sudden downturn in business is much easier. However the return on investment will be lower.
Moderate Risk
An owner will match assets and financing. Lines of credit will be used for short term inventory and receivables financing and long term loans will be used for asset purchases or long term projects. The downside is a slight risk if interest rates increase dramatically or the economy or industry changes radically.
Aggressive
An owner chooses to limit cash and near-cash assets in favor of putting assets in long term investments and/or borrowing for short term needs. While tending to generate the highest return on investment, there is significant risk of increasing interest rates and unexpected cash needs. An owner will find it difficult to improve working capital quickly, especially if cash flow declines. Additionally, when in such a situation, an owner will have difficulty qualifying for additional loans due to lack of collateral value.
Before choosing an aggressive stance, be sure you are comfortable with the market and your business plan. Those who select an aggressive stance without understanding will likely perish.
