Many people do not realize how important the subject of ethics is in business.
I had to take a university course in ethics a couple of years ago, and unfortunately the course did not cover much about ethics at all. It was more concerned with social justice--another subject entirely, but one beloved by many university faculty members. Maybe actual basic ethics is too simple for the university level.
Ethics has to do with simple things like telling the truth. In business it means not lying about one’s product or service, not trying to put one over on customers or investors and giving honest value for money received. These things are the backbone of success in business and of the health of the whole economy.
We see the consequences of rampant dishonesty in a case like Enron. A lot of people get hurt, and then Congress thinks it has to pass a raft of new laws to prevent it from ever happening again. The new laws fail to prevent it from happening again, but they take up a lot of time that could be better spent on more productive things.
It should also be pointed out to all observers that if someone commits a crime it does not mean that everyone else in his neighborhood or racial group is also committing the same crimes. Similarly, if a corporation breaks the law, it doesn’t mean that all corporations are doing the same thing. There are actually quite a few American corporations that are founded on ethical principals and who behave ethically. Some of them have been around for a century or more, quietly doing good work, producing good products. The ones that don’t behave ethically make the news, and luckily they don’t have much longevity, either. People catch on that their products are inferior or the deals their customers or investors get are unfair. Or they get into legal troubles.
People who think there are no consequences for dishonesty as long as they are not found out are kidding themselves. Such people often end up in jail or on the scrap heap of failure. And on the personal side, such thinking leads to broken marriages and family discord.
Where a sense of ethics comes from is beyond the scope of these comments. Religious education? An innate sense of right and wrong? Parents and teachers can try to pass on rules and lessons in behavior. Some take it to heart; others don’t. A successful society is built by and of those who do.
Friday, January 29, 2010
Wednesday, January 27, 2010
Free Enterprise
ELEMENTS OF FREE ENTERPRISE
(And why it works)
I. Rewards and penalties.
If people work hard, they generally make more money. If they don’t work, they might be able to receive some public assistance, but that is usually much less than what they can have by working. Some choose not to work, but most choose to have more by working.
This arrangement is good for the society at large because it (by and large) requires production. It requires that people contribute something of value to earn their keep.
One of the basic laws of physics is that all things tend towards entropy (a physics concept that can be roughly translated as “disorder”). Energy is required to keep matter in an organized state. Similarly, a great deal of energy is required to sustain a large society, and if every person who can work does work, the job can be done.
The distinction between Free Enterprise and Capitalism.
The two are generally thought of as being the same thing, and indeed they may both be considered to be part of the same thing. But it is possible to make a distinction between them.
Free enterprise basically means that a person is free to go into any business he chooses and conduct his business in any way he sees fit, as long as it does not violate any laws. It is true that there are plenty of laws to be aware of, and some of them could be thought of as constraints on free enterprise. But within those boundaries, a businessman (or woman) has considerable freedom.
During the Cold War, the term free enterprise was often used in contrast with communism, which sought to control all aspects of the economy.
Free enterprise operates according to the strictures of Adam Smith’s “invisible hand.” That venerable economist used that term to denote the process of natural selection that rewards businesses that supply things the marketplace wants and punishes businesses that do not.
The term capitalism, however, though it is used as an umbrella term that includes the concept of free enterprise, more specifically refers to the use of capital. Capital is anything of value that can be used in business to make more money. Capital is often thought of as simply money, but it is not restricted to that. Machinery and equipment, for example, are capital assets. They can be used to manufacture goods to be sold, thereby making money.
Therefore the terms capitalism and free enterprise refer to different yet complementary aspects of our economic system.
II. Issues of capitalism.
People who object to capitalism generally think of the stereotyped fat capitalist who sits around doing nothing except making money on his money. He produces nothing, heartlessly refuses to pay his workers a decent wage and probably enjoys raping and polluting the environment.
This is a difficult stereotype to argue against if people have it fixed in their minds. But it is a ridiculous caricature. Undoubtedly such people exist here and there in the world, but that description is more likely to fit a dictator of a third world country than a capitalist.
