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Do the Opposite of the Financial Advice Business Schools Provide and You'll Succeed

Mar 22, 2008
Conservative financing Is the right foundation for the irresistible growth enterprise. Borrowing money enhances risk, and voluntarily taking on greater risk that is avoidable will normally be a bad idea when dealing with irresistible forces.

If you succeed in capturing the potential momentum of the irresistible force, you'll never be able to retire the debt; you'll simply be refinancing and increasing it. That position leaves you exposed to credit crunches, interest rate volatility, and times of capital shortages.

In case you think that's something you needn't worry about, consider the circumstances of September 1998 when the savings rate of U.S. consumers turned negative for the first time since the Great Depression of the 1930s. If consumers in the largest economy in the world can't save much money from their incomes during an economic expansion, where will the funds come from for borrowing in the future as worldwide growth expands?

This certainly suggests that we could be entering an era of scarce and increasingly expensive debt. In the aftermath of Russia's default on its bonds in August 1998, many low-rated borrowers found themselves temporarily unable to get money anywhere.

Some high-risk consumer lenders went out of business because no one would buy their debt at reasonable prices. That circumstance may occur more frequently in the future as the explosive growth in corporate bankruptcies in 2008 demonstrates. The same thing happened during the clean-up of the S & L debacle described earlier.

Also, inflation all but disappeared in the 1990s except in the form of home and securities' prices. Since a change in the investing mood could quickly burst the inflated stock prices, the careful organization would naturally see the early years of the twenty-first century as a good time to have little debt and lots of cash immediately available. If prices continue to deflate in many markets from homes to the value of the dollar, cash holdings will expand in purchasing power. Debt will be ruinous unless interest rates also turn negative (as actually did occur with Japanese government debt during 1998).

How can you change the way you finance your operations so that you'll be less affected by adverse shifts in the availability and cost of capital for enterprises like yours?

Besides having low costs, little debt, lots of cash, and being prepared to fund unexpected needs, you need to develop helpful new sources of capital that will be captive to you. For example, if your suppliers gain more profits from what they supply you than you do in using their goods, you may be able to arrange to pay them more slowly than your customers pay you so that you have no net investment in these supplies.

Of critical significance is managing the organization's cost of equity. An enterprise's capital management will be a key skill throughout the twenty-first century as the new forms of economic growth replace the older ones based on manufacturing and established forms of service. This aspect is extremely important for publicly held companies, because of the power that public stock gives to acquire assets at a bargain price, motivate and attract employees, encourage customers, and reduce costs.

How can you expand your organization with less capital and less inflexible investments?

Companies that require less capital will be able to grow faster than those that need more will. For example, eBay quickly established a large and profitable position in Internet auctions by bringing millions of potential buyers and sellers together, while not needing to take an ownership position in the goods that are being auctioned or providing a physical location for inspection and sale of the goods. Those Internet sites which are only retailing their own products usually are not nearly as profitable nor able to grow as fast.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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