When Goldman Sachs released its 2016 research estimate for the S&P 500, it prompted me to wonder what lessons small- to mid-size companies could learn from the examples of their S&P 500 big brothers. The answer: There's much to be gained from following these leaders' examples, but they need to be modified to the specific goals and needs of smaller enterprises.
The bottom line is that they're focused on increasing profitability (you should be, too), and they're spending trillions to do it. Goldman Sachs estimates that Standard & Poor's 500 companies will spend $2.2 trillion in 2016 to make their companies more profitable or to make money for their shareholders. While you may not have that kind of cash available to you, you can model your growth opportunities after some of the best businesses in the world. You may even be able to get some of the $2.2 trillion they're dishing out!
So how could your health care company better use its resources in 2016? You don't have to have a Harvard MBA or be an investment banker from Goldman Sachs to see the value of growing your business—these five basic ways that companies improve are common sense.
S&P 500 companies will spend the largest portion of $2.2 trillion in capital expenditures (CapEx). Spending $650 billion on CapEx purchases will not likely immediately lead to increased revenues, but over time this expenditure will increase each company's cash flow, ultimately creating value for the shareholder by increasing the stock price.
Small business application: Health care businesses should consider building leaner facilities, updating equipment, entering new markets, improving processing, updating technology, etc.
Goldman Sachs expects cash dividends paid to shareholders to reach an all-time high of an estimated $450 billion that will go directly in their investors' pockets.
Small business application: If you are a sole proprietor, pay yourself first. Typically, as a business owner, you are trained to pay everyone and everything first, then take what is left over for yourself. If you make it a priority to pay yourself—even if that means an hourly wage—it will create a noticeable difference in how you run your day-to-day operations, not to mention your personal bottom line.
3. Stock Buy-Back
Goldman Sachs estimates companies will buy back $300 billion of their own stocks. Most companies are already engaged in buy-backs on some level, but $300 billion would be the largest such investment in one year.
Small business application: Smaller health care businesses should consider taking advantage of opportunities to deleverage any liabilities. Buy out owners who do not contribute. If you do not have the capital to buy out a non-performing stakeholder, find a new stakeholder (preferably one who adds value) who does have the capital, and facilitate the transaction. Your company will be stronger with active, engaged owners.
4. Research and Development
New products will be the target of another $256 billion in expenditures. R&D is historically what American companies do best.
Small business application:
Focus on small initiatives that fall in line with what you are already doing. Think along the lines of improving an existing medical device or streamlining a procedure or process.
5. Mergers + Acquisitions
M+A will take up another $300 billion in estimated expenditures, and this is just the cash side. Stock trades and other paper transactions will augment this figure to more than double, if not triple.
Small business application:
Broader health care service sectors are consolidating as a result of Medicare's volume-based reimbursement approach. Smaller providers, however, may suddenly find themselves below the economies of scale needed to survive. Many must find a larger company with which to merge, a trend of consolidation that is happening throughout health care.
Smaller health care businesses may find a variation of this approach can work well for them, such as acquiring companies in parallel markets. Diversifying into new, but related, health care verticals can yield several advantages. Not only is the company diversifying cash flow streams, but it is also insulating itself from risk of reimbursement fluctuations. This approach can also impact fixed overhead costs by consolidating items such as billing, payroll and other back office roles.
An added benefit to entrepreneurs who choose to be acquired: They are generally given autonomy to run their divisions within the larger enterprise, but without the headaches associated with back office business matters.
Consider which of these approaches might work best for your company. Each approach holds value, but for smaller health care companies, the final point may prove the most intriguing.
Over time, large companies tend to become weighed down in their own bureaucracy. Look at any large competitor in your market, and see how easy it can be to dance circles around them. These companies tend to look for smaller, more nimble companies to acquire, not primarily for geographic or market saturation, but for the talent the smaller company offers.
Is there an opportunity for you in this arena? Is now the time for you to seek to be acquired? Or is now the time for you to acquire another company—or merge and expand?
The S&P 500 projection for spending $2.2 trillion to grow profitability offers small health care companies a playbook for the future. How will you choose to move forward?