The question of whether there are evil people in ultimate control of our capital system may be one best left to conspiracy buffs. It is not impossible that some positions of power are held by people of ill will. Nor is the opposite impossible, i.e., that competent people of good will hold many positions of power. Though the world is far from perfect (it never has been, nor is it likely to be in the near future), the fact is that the world’s economy is generally expanding and has been doing so (with momentary ups and downs) since the end of World War Two. Most of us would agree that this is a good thing. More and more people around the world are being lifted out of subsistence existences. Hunger is receding as a problem.
Could such general expansion happen under a regime whose intention is to crush and oppress people? We saw the economic stagnation and even regression that occurred under communism in the Soviet Union and in Red China under Mao. We can’t make progress if those at the top prevent it.
Given the above general shape of things, one could conclude that there are at least some people who are trying to make the system work for the benefit of all. Or, as Ayn Rand (author of Atlas Shrugged and The Fountainhead) postulated, they may be in it for their own self interest, but the way the system works, their self interest ends up benefiting all.
Could the system work better? Without a doubt. But the fact that it is working enough for growth and improvement to occur is a great thing. The history of the world is full of times when things were getting worse, not better.
A businessman (or woman) seeking to exercise his or her rights under the free enterprise system, may wish to start a business or expand or diversify an existing business. To do any of these things, he or she will need money. I.e., capital.
And where does that capital come from? It comes from banks, private lenders, venture capitalists, etc. These are the primary sources of capital.
The fact that the sources of capital—the capitalists—have the money is not the important thing. The important thing is how the capital is used. How the capital is used depends not so much on the capitalists as it does on the people who gain access to the capital through borrowing, sales of stock, etc.
The people who gain access to capital are established businesses, entrepreneurs, consumers, etc.
The question of whether borrowing and lending of capital is good or bad for the economy has long been settled. The existence of debt in the economy is good up to a certain point. It is true that the borrowing and lending of money is one of the major things that cause the booms and busts of the economic cycle. But without borrowing, entrepreneurs with brilliant business ideas would never get their ventures off the ground. The jobs they create would go missing from the economy, and important new products and services would never reach the market. Even established products would die out. There would be scarcity and massive unemployment.
OK, some might say, we need sources of capital. But does capital have to be in the hands of a rich elite? Couldn’t the government substitute itself for the rich elite and become the source of capital for all users?
The first step in answering such questions is to note that the communist experiments in China and the Soviet Union in the 20th Century did not go well. True, they were attempting to take over the whole economy. We saw that governments can never substitute for entrepreneurs, the dynamics of competition and the complex workings of the marketplace.
Secondly, the present extent of government regulation of and participation in the capital markets almost makes government takeover of capital a fait accompli. Although in reality the sources of capital are privately owned (except the biggest source, the currency itself), much of the power of capital concentrated in a few hands has been taken away, and much of the (theoretical?) ability of capitalists to harm individuals and the economy has been mitigated through anti-trust laws, securities and exchange regulations and various consumer protection laws regarding borrowing and lending.
Of course, this is not to say that the potential for abuse does not still exist. For example, energy consumers in California were badly mauled just a few years ago by market manipulators. But the fact is that there are some mechanisms in place designed keep the markets operating and to attempt to maintain a certain level of fairness in them.
If government regulation of capital markets has been such a boon, why not go all the way? Why not have government take them over completely?
First of all, banks and other sources of capital are businesses, just as are the businesses to whom they lend. They respond to the dynamics of competition and the laws of supply and demand. Government is a fundamentally different activity. Government officials have a different mindset and different purposes and goals from capitalists. Capitalists, if they are doing their jobs correctly, serve a definite function in keeping the economy working. Government officials may or may not understand and correctly performs those functions.
