Many are so busy running the day-to-day operations of their businesses that the financial aspects of the company are often overlooked. Nonetheless, the bottom line of a business won’t improve by itself.

“Most small business owners are really challenged just to get their financials out — not to mention smoothing out revenue in a legitimate way,” said Ric Denton, counselor and immediate past chairman of the Colorado Springs chapter of SCORE, the Service Corps of Retired Executives. “There are small businesses that do have their act together with good planning in place, but I would say they are the exception rather than the rule,” Denton said.

The topic at the latest Colorado Springs Technology Incubator’s Business Series breakfast was “Financial Management of Venture Companies.”

Keynote speaker Jeff Schneider, president of EFA Services Inc., an entrepreneurial finance and accounting firm, had advice for entrepreneurs who need outside capital to meet their goals and an exit strategy to return money to investors — in other words, business owners who need financial management.

Meeting payroll each month or preparing taxes annually does not constitute such a plan.

Financial management has three elements: “accounting process” (payroll, invoicing, paying bills, etc.); “accounting practices” (recording and reporting historical financial data); and “financial analysis” (using financial data to make management decisions).

When Schneider asks people who is doing their financial management, he’s likely to hear that a relative is “doing the books.”

“That’s a lot different than financial management,” he said.

He likens the difference between large businesses and small companies to commercial airline pilots versus private pilots and propeller planes.

“You still have a checklist for a small plane. You don’t just jump right in and fly,” Schneider said.

His recommendations for the accounting process include paying your bills — especially those that can impact your personal credit rating; outsourcing payroll because of the state and federal laws involved; reconciling bank accounts and credit card accounts; and following a regular schedule.

And for accounting practices, small business owners need to know the difference between cash versus accrual accounting; generally accepted accounting principles; balance sheet — capital, loans, fixed assets and liabilities; and accurate monthly financial statements.

Accurate statements are necessary to “see what’s going on in your business — the trends,” he said.

For instance, if monthly revenue is computed on a nonaccrual basis, it will vary from month to month and can look like a zigzag when graphed. “But if you defer revenue (using accrual accounting), then you have a trend line,” he said.

With a little hard work and some good fate, that trend line can even head toward the sky.

Lastly, financial analysis involves the future.

In order for small business owners to succeed, they need to know where they’re going with their financials.

“Accounting deals strictly with the past,” Denton said. “But you need to have projections to know if you’ll be OK in the future.”

First a company needs sale projections, in order to calculate financial projections.

“Even as a small company, you really need both a chief financial officer and an accountant — even part-time — giving you good advice,” Denton said.

The future of a venture company — or any business, for that matter — depends on four things, Schneider said, “C-A-S-H. How much is needed; how much will be generated, and how much will be returned to investors.”

Analysis necessitates a short-term operating plan, and a long-term financial plan. Components of a long-term plan include profit and loss statements, balance sheets, cash flow, capitalization table and investor return calculation.

Not every investor will want to see the financial plan.

“Maybe not family or your close friends — but angel investors will want it,” Schneider said.

The plan won’t be easy to create, nor will it be accurate six months later.

“So why do it?” he said.

Because it gives business owners a “financial prototype,” which helps to better understand the business and what they’re trying to accomplish.

Not to mention someone might actually ask for the financial plan.

More importantly, “if it doesn’t work on paper, then it probably won’t work in real life,” Schneider said.

Small business owners can do much to improve their odds of success.

While CEOs tend to concentrate on operations management, human resources management and marketing/sales management, it would behoove them to likewise pay attention to financial management.

As a SCORE counselor, Denton has met with many people who don’t realize the importance of rigorous accounting and financial planning.

“Some people are clueless in accounting and come up with the craziest set of charts I’ve seen in my life,” Denton said. “And I just want to cry.

“Unless they are especially knowledgeable in accounting, I’m a strong advocate of outsourcing.”

Instead, business owners ought to be out in the marketplace, promoting their business and spending their energies driving revenue.

Rebecca Tonn can be reached at rebecca.tonn@csbj.com or 719-329-5229.

In fact, bankers are frustrated that they can’t make the loans they want to, said First Commercial Bank Colorado Springs Market President Jack Kerr.

That’s a problem bankers will be faced with this year, he said.

“Banks in El Paso County and Colorado as a whole will be predicated on resolving problem loans and selling or liquidating foreclosed or repossessed assets — most of which will be sold at values that are less than the banks have on their books,” Kerr said. “But banks need to sell those assets to replenish capital.”

