MANAGING FOR RISK IN 2013

Racing businesses positioning for the rest of 2013 and beyond face tremendous uncertainty from changes within the industry and volatile outside forces.

Strategic and operational planning for enterprises have become increasingly challenging in the 21st century because risks and contingencies have grown in magnitude. Planning has been complicated by unstable fiscal policies and permissive monetary initiatives in the United States and Europe, sophisticated technologies that disrupt established business models, and unpredictable “black-swan” events like terrorism that can dampen commercial activity.

The United States is bleeding red ink in order to accommodate an unsustainable level of government spending, with the lion’s share accounted for by burgeoning entitlement programs. Since January 2009, the U.S. national debt has exploded by about 53.3%, from $10.7 trillion to $16.4 trillion.

In 2009 federal government spending as a percentage of gross domestic product was at the highest level (25.2%) since the end of World War II. This was due to the dramatically slowing economy in 2008 and government bailouts of companies and banks beginning at the tail end of the Bush presidency.

The 2013 New Year’s Day federal budget agreement to deal with the nominal fiscal cliff did nothing to impede the trajectory of government outlays, and left many important and divisive issues to be resolved in the near future. Moreover, the compromise raised tax rates on individuals earning more than $400,000 and couples earning more than $450,000, which could affect small businesses that choose to be taxed as individuals.

Yet the U.S. economy is amazingly resilient, and its growth rate could improve in 2013 in spite of the head winds. Caution calls for businesses, including those in horse racing and breeding, to put extraordinary emphasis on cash management and a solid balance sheet. Companies with free cash flow—operating cash flow minus capital expenditures—will have the ability to capitalize on opportunities as they arise and weather unexpected events in an inscrutable 2013 and beyond.

A shorter version of this article appeared in the Blood-Horse of January 12, 2013. Copyright © 2013 The Blood-Horse. Used with permission.

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