Capitalists who do not perform their functions in the way the market demands will eventually go out of business and be replaced by those who do. If government officials were in charge, they could go on going a bad job for a very long time without being replaced. Loans that should be made would not be made, and loans with no business or economic merit would be made. The economy as a whole would suffer, as would individuals affected directly by lack of needed loans or by debts larger than they can handle. Such things do happen in the economy as it is, but the penalty for them is that those suppliers of capital lose money. Again, that penalty would not work very well with the government as the source of capital.
An example:
A man wants to open a store in Yourtown, USA. He is skilled at operating stores and has a good plan for an efficient establishment that would supply things people in Yourtown need at better prices than the other stores in the area are able to offer. But he does not have enough money to get the store started—to lease a building, remodel it to his specifications, stock it, hire employees, advertise, etc. So he goes down to his friendly neighborhood capitalists, the local bank. The loan officer and other bank officials go over the plan with him. The bankers have some knowledge of general business operations and start-ups, and they offer some suggestions. After due consultation, they are satisfied that the plan is solid and has good money-making potential. They loan him the money. The store is started up, and it is a smashing success. The citizens of Yourtown get the benefit of paying less for things they need, leaving them with more money to spend on other things. The employees of the store have jobs. The store owner makes a profit. We won’t say “everybody is happy,” but overall it is a good thing.
And say the owner becomes very successful indeed. He expends, he opens stores in other cities. He becomes rich. What then? Is he a bad guy now? He probably does not keep his money buried in his basement. It is probably in banks and invested in stocks and bonds. As such it is in use, funding other businesses and doing its part to keep the economy going. Also, if the owner is like many people who acquire money, he is probably quite generous with it, giving to charities, perhaps even establishing a foundation for the benefit of his favorite cause.
(And why it works)
I. Rewards and penalties.
If people work hard, they generally make more money. If they don’t work, they might be able to receive some public assistance, but that is usually much less than what they can have by working. Some choose not to work, but most choose to have more by working.
This arrangement is good for the society at large because it (by and large) requires production. It requires that people contribute something of value to earn their keep.
One of the basic laws of physics is that all things tend towards entropy (a physics concept that can be roughly translated as “disorder”). Energy is required to keep matter in an organized state. Similarly, a great deal of energy is required to sustain a large society, and if every person who can work does work, the job can be done.
The distinction between Free Enterprise and Capitalism.
The two are generally thought of as being the same thing, and indeed they may both be considered to be part of the same thing. But it is possible to make a distinction between them.
Free enterprise basically means that a person is free to go into any business he chooses and conduct his business in any way he sees fit, as long as it does not violate any laws. It is true that there are plenty of laws to be aware of, and some of them could be thought of as constraints on free enterprise. But within those boundaries, a businessman (or woman) has considerable freedom.
During the Cold War, the term free enterprise was often used in contrast with communism, which sought to control all aspects of the economy.
Free enterprise operates according to the strictures of Adam Smith’s “invisible hand.” That venerable economist used that term to denote the process of natural selection that rewards businesses that supply things the marketplace wants and punishes businesses that do not.
The term capitalism, however, though it is used as an umbrella term that includes the concept of free enterprise, more specifically refers to the use of capital. Capital is anything of value that can be used in business to make more money. Capital is often thought of as simply money, but it is not restricted to that. Machinery and equipment, for example, are capital assets. They can be used to manufacture goods to be sold, thereby making money.
Therefore the terms capitalism and free enterprise refer to different yet complementary aspects of our economic system.
II. Issues of capitalism.
People who object to capitalism generally think of the stereotyped fat capitalist who sits around doing nothing except making money on his money. He produces nothing, heartlessly refuses to pay his workers a decent wage and probably enjoys raping and polluting the environment.
This is a difficult stereotype to argue against if people have it fixed in their minds. But it is a ridiculous caricature. Undoubtedly such people exist here and there in the world, but that description is more likely to fit a dictator of a third world country than a capitalist.