This is a different market than in the ‘90s when the Federal Deposit Insurance Corp. and resolution trust corporation assets were being sold at auction or in bulk sales packages — investors were actually buying those assets.

Today there aren’t financing sources, especially not for non-owner occupied real estate, such as retail centers, office buildings, subdivision developments or a piece of raw ground, he said.

Most banks are already too heavily leveraged on non-owner occupied assets, which are considered riskier than owner-occupied.

Ironically, in some cases, owner-occupied real estate is arguably more risky than non-owner occupied.

For instance, compare two similar 10,000-square-foot buildings, one owner-occupied and the other leased by four tenants. If the owner goes out of business, it’s more difficult to lease 10,000 square feet than 2,500 if one tenant goes out of business.

“Colorado Springs lives and dies by commercial real estate,” Kerr said. “But you have to look at the uniqueness of Colorado Springs — not as a comparison to Phoenix, south Florida or Las Vegas.

“Bankers need to finance those buildings, or more owners will go out of business and banks will have even more assets coming back in on nonaccrual (principal and interest unpaid for at least 90 days) loans. Without interest they’ll need more capital going forward.

“From 1995 to 2007, it was impossible to make a bad loan,” Kerr said. “Anybody could make a loan on anything — the value of the collateral always went up. But the chairs started getting pulled out slowly in the spring and summer of 2007, and got worse at the end of 2007 and beginning of 2008. My expectation is that we’re still 18 months out until we can absorb all the assets that are being taken back by banks, investors and hard money lenders.

“It will once again be survival of the fittest and survival of prudent bankers — those who mitigated risk (to begin with),” he said.

Because of regulatory guidelines and the 300 percent of capital threshold for non-owner occupied real estate, banks sometimes have to forego the opportunity to make loans to well-collateralized borrowers with good credit history and net worth.

“For seasoned bankers, this is the worst scenario — because we know we could make money for ourselves and our investors and the loan would be solid and performing,” Kerr said. Not to mention a banking relationship established today converts to additional loans, referrals, sources and other future relationships.

“Most of the deals I’m seeing are investors from out of state,” he said. Local developers are “upside down” in projects, and there is much less liquidity on the hard money side.

Guidelines will likely tighten going forward, but the economy will eventually recover.

Meanwhile, banking is still about relationships, having contacts in the community and knowing more about a project and a developer than merely what’s on paper.

“You can hire all the techno-wonks you want to do the research to supplement a credit request,” Kerr said. “But it still comes down to a lender knowing the project and the person — whether they have the tenacity to stay on the project for the long haul and adapt to a changing environment.”

And, whatever a banker does, he or she shouldn’t lend to sectors that are “plateaued or sunset-phasing.” Although Mark Twain said to “buy land, they’re not making it anymore,” Kerr adds a caveat — “you’d better know where that land is.

“Know your borrower — but know your property as well.”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.

Equity markets and investing

Slowly the economy will improve. But meanwhile, opportunities are already available for investors.

“We’re expecting positive gross domestic product growth in 2010 — maybe in the 2.5 percent range,” said Jeff Savage, senior director of investments for Wells Fargo Private Bank.

“But we expect unemployment to get higher in the 10 percent range for the first half of the year, and then decline in the last half of the year.”

Several leading economic indicators turned positive during the last half of 2009, including the stock market. But unemployment is a lagging indicator of a recovering economy.

“People need to have a very good grasp on the amount and kinds of risk they have in their portfolios. Investors need to be in real estate investment trusts and commodities during 2010 — not just gold and oil, but all of the metals, energy and agriculture,” Savage said.

“About $3.5 trillion is on the sidelines, or in cash and money market funds. But people need to get that money back in and working for them.”

This has been the worst decade since the 1800s in the U.S. equity market.

“So if you can stomach it at time like this, it’s very advantageous to be in the market now — because in the next few years it will revert. As of November 2009, the Dow Jones Industrial Average was about 4,000 points down from its high (during July 2007),” Savage said.

Investors should be in four asset classes: stocks, national and international and developing and emerging; bonds; alternative/complementary funds; and real estate.

Historically, the stock market makes substantial gains after a precipitous decline.

Investors have experienced “some mental relief, if you will, with the way the market has recovered,” Savage said. Psychology is “fragile. If something happens to the market, people will revert quickly to pessimism. But this is one of the best times to invest.”

SBA loans and small businesses

“The impact of the recession will continue to be reflected on small business financial statements well into 2011,” said Greg Clarkson, Small Business Administration division manager for BBVA Compass.

