As reported in the web-exclusive article “Consumer Credit: The Next Crisis,” American consumers are carrying a dangerous, unsustainable amount of debt. Over the next several months, many will default on their loans. The authors of the article, investment banker William Jarvis and Wharton School professor Ian MacMillan, warn we should brace ourselves for record numbers of personal bankruptcies.
Still more consumers will not file bankruptcy but will radically slow down on both borrowing and spending. That’s exactly what they should do for themselves. But the cumulative effect on the economy of all this deleveraging and defaulting is troubling.
The consumer credit crisis will endanger many businesses. Your company’s sales, gross margins, and bottom line are probably more exposed than you realize. (To make matters worse, you’ll probably never see the rates of growth you came to depend on before the current slowdown–because far too much of that growth was fueled by easy credit that never should have been granted.)
But how do you know how exposed to consumer leverage your business is? Jarvis and MacMillan have created an HBR Toolkit (downloadable PDF) to help you figure that out. The article shows, step-by-step, how to calculate Consumer Leverage Exposure, or CLE, a metric they advocate for companies reporting on a regular basis. CLE helps you to quantify both the damage that increasing levels of
consumer default would wreak on your company and how much your company’s
own indebtedness plays into that exposure.
The Toolkit takes you through the calculations with a fictional company called JarMac, and includes a CLE calculator (downloadable spreadsheet) so that you can plug in your company’s numbers to see your exposure.
As the authors note, it’s too late to prevent the the credit crisis, “but thankfully, this corporation killer can be diagnosed,
analyzed, and managed.” The toolkit and calculator “can help you identify
the warning signs of consumer leverage exposure (CLE) and take action to
forestall much of the crippling impact it could have on your company.
“Managers that ignore the warning signs and leave their company
vulnerable will have only themselves to blame.”