The question of whether there are evil people in ultimate control of our capital system may be one best left to conspiracy buffs. It is not impossible that some positions of power are held by people of ill will. Nor is the opposite impossible, i.e., that competent people of good will hold many positions of power. Though the world is far from perfect (it never has been, nor is it likely to be in the near future), the fact is that the world’s economy is generally expanding and has been doing so (with momentary ups and downs) since the end of World War Two. Most of us would agree that this is a good thing. More and more people around the world are being lifted out of subsistence existences. Hunger is receding as a problem.
Could such general expansion happen under a regime whose intention is to crush and oppress people? We saw the economic stagnation and even regression that occurred under communism in the Soviet Union and in Red China under Mao. We can’t make progress if those at the top prevent it.
Given the above general shape of things, one could conclude that there are at least some people who are trying to make the system work for the benefit of all. Or, as Ayn Rand (author of Atlas Shrugged and The Fountainhead) postulated, they may be in it for their own self interest, but the way the system works, their self interest ends up benefiting all.
Could the system work better? Without a doubt. But the fact that it is working enough for growth and improvement to occur is a great thing. The history of the world is full of times when things were getting worse, not better.
A businessman (or woman) seeking to exercise his or her rights under the free enterprise system, may wish to start a business or expand or diversify an existing business. To do any of these things, he or she will need money. I.e., capital.
And where does that capital come from? It comes from banks, private lenders, venture capitalists, etc. These are the primary sources of capital.
The fact that the sources of capital—the capitalists—have the money is not the important thing. The important thing is how the capital is used. How the capital is used depends not so much on the capitalists as it does on the people who gain access to the capital through borrowing, sales of stock, etc.
The people who gain access to capital are established businesses, entrepreneurs, consumers, etc.
The question of whether borrowing and lending of capital is good or bad for the economy has long been settled. The existence of debt in the economy is good up to a certain point. It is true that the borrowing and lending of money is one of the major things that cause the booms and busts of the economic cycle. But without borrowing, entrepreneurs with brilliant business ideas would never get their ventures off the ground. The jobs they create would go missing from the economy, and important new products and services would never reach the market. Even established products would die out. There would be scarcity and massive unemployment.
OK, some might say, we need sources of capital. But does capital have to be in the hands of a rich elite? Couldn’t the government substitute itself for the rich elite and become the source of capital for all users?
The first step in answering such questions is to note that the communist experiments in China and the Soviet Union in the 20th Century did not go well. True, they were attempting to take over the whole economy. We saw that governments can never substitute for entrepreneurs, the dynamics of competition and the complex workings of the marketplace.
Secondly, the present extent of government regulation of and participation in the capital markets almost makes government takeover of capital a fait accompli. Although in reality the sources of capital are privately owned (except the biggest source, the currency itself), much of the power of capital concentrated in a few hands has been taken away, and much of the (theoretical?) ability of capitalists to harm individuals and the economy has been mitigated through anti-trust laws, securities and exchange regulations and various consumer protection laws regarding borrowing and lending.
Of course, this is not to say that the potential for abuse does not still exist. For example, energy consumers in California were badly mauled just a few years ago by market manipulators. But the fact is that there are some mechanisms in place designed keep the markets operating and to attempt to maintain a certain level of fairness in them.
If government regulation of capital markets has been such a boon, why not go all the way? Why not have government take them over completely?
First of all, banks and other sources of capital are businesses, just as are the businesses to whom they lend. They respond to the dynamics of competition and the laws of supply and demand. Government is a fundamentally different activity. Government officials have a different mindset and different purposes and goals from capitalists. Capitalists, if they are doing their jobs correctly, serve a definite function in keeping the economy working. Government officials may or may not understand and correctly performs those functions.
Capitalists who do not perform their functions in the way the market demands will eventually go out of business and be replaced by those who do. If government officials were in charge, they could go on going a bad job for a very long time without being replaced. Loans that should be made would not be made, and loans with no business or economic merit would be made. The economy as a whole would suffer, as would individuals affected directly by lack of needed loans or by debts larger than they can handle. Such things do happen in the economy as it is, but the penalty for them is that those suppliers of capital lose money. Again, that penalty would not work very well with the government as the source of capital.