And small business confidence, of course, relies on having sufficient revenue to support projected growth.

For the two months ending Nov. 30, 2009, SBA 7(a) loan approvals totaled 10,296 applicants for $2.86 billion — an increase of 4,241 applicants, 70 percent, and $1.62 billion, 130 percent, over the same period during 2008.

“Small business owners need to be pro-active in developing a relationship with a bank that understands small business and the nuances of their business model and has a product mix that meets their needs,” Clarkson said.

“Small business owners need options — and to properly assess those options, they need a relationship. These are challenging times.

“We as lenders can’t just sit back and focus on having small business owners come in and ask us what we have to offer. We have to proactively be in the market and show them what we have to offer,” Clarkson said.

Economic and entrepreneurial future

The City of Colorado Springs has a “big financial problem,” said Daphne Greenwood, professor of economics at the University of Colorado at Colorado Springs. And giving “big subsidies” to the United States Olympic Committee and other organizations is not popular with voters and the constituency.

“It’s amazing to me that in a city that’s not that big that citizens don’t have any input — challenging that culture will be difficult,” Greenwood said.

2010 will be a tough year with all the budget cuts.

And for long-term economic development, “less and less can you depend on bringing in large companies (to create) jobs” and drive the local economy,” she said. “More and more, the mid-size communities that are thriving have many small businesses that are rooted in the community and started by locals. But this depends on a local culture that encourages creativity and innovation.”

But part of the problem is a lack of venture capital, which has plagued the Springs for years.

“We need to make the community a kind of quality place where venture capitalists want to live,” Greenwood said.

This requires more and varied “cultural activities, diversity and quirkiness,” but it has to derive from private sector economic development — not government stimulus or programs.

Another factor which influences small business start-up culture is the people who live in the community.

Innovation and creativity starts with the culture of local schools and school boards, she said, and how much students are encouragement to think for themselves — “rather than teaching them to the test or to conform to the norm.

“We need to encourage students to follow their star and dare to be different,” Greenwood said. “There is a correspondence between tolerating diversity, cultures and ethnicities and having young people who go on to invent new things or try a new marketing strategy — because artistically and scientifically they’ve been allowed and encouraged to think outside the box.”

And changing the economic and creative culture is not about more rules and regulations.

There’s “no law you can pass — no law you can throw at it. It ought to become part of the conversation for the Chamber of Commerce, every school board, the Economic Development Corporation — and all the organizations that want the community to thrive,” Greenwood said. “Before any decision is made, (they should) ask — is this moving our community toward creativity and diversity?”

Credit union industry

Like other sectors of the financial industry, the credit union sector has also been under stress.

“The industry’s not out of the woods, yet,” said Bruce Gillooly, vice president of corporate communications for Security Service Federal Credit Union. “But we’re seeing some signs of future potential. The credit union industry as a whole reacted well to the financial meltdown. We were quick to bail ourselves out and police ourselves.”

But the government is in a “regulatory mood.” Credit unions comprise only 6 percent of the financial industry, Gillooly said, and heavy regulation can overburden the industry. “Much like our counterparts in the banking industry, it’s harder (and more expensive) for the smaller institutions to hire compliance experts to comply with increased and complex regulations.”

And credit union members still want safety and soundness, access to convenient and inexpensive credit, and products and services that are useful to them.

“We’re confident we can work with legislators to protect consumers and provide the services they need. Colorado delegates in Washington D.C. have been supportive and understand the value of credit unions to their constituents,” Gillooly said. “2010 has the potential to be the bridge to a prosperous future.”

Financial institutions and hiring

A Grant Thornton LLP survey of banking and financial institution comptrollers and chief financial officers showed that only 20 percent plan to increase hiring during the first half of 2010, and 55 percent plan to reduce bonuses. Not surprisingly, banking/financial institution CFOs are more pessimistic than those in other industries.

And during the next six months, 22 percent will reduce 401 (k) matches, 43 percent will reduce stock options and other forms of equity-based compensation, and 31 percent will reduce health care benefits.

Banks and regulation

Banks are slowly addressing some of the internal issues they have, said Don Childears, president of the Colorado Bankers Association. “And we’ll probably be coping with a new layer of regulations from Washington, which will unfortunately deter lending even further.

“Congress says ‘lend,’ and the regulators say ‘don’t you dare take that risk.’ But (further) regulations are only necessary for those entities that brought about the meltdown 16 months ago — lenders that were not regulated or only lightly regulated. But the reaction is to regulate institutions (across the board).”

