The U.S. economy is primarily consumer-based, as personal consumption accounts for about 70% of gross domestic product. Without reduced unemployment, a stronger dollar and population growth, retail spending and business expansion cannot occur and, therefore, there will be no economic recovery.

Many stressed companies are relying on an improving economy and hope to "ride the wave." Organizations that have benefited from the recent economic "rebound" need to realize that much of the improvement has generally come from (a) the sale of assets at substantial discounts to historical levels and (b) drastic cost reductions as jobs have been shed and supply contracts have been canceled. Both of these survival strategies are short-term solutions and have come at the expense of properly managing working capital. As a result, when the economy does pick up many of these companies will not be able to finance working capital expansion to keep up with increased sale volumes since all the "furniture has been burnt," with no working capital rationalization options available.

Stressed companies that are focused on improving their operational capabilities and strengthening their capital structures will be better positioned to weather the current environment intact. If properly positioned, these companies will have maintained working capital at appropriate levels to support current (and future) revenue levels (that is, keeping their furniture intact). Ignoring such issues could put companies in the troubling position of surviving the downturn only to face a working capital shortage in the face of an extremely difficult financing environment.

The recent fiscal stimulus focused on providing liquidity to financial institutions and mid-to-large corporations in the form of tax rebates, loans and equity investments. The liquidity may have been helpful if it was used to delever the companies' balance sheets or properly incentivized lenders to open for business. However, in most cases, these government funds were short-term fixes as companies used the monies to fund additional losses in the hope that the additional time it provided will allow the economy to recover while turning around its performance. In other words, most companies used the fiscal stimulus as new furniture to burn.

The stimulus should have focused on direct job-creating infrastructure improvements needed in the long term (including public transportation and water desalinization). Employment levels are highly correlated (about 80%) with real GDP growth. Thus, this approach stimulates economic growth through job creation, yielding longer-term economic recovery.

In addition, a more restrictive monetary policy would be beneficial since the recent fiscal stimulus artificially suppresses interest rates. An increase in interest rates can actually be beneficial to the economy through:

There are recent examples of interest rate hikes leading to continued economic growth. For example, between early 1994 and early 1995, the Federal Reserve raised interest rates 3.0% and then maintained those higher rates until the recession of 2001. GDP growth exceeded 4.0% in five of those seven years, which had not occurred since the early-to-mid 1960s.

There are steps that can and must be taken by investors while reviewing/addressing portfolio companies to increase the likelihood for survival. These same steps should also be at the forefront of any due diligence process. In doing so, an investor can be more confident that a target will become a successful investment. Some examples of such action steps include:

1. Identify liquidity and covenant issues under downside scenarios.
2. Develop a "Plan B" that includes cost reduction and liquidity management initiatives consistent with the downside scenario.

Preparing for continued top-line stagnation (and even potential deterioration) may seem pessimistic given the optimism currently put forth by various pundits as well as the recent run-up in the equity markets. However, the lack of market fundamentals and, therefore, the fallacy of a "jobless" recovery make such actions imperative.

Paul Andrews is a managing director with UHY Advisors FLVS Inc. and national practice leader of its turnaround and restructuring group. Aaron Tam is a principal with UHY in the turnaround and restructuring group.