It's Not Good to be the Bank

No signals, no trades.

This is an interesting series done on a small manufacturing company that is facing severe financial issues. As an old business banker I find myself yearning (yearning? that's kinda weird) to see their financial statements. So many things at play here that affect so many people. I remember the stress of dealing with situations like this. You know there are employees, you feel the emotions of the owners, anger, sadness, denial.

I don't miss that.

The issue is debt. When Jen talks about growing too fast she hits it right on the head. Most small business owners don't get this. They think more sales and more growth are the keys to success. Sustainable growth is the key. Meaning that your equity has to grow with your increased sales. Debt can increase to help fund the growth but it cannot fund all the growth. If you keep pushing the debt levels before your retained earnings have time to grow you will eventually find yourself in the situation they are in now.

It's all about financial ratios, ratios that are very simple to calculate and understand if you take a little time to do it. They must be I did them. :)

Most small business owners won't, at least they won't until it's too late.

J.W. Hulme's problems have nothing to do with the current "credit crisis", these individual credit crisis happen all the time, and have been going on for decades.

I think the lack of financial literacy the world faces is the greatest mistake our educational systems have ever made.

When we all ate what we grew financial literacy was not much of an issue. As mankind became more "sophisticated" our understanding of finance has stayed in the agrarian age. Actually you could argue it has gotten worse since then. We have so many more ways to screw up financially.

Why is financial planning of some sort not taught as a core subject in high school? It is certainly more relevant than most of the current curriculum. Suze Orman and Oprah are trying, but if you know anything about the subject watching them try and teach very simple concepts to adults is like watching a 40 year old trying to learn how to read, or add 2 + 2.

It's painful.

It just shouldn't be this way.

Maybe Obama will fix it. He is going to cure all. Right?

Wait, he's going to borrow trillions without any thought of the consequences.

Have I mentioned debt is bad?

The Risk Fallacy

"But all the drama and chaos of recent months obscures the most fundamental cause of the entire financial crisis: a basic misunderstanding of risk (abetted by heavy borrowing). The paradox is that Wall Street's strategy to avoid excessive risk - by dispersing it - ended up exacerbating precisely the problem it was designed to prevent." By Nomi Prins, Fortune

Click on the read more icon for the full Fortune story.

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10 Questions For Life

If the recent market "events" have you feeling a little uncertain of your financial future I offer to you, 10 Questions for Life and the corresponding 10 Financial Rules for Life.

This is a blatant plug for a non commercial blog hosted by a old banker.

Here you go.

1) Do you know where and how much money you spend every month?

2) Do you have any savings?

3) Do you pay off your credit card every month?

4) Do you know how much money you will need to retire on?

5) Do you know your net worth?

6) Do you know how much debt you have?

7) Do you teach your children how to handle money?

8) Do you invest on a regular basis?

9) Do you give money to charities?

10) Are you happy?

If you answered no to some, most, or all of these questions then the 10 Financial Rules for Life may be of some help to you.

Click on the post title for the 10 Financial Rules for Life or copy and paste this link.

http://financialliferules.blogspot.com/

Hank Speak

I hope the only lesson learned here is not, if you are going to fail, make sure you fail so big we can't afford to have you fail.

Debt should not be used to increase your return on equity numbers, debt is bad, debt is dangerous, debt is to be avoided, always has been, always will be.

I find it odd that companies like Microsoft, that have no debt, grow revenue, grow net income, each and every quarter don't see there stock go up.

While their stock went no where for the last 5 years, leveraged home builders and investment banks saw there stock go through the roof.

For a while.

So now that people are a little "concerned" about their investment holdings a check on the amount of debt a company has may be an idea. I'm an old banker so it's always the first thing I look at.

One reason to check this now is the cost of borrowing is going up, way up, for everyone.

But the best reason to check the amount of debt on the balance sheet is, the last time I checked you can't go bankrupt if you don't have any debt.

Public companies have access to public equity, they don't really need alot of debt. They have taken it on over the past 10 years because it was cheap and they could boost their return on equity number with it.

It looks like those days are over.