Regulators are trying “to issue as many speeding tickets as possible,” said John Carter, vice president, of Bankers’ Bank of the West. “Banks are being criticized for not providing credit, but they’re being prudent. Financial institutions are stewards of the deposits of customers — so they have higher standards. It doesn’t make sense for people to expect them to lend (frivolously). They have to make sure credit extensions are both productive and protected,” Carter said.

“On the bright side, there are some very healthy banks in Colorado. And some of the community banks are (filling the gap) for national banks. So that does provide some resilience going forward.”

But since banks had to pre-pay three years’ worth of Federal Deposit Insurance Corporation insurance during the fourth quarter of 2009, that has an immediate “liquidity impact and constrains their ability to use those funds for other purposes,” Carter said.

The era of fast, loose and easy loans seems to have evaporated for the foreseeable future.

During a recent Entrepreneurial Corner at BiggsKofford P.C., several bankers talked about why loans cannot always be renewed and what the industry is battling as it attempts to balance capital and lending.

Although the contrast between the current lending environment and several years ago seems “stark,” said Doug Woods, group president of southern Colorado and Denver for Great Western Bank, in reality, lending “five years ago was unrealistic — and what we’re (the industry) doing now is overreacting. The regulators are as unyielding, unrealistic and ultra-conservative as I’ve ever seen in my (28-year) career.”

While regulators say they’re attempting to encourage lending, that doesn’t exactly square with reality.

According to regulatory requirements, banks may only have a concentration of commercial real estate loans up to 100 percent of capital limit. Investor real estate is capped at 300 percent of capital limit.

Therefore, banks with such loans on the books must increase their capital, Woods said.

And the only way to increase that ratio is to decrease loans.

“Most community banks in this town were over-concentrated in real estate loans — because those are the loans available in this town,” said Steve Ingham, president of Academy Bank.

“Our access, as a national bank, to capital eases some of our pain, but we also have stricter regulatory requirements,” said Grant Ary, Wells Fargo’s manager for the Colorado Springs downtown market. “We borrow money from depositors, and we have to be a good financial steward of their money.”

And instead of quarterly payments, banks are now required to pre-pay three years of Federal Deposit Insurance Corp. payments.

Imagine having to pre-pay your vendors for three years, and you’ll begin to grasp the enormity of such a payment.

“The FDIC increase in insurance premiums has cost all of us a tremendous amount of money — and we have to (pass that cost along), or we don’t stay profitable,” Ary said.

The enforcement of regulations has changed more than the regulations themselves, Ingham said. “And the regulators are blamed by Congress for the situation. We’ll see more regulation changes as a result of this.”

Return on equity and return on assets are different today, “And I don’t think investors have made that (mental) shift yet,” Woods said.

Some small business owners are living in the past, expecting loans and terms that are “not the reality of the world today.”

And banks have to determine whether they can collect on whatever is offered as collateral.

A small business owner who does government contracting, for instance, might think that with good credit, obtaining a loan should be simple.

But banks cannot obtain liens on government accounts receivable.

The best thing small business owners can do is communicate with their bankers — long before they need a loan or their loan is up for renewal.

“You negotiate the terms of the loan, and then you enter into a contract,” Ary said. “As the market changes, the renegotiation of that contract is (critical), as well as communication.”

Basic economics dictates that banks pass on the cost of increased FDIC insurance to the customer, just as freight companies did during 2007 when fuel prices increased.

“Passing cost along to the end-user is a natural function of reality,” Ary said. “Ninety-nine percent of the time, we have to be right (about a loan). That’s not a lot of margin.”

Banks that have loan losses of 1 percent to 2 percent on an ongoing basis will fail, Woods said.

The industry had trouble because “bankers got away from pricing for risk — because they were pricing to be competitive,” Ingham said.

And it’s not as though all banks have stopped lending — it only seems that way. But, before the liquidity crisis and housing market collapse, the majority of commercial loans were made by non-bank lenders.

“But non-bank lenders either failed or pulled out of the market because they were doing non-recourse loans,” Woods said.

The bottom line: No one has all the financial and lending answers without knowing the future.

But no matter how successful business owners might be, it’s imperative they develop and nurture relationships with bankers.

Then, whether the market is abundant and liquid or dry and illiquid, entrepreneurs will be better prepared to expand their business or stay afloat — whichever the current economy dictates.

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.

