Last month, the annual pilgrimage to Davos, Switzerland took place. Officially called the World Economic Forum, the world’s political and economic elites gather here to discuss (some would say “plan”) the global economy.
There are hours of video available for those who want to hear what everyone had to say but I think the interview with Ray Dalio, Chairman, Co-CIO & Founder of Bridgewater Associates is worth a listen. In it, he discusses the state of the economy as we near the top of the economic cycle.
Business owners and financial managers should take steps now to prepare for the inevitable. Look back to 2007-2009 and remember what happened in those days and prepare for the possibility of them again. Don’t assume anything that happened then won’t or can’t happen now. Among the credit and cash flow lessons to remember are:
- Business failures will increase as sales slow, cash flow tightens and payment defaults ripple through the supply chain.
- Companies that have never been late to pay invoices will default to the shock of some.
- Bank lending standards will tighten and some businesses will face the loss of financing, which will also ripple through the supply chain (see #1 above).
- Highly leveraged companies will need to de-leverage because of #1, #2 and #3 above.
It isn’t popular for many in the financial media to suggest that our economy won’t always keep growing but the reality is that a change is coming. Be prepared.
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