Predictions for the coming new year have been running their course.  

If you read this blog you know I’ve been a long-time fan of “Coast to Coast AM”, the most popular of all the night time radio programs.

The January 1, 2009 broadcast was quite fascinating.

Gerald Celente,  led off a number of futurists, psychics and practitioners of the predictive arts.  For those of you who may not be aquainted with Gerald Celente, he’s been around a long time – has established himself as being very accurate at predicting coming trends.

His predictions were the most dire:

We’re going to see a substantial failures of retail merchants beginning in January. The main reason was the dismal holiday selling season – the worst in decades.

What a lot of people don’t realize is that most retail operations whose sales drop 10% or more can suddenly be faced with massive lay-offs, store closings and even bankruptcy.

Why?

Except for a handful of businesses – most businesses are leveraged, mortgaged and basically running on credit.  Which means that 10% loss in sales revenue can cause them to not have the financial where-with-all to continue to operate – That 10% is where they’re operating profit exists.

Look at it this way:

A business with a 1,000 stores with a revenue of  1 million dollars per store equals a billion dollars.  10% of a billion is 100 million.  This is simplistic but hopefully you get the idea -  Those stores have to maintain a certain level of revenue in order for the 10% profit margin to actually happen.

This where it can get complicated 

The profit margin rapidly deteriorates as the revenues go down – It’s not in direct proportion.  If the revenue drops to 900 million dollars the profit doesn’t stay at 10%

It may drop to 5 or 6%. 

A 10% drop in revenue can have a catastrophic effect on many businesses. Causing their profit margin to shrink very rapidly…

This is why banks are not lending to businesses – which appear to have large yearly sales revenue – It has to do with businesses’ revenue model. As far as the bank is concerned the bottom line profitability of the business – which is how the loans will be paid back -  is much lower than a 10% fall in yearly revenues would indicate.

You see, many American businesses – like many Americans  – are operating on a week to week basis – often struggling to keep afloat even in the best of times.

I’m sorry to say that we’re going to see a large number of businesses fail in the coming months because a 10 -15% fall in revenues means they won’t be able to keep their doors open.

Please support your local merchants. There’s a lot of good people who are suffering though sleepless nights right now.

-Bob Baran