Dakin was part of a panel of speakers featured during a Peak Venture Group seminar, “Alternatives for Injecting Cash Into Your Company,” at the Garden of the Gods Club.

For instance, if a company can “match the novelty and interest aspects of a large business, it can use the massive advertising budget of that business to help itself and help them (the large company) distinguish themselves from others.”

“If you don’t have cash, what capital do you have?” Dakin asked. “Credibility and knowledge can be more valuable than cash.”

Entrepreneurs and small business owners should consider three-way trades and recruiting resources.

“Then everyone who has a resource is a potential customer,” Dakin said. “If you don’t have cash — it doesn’t mean you’re dead in the water — it means you have to be creative.”

And a business could take the entire lifecycle of a product and break it into a relay race.

“Have another company carry your baton to the finish line,” he said. “Find someone who does it well, pass the baton to them, and share in the outcome.”

Business owners also should do what’s logical.

“Maybe having a strategic partner is better for you than a traditional bank loan,” said Matt Barrett, director of the Small Business Development Center. “You have to do what’s best, fastest and cheapest for your business.”

And the quality of potential deals is improving as people “continue to tweak their products,” Dakin said. “They’re waiting because there’s a logjam of deals as capital has become scarce in the market.”

Angel investors have started investing — barely — since September.

“They’re moving slowly and have a larger portfolio to choose from — so they can be very selective, and their investments tend to be smaller,” Dakin said.

And while the capital markets will thaw, eventually, patience and networking are crucial, panelists told the audience.

“I cannot over-emphasize the importance of networking and getting out there and talking to people and learning from them,” said Jeff Schneider, founder of Entrepreneurial Finance and Accounting Services.

This recession has been a “culling of the herd,” Barrett said. “Times are tough. But there is a light at the end of the tunnel — and it’s not a train. If you’re still in business, hang in there — we’ll pull out of this.”

Entrepreneurs should keep meeting people and establishing connections, friendships and leads.

“You cannot be creative enough,” Dakin said, “until you have all the money you need.”

Retirement roadmap

Americans are inordinately fond of top 10 lists.

And for investors, lists can be helpful in guiding them toward a secure retirement.

Donna O’Bryant, a financial adviser with Edward Jones, recommends 10 steps toward planning for retirement.

The first is to “map out goals for retirement,” including expected income from Social Security, pensions, part-time work — “which can be a significant source of income — and break down spending by necessities and discretionary, quality of life items, such as travel, entertainment and country club memberships.”

The second is to plan for a long retirement.

A couple, aged 65, has a 50 percent chance of at least one of them living to age 90, according to the Individual Finance and Insurance Decisions Centre.

No. 3 is, “start smart with your spending. Try to limit yourself to withdrawing 4 percent in the early years, so you’re not cutting too much into your principal,” she said. Remember that “inflation doesn’t retire.”

An income of $50,000 today, at 3 percent inflation, requires $100,000 25 years from now to maintain the same standard of living.

“Prepare for the unexpected,” she said, which includes having cash reserves, annuity income guarantees and a diversified portfolio.

“You shouldn’t put all your money into any one kind of investment,” O’Bryant said. “And don’t reach for yield. Stocks or bonds that pay abnormally high dividends or interest generally represent greater risk.”

The next step is to “maintain a healthy portfolio,” with long-term care insurance, health insurance, and being proactive about one’s own health care.

“Eating a healthy diet, exercising and having an annual checkup may not only improve your quality of life, but may also reduce your health care costs,” O’Bryant said.

The eighth step in the roadmap is to “keep retirement from being taxing,” by understanding tax laws related to individual retirement accounts and working with a tax professional, “to be sure you’re not behind with taxes or paying them unnecessarily,” she said.

And “define your legacy — if you don’t have a strategy for your estate, the courts or government will,” she said. “Be sure you are in control of your estate and how you want to pass on your assets.”

And, No. 10 is, “remember your annual checkup,” O’Bryant said. “Just like a health checkup, a yearly financial review can help identify issues early, before they become a problem.”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.

Investing in entrepreneurs who have “no chance” at success squanders resources and “misdirects human capital,” said Thomas Duening, El Pomar Chair for Business and Entrepreneurship in the College of Business at the University of Colorado at Colorado Springs.

For instance, “an unemployed worker who has been downsized, starts a low-growth company and struggles for two years and fails — he or she could have spent that two years retraining for a better position,” Duening said.

Being an entrepreneur takes far more than capital, a few ideas and courage. And for those who believe that it’s all about the bottom line and profit — that’s an upside-down perspective.