An example:
A man wants to open a store in Yourtown, USA. He is skilled at operating stores and has a good plan for an efficient establishment that would supply things people in Yourtown need at better prices than the other stores in the area are able to offer. But he does not have enough money to get the store started—to lease a building, remodel it to his specifications, stock it, hire employees, advertise, etc. So he goes down to his friendly neighborhood capitalists, the local bank. The loan officer and other bank officials go over the plan with him. The bankers have some knowledge of general business operations and start-ups, and they offer some suggestions. After due consultation, they are satisfied that the plan is solid and has good money-making potential. They loan him the money. The store is started up, and it is a smashing success. The citizens of Yourtown get the benefit of paying less for things they need, leaving them with more money to spend on other things. The employees of the store have jobs. The store owner makes a profit. We won’t say “everybody is happy,” but overall it is a good thing.
And say the owner becomes very successful indeed. He expends, he opens stores in other cities. He becomes rich. What then? Is he a bad guy now? He probably does not keep his money buried in his basement. It is probably in banks and invested in stocks and bonds. As such it is in use, funding other businesses and doing its part to keep the economy going. Also, if the owner is like many people who acquire money, he is probably quite generous with it, giving to charities, perhaps even establishing a foundation for the benefit of his favorite cause.
Wednesday, January 6, 2010
Cash Flow, Small Business, Part 2
Weekly Planning
Once you have your average budget figured out (see Cash Flow, Part 1), you can begin applying it to operations on a regular basis.
Here is one system of organizing for cash flow control.
Allocate a regular time at the end of each week when you and perhaps some selected employees can plan how to spend the money that came in that week. Any employees can submit written spending requests, which will be adjudicated at this time.
Ideally, the first thing to do is to allocate a fixed percentage of the week’s income to a reserve fund.
Then, allocate payments to the following:
• Bills. If you can’t pay them all this week, pay them in the order in which they were received, or in the date order in which they are due.
• Take a look at the weekly budget. Set aside weekly amounts for bills or payments that occur monthly, such as the rent and utilities. Keep a record of amounts set aside each week, amounts spent and balances available.
• Go through the written spending and purchase requests of employees, paying attention to where (and if) they fit into the budget. Approve the ones that fit into the budget, if there is enough money this week.
• If the week’s income was more than the budgeted amount, you can use the excess to catch up on any shortages from prior weeks, or, if everything is caught up, approve additional spending requests that otherwise might not be strictly per the budget.
Even if you have no employees, it is a good idea to have a structure such as this for the control of cash flow, so that you can keep up with the bills, eliminate the unexpected need to write a check right now for something that was forgotten, to make sure there is enough money for the rent when it comes due, etc.
Once you have your average budget figured out (see Cash Flow, Part 1), you can begin applying it to operations on a regular basis.
Here is one system of organizing for cash flow control.
Allocate a regular time at the end of each week when you and perhaps some selected employees can plan how to spend the money that came in that week. Any employees can submit written spending requests, which will be adjudicated at this time.
Ideally, the first thing to do is to allocate a fixed percentage of the week’s income to a reserve fund.
Then, allocate payments to the following:
• Bills. If you can’t pay them all this week, pay them in the order in which they were received, or in the date order in which they are due.
• Take a look at the weekly budget. Set aside weekly amounts for bills or payments that occur monthly, such as the rent and utilities. Keep a record of amounts set aside each week, amounts spent and balances available.
• Go through the written spending and purchase requests of employees, paying attention to where (and if) they fit into the budget. Approve the ones that fit into the budget, if there is enough money this week.
• If the week’s income was more than the budgeted amount, you can use the excess to catch up on any shortages from prior weeks, or, if everything is caught up, approve additional spending requests that otherwise might not be strictly per the budget.
Even if you have no employees, it is a good idea to have a structure such as this for the control of cash flow, so that you can keep up with the bills, eliminate the unexpected need to write a check right now for something that was forgotten, to make sure there is enough money for the rent when it comes due, etc.
Subscribe to:
Posts (Atom)