“The pathway to wealth is inherently ethical — it’s not about creating profit, but creating value,” Duening said. This value is what uplifts a society because economics is the driver of culture. “At the end of the day, you can’t do good if people are hungry. And, I believe in education as an economic driver. You provide value to a region by bringing them up to a certain level of education.”

And the best economic development occurs between those who have the capital and those who have the ideas — they have symmetrical goals, he said.

As for ideas, any service or activity has to be market driven. And age doesn’t hurt, either.

“Most 18- to 22-year-olds are not prepared to run a company,” he said. “The average age of a first-time technology entrepreneur is 39.”

Although technology start-ups have been especially in vogue this century, a successful company requires leadership and “logic that differs from traditional causal logic.”

The premise of causal logic is that if people set clear goals and follow specific steps — they will be successful. Most people use this logic and it works fabulously — for things such as saving money, losing weight and quitting bad habits, etc.

But technology leaders, such as Meg Whitman, former CEO of eBay, Steve Jobs, co-founder of Apple, and Bill Gates, co-founder of Microsoft, were entrepreneurs earlier in life, and their “future was uncertain, goals unclear and the path to success littered with ambiguity,” Duening said.

Their logic was not causal — it was “effectuation logic,” which is based on the notion that “multiple alternative goals can be achieved — any one of which would constitute a successful outcome,” Duening said.

Each of them started a company with the idea of changing the world — and each likely exceeded his or her own expectations.

But what matters — to leaders who are creating the future — is which resources are available, and how they can be deployed profitably.

As Gates, Whitman and Jobs “struggled each day to create a better future,” they didn’t envision the global impact their companies would have.

But as technology leaders, they were “comfortable with pursuing an unknown and unknowable future,” Duening said. “They were not averse to uncertainty and ambiguity.”

People who psychologically need a steady paycheck or a “prescribed future,” don’t exactly fit the parameters of an entrepreneur.

However, would-be entrepreneurs, who are undeterred after reading this column, can learn effectuation logic.

Here are five of the underlying principles of effectuation logic, which Duening espouses.

“Affordable loss principle — invest only what you can afford to lose; bird-in-hand principle — start with what you have, who you are and whom you know; crazy quilt principle — build networks of self-selected, committed individuals; lemonade principle — embrace and leverage ambiguity and change; pilot-in-the-plane principle — the future is created by what people do.”

For those aspiring to entrepreneurial leadership, ask yourselves Duening’s questions: “Given who you are, what you know and whom you know — what types of economic and/or social artifacts can you, should you, create? What types of ideas and opportunities should you (emphasis on “you,” not your colleague or friend) pursue?”

And, contrary to the popular belief of entitlement — wealth has to be created.

Entrepreneurs are “constrained in a productive way by free market economics. You only find out what’s right and true by going out in this world and sticking your beak out,” Duening said.

“When a society is so fat that it thinks we can just reallocate wealth instead of creating value — then we die.”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.

“We’ll see continued uncertainty — but nowhere near what we’ve seen for the last 18 months,” Greiner said. “We’ve been calling the (end of the) recession, but the ferocity of the rebound will be a little stronger than we thought (albeit weaker than ‘normal’ after a recession) — probably strong enough for some job creation in the first quarter.”

The unemployment rate is “searching for bottom. We’ll see 10 percent or so, but 11 percent is probably not going to occur.”

The third estimate of second quarter gross domestic product came in at negative 0.7 percent, according to the Bureau of Economic Analysis. Not quite positive as anticipated, but a distinct improvement compared to the first quarter’s negative 6.4 percent.

At this point, Greiner anticipates that third quarter GDP will be 3 percent, and 4 percent for fourth quarter.

(The “advance” estimate of Q3 GDP will be released Oct. 29.)

The six-month rate of change in the leading economic indicators is, he said, one of the more dependable indicators of economic acceleration.

(And here I thought “acceleration” was how to fly by all the tourists driving up Ute Pass.)

“Historically, the U.S. economic growth rate accelerates to the upside whenever the economy has been in recession and the LEI six-month rate of change exceeds 3.5 percent,” Greiner said. “This has been true 100 percent of the time since the end of World War II and has been true in calling the end of the last 10 recessions.”

And, yes, the LEI six-month rate of change grew by more than the magical/requisite 3.5 percent last month.

He expects that GDP will remain positive, about 2 percent to 3 percent, during 2010. But unemployment won’t go below 6.5 percent or 7 percent during the next year or two.

“The conservatives will call this the ‘jobless recovery,’” he said.

The fourth quarter will be “one of the best” during the next four or six quarters, because inventory levels — raw materials, etc. — are extremely low. Industrial production has started to “ramp up” since the beginning of September.

“The slingshot effect, of coming out of recession and pent-up demand, will get inventory levels up quickly,” Greiner said.

The fourth quarter will be driven by inventory accumulation, because the consumer has been weakened and consumer demand will lag.

And for now, there is “so much slack in the system” that inflation will not be a problem.

Demand (pull) and supply (push) are part of the inflationary processes.

“When you’re at full production capacity, then prices rise sharply and quickly,” he said. “Now we’re running at 70 percent of full capacity, but their ability to fulfill orders is high.”

Inflation is not a risk until the nation is above 80 percent capacity rates.

“Inflation is basically benign for the next six to 12 months,” Greiner said.

However, after that, there is a great risk of inflation unfolding on a worldwide level if central banks don’t raise interest rates during the next 12 months. The Federal Reserve and U.S. Treasury need to “tighten down money supply and raise interest rates” during the next year.

Another risk is the potential for a double-dip recession.

“The probability is 20 percent,” Greiner said. “After a normal recession and recovery, the probability would be zero to 10 percent.”

During the next 12 months, there is a 60 percent probability of staying out of recession and not having a major surge in inflation. But there is a 20 percent probability of a rapid rise in inflation.

Although things are improving, it will take time to recover.

Consumers’ balance sheets have been “deeply damaged” during the last two years, so consumers won’t be pulling the United States out of the recession as they normally do.

And the banking system was “damaged dramatically” and will continue to be for the next year or so.

“Last year it was national banks,” Greiner said, but some smaller and community banks will have trouble during the next year because of bad loans and lack of capital.

Overall, he expects that stock market prices will close at higher levels by the end of the year and the “second leg” of the bull market will begin during the next few months.

“These are the odds we’re playing with right now,” Greiner said. “And the stock market has been sensing this. It’s a feel-good Goldilocks environment — not too hot and not too cold.”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.

Pardon me, but having a will and creating a simple trust is essential to preserving one’s legacy.

(This should not be an “aha” moment — but if it is, do yourself and your heirs a favor and make a will already.)

Recently at The Broadmoor, Certified Financial Planner June Walbert, with USAA in San Antonio, gave two presentations — about long-term care insurance, building a retirement paycheck, tax diversification and preserving your legacy.

When yours truly caught up with Walbert for lunch at The Tavern (try the grilled salmon over Caesar salad, it’s fabulous, darling), we spoke about municipal bonds and Roth Individual Retirement Account conversions.

“I don’t even have to have a crystal ball to predict that taxes will go up,” Walbert said. “We just don’t know how much and when.”

Thus, municipal bonds are a “great investment in an unfriendly tax environment.”

And right now, the spread between Treasury bills and municipal bonds is “3 percentage points — when you consider the taxable equivalent yield (for a 35 percent tax bracket),” she said.

“So, people buy bonds for the milk, not the cow,” she said, laughing at herself for using such a phrase.

When interest rates rise, bond prices typically fall, so investors need to be ready for volatility in bond prices by remembering that they buy bonds for the yield (the income aspect, aka the “milk”), not for the capital appreciation — because it’s the taxable equivalent yield that matters.

Now for the don’t-try-this-until-you-read-this caveat or two.

Muni bonds are best for folks in at least a 28 percent marginal tax bracket — for investors in a lower tax bracket, it “makes more sense to stick with Treasuries and corporate bonds.”

And munis are only for the “taxable portion” of one’s portfolio. If investors in a higher tax bracket have a 50/50 allocation of stocks and bonds in their portfolio, then half of the bond allocation of the portfolio could be in municipal bonds.

The other half of the bond allocation should be in Treasuries, corporate bonds and, perhaps, “a small slice of high-yield bonds.”

“Just as you diversify with stocks, you need to diversify with bonds,” Walbert said.

Now for Roth IRA conversions.

“There are two compelling reasons to convert to a Roth, now or in the future,” Walbert said — to create a tax-free income stream for retirement, and/or to create a tax-free legacy for your heirs.

And there are two reasons why today, or very soon, is an optimal time to convert: “depressed account values” (a lovely euphemism for — your retirement account has been decimated by the recession, so you’ll pay less tax), and “historically low tax rates.”

For instance, during 1913, the marginal tax rate was 7 percent. Toward the end of World War II, the rate jumped precipitously to 94 percent, due to war reparations and social programs (not dissimilar to the nation’s current situation).

By 1980, the rate had lowered to 70 percent, and by 1990, it dropped to 28 percent. This year, it’s 35 percent. In other words, it can go (and has gone) much higher.

The marginal tax rate (the percent at which each dollar above a certain threshold is taxed) is not to be confused with the average tax rate (total tax as a percentage of total income earned).

“If you’re retiring soon and will need all that money for retirement,” Walbert said, “then conversion to a Roth is probably not right for you. But if you don’t need the money for 10 or more years — or you’ll never need the money and want to pass it along to your heirs, then you or your heirs could enjoy that money in the same tax-free environment.”

And, there is no minimum required distribution with a Roth IRA, as there is with a traditional IRA. But don’t try this alone — consult with a qualified financial or tax professional.

“The key beauty of having a Roth IRA is in having some control over your taxes in retirement,” Walbert said, whereas, pensions are subject to ordinary income tax, and realized gains from joint or brokerage accounts are subject to capital gains tax.

And both of these taxes, as mentioned before, are apt to go up.

“It’s a good idea to fold a Roth account into your mix of investments,” Walbert said.

That way, you won’t be shocked or dismayed when taxes increase, much like some dear readers were taken aback by Monday’s snow on the last day of summer — guess you haven’t lived in Colorado Springs long enough.

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.

But more regulation, proposed by the Obama administration, is not the answer, said Mariner Kemper, chairman and CEO of UMB Financial Corp.

While Kemper is “eager” to see the nation implement long-term solutions and deal with troubled institutions, he said the task needs to be approached realistically and rationally — “rather than rush to do something that may do real damage in the long run.”

Pundits, reactionaries and politicians insist that more regulation will solve the problem.

“But there’s been plenty of regulation,” Kemper said. “The big issue is enforcement and execution — regulation has not been well-enforced over the years.”

As people look for scapegoats to blame for all the problems, they want answers — which often include demonizing the banking industry — and solutions.

“Traditional banking — which gathers core deposits in a bank’s territory and lends those funds out to customers whom bankers know and understand — did not cause the economic crisis,” Kemper said.

But financial service conglomerates are a “different” story.

“By inflating their leverage in a low-interest rate environment, they created liquidity and transferred risk by packaging loans into exotic financial products, selling them all over the globe,” he said. “Banking didn’t get out of hand — the products did.”

One of the weaknesses in the regulatory industry is lack of understanding about the products and their systemic impact, Kemper said.

And keeping “too big to fail” institutions on taxpayer-funded life support only “prolongs the agony.”

The goal, instead, should be to resolve these situations, by “shutting down failed businesses, and spinning off viable enterprises as agile, focused competitors,” Kemper said.

“We already have five regulatory agencies that don’t work together and have rules that sometimes conflict,” he said. “Instead of more Big Brother — we need a systemwide regulation,” which would make the agencies coherent amongst one another.

“The proposed Consumer Financial Protection Agency would be a disaster,” Kemper said. “It’s so far-reaching that it flies in the face of a free-market system.”

As for reform, the nation would derive much greater benefit from “incentives-based reform,” rather than using a punitive system.

His suggestions for incentives to “drive behavior” include a “much more robust tiering system” for Federal Deposit Insurance Corp. insurance.

“The more risk you take, the higher the premium should be, just like with car insurance,” he said.

Financial institutions should have to cover their own costs for the risks they take, Kemper said, “So conservative banks aren’t faced with paying for the irresponsibility of others — or having our reputations lumped together with theirs.”

And capital requirements could be regulated in the same fashion — via incentives.

As proof that increasing regulations and adding agencies has not worked, nor has the government learned a lesson, he said, the nation has had 32 recessions since the mid-1850s.

“We don’t teach people to (mitigate) risk by looking over their shoulders,” Kemper said. “We teach them by rewarding for quality and charging for risk.”

During 1873, the U.S. had a Great Depression — something people tend to forget about.

“We’ve been here so many times — and with each recession, depression and crisis, we’ve had (or added) regulatory bodies, yet we still have another recession,” Kemper said. “Instead of more eyeballs, let’s put the burden on the institutions that take the risks — by having them reserve for the risk through higher premiums and higher capital levels, which also protects shareholders and depositors.”

He said reform is needed, but not more regulations and more institutions.

“Instead, we could solve most of our industry problems by offering incentives — it’s a fact of human behavior,” Kemper said. “We need incentives to behave.”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.