Optimism

Lots of gloom and doom out there, but it depends where you look. A new book has come out bucking that trend. It is called "The Rational Optimist: How Prosperity Evolves," by Matt Ridley. Mr. Ridley is a science writer. His foundation for optimism is: innovation. The long term trend of human history has been upward, he says, because humans are continually innovating. Innovations have led to vast improvements in the human condition, and it is likely that trend will continue. The problem of feeding a couple of billion more people by the year 2110 can easily be solved by the advances in agriculture and biology that are occurring as we speak. In fact, we could have more than enough food, using even less land than we do now. The book is full of statistical evidence that things have been getting better all the time, not worse.

What can you do?

Realistically speaking, the state of the economy is, well, let’s just say not as good as it could be. We needn’t get into an exhaustive analysis of it here. There is plenty of that in the media, much of it conflicting. But it might not be a bad idea to look at the big picture for just a moment before we move on to things closer to home.


Usually an economy gets into trouble when there is too much debt in the system, and people can’t pay it off. The economy goes into a decline, and by various mechanisms (such as bankruptcy, or the action of creditors simply writing off hopeless debts), the excess debt gets washed out of the system. Then a recovery begins, assisted by renewed lending.
The perils of capitalism include the “business cycle,” which basically describes the action of the economy fluctuating between expansion and contraction. Many contractions over the years (and centuries) have been very painful, even catastrophic, and as time goes on, various governments have passed laws to try to prevent, modify or soften many of the conditions associated with the contractions.
However, you might as well try to legislate against old age. It just won’t work. The business cycle will have its revenge. Some things can be done to delay a contraction. But it just might be that the contraction, when it comes, will be much worse than it would have been if we hadn’t delayed it.
Currently, some debts are being washed out of the system through bankruptcy and such. The real estate bubble is slowly deflating, despite various government efforts to prop it up and ease the pain. “Troubled assets” in the banking system are being “resolved” by government action.
However, the big problem now is that government debt is growing at an alarming rate, and markets are showing investors’ concern about that. Surveys indicate most voters favor cutting the federal deficit, but many in our government want to spend more to stimulate the economy. There is little agreement amongst the so-called experts about whether that would make things better or worse.



These things are important when you vote, but what about now, in everyday life and business?
The lesson of the above considerations is that business and personal finances could be facing some headwinds in the immediate future. No one knows exactly how things will go, but it would not be the best strategy to just assume—or even just to hope--that everything will be hunk-dory by next January 1 (or some such date).
So, what is one to do?

Business strategies:
Businesses that are facing stresses can either (a) give up and go out of business; (b) try to muddle through and hope for the best; or, (c) try to do something effective to make things better.
There is plenty of advice about how to do (c), but if I may I would like to add another “big picture” suggestion:
Your most valuable weapon is communication. Communicating with existing customers and potential customers is paramount. Maintaining and using a mailing list (and/or e-mailing list) of existing customers can be of inestimable benefit to a business. There are also endless means of electronic contact available today—Twitter, You-Tube, etc, etc. (I can’t say I know how to use them all effectively myself, but they are definitely out there.)
Any and all means of contacting potential new customers should be explored: advertising, bulk mailings, etc. (Bulk mailings can be very effective, and cost effective.)
Communication also includes knowing who you are communicating to. Blind advertising and mailings are not the best idea. A little market research—in the library or online—can go a long way. Surveys are also an excellent source of information about your market.
Communicating one on one with customers and allowing them to communicate with you is also extremely important—if not vital. (And when I say vital, I mean it can be a matter of life or death to a business.)

Communication is not going to be the answer to everything, but it is certainly very high on the list of things to do to make things better.


Personal finances:
Although the government and the companies producing consumer goods would like you to resume consuming at all costs, that is not necessarily the best strategy for one’s personal finances. Sometimes one has to consider what is best for oneself and not sacrifice oneself for the common good. (Consuming is not usually thought of as a sacrifice, but in this case it could turn out to be that way.)
Some old strategies (and clichés) are still true. You should have savings. You should budget your money. Don’t put all your eggs in one basket. There’s no free lunch. Get rich quick schemes don’t work.
Making more money is also helpful, obviously. Investing in education is good for that. Or, some people start businesses on the side, get a part time job, or figure out other ways to make ends meet.
It is difficult to predict how the national and international economy will impact one’s life. Who knows if a particular investment will turn out to be good or bad? What unexpected event might happen that would throw off your calculations?
But there are things you can do to try to keep control of your situation. Having a big cushion (which is not all in one basket) to fall back on works well if one can manage it. Being able to handle problems when they come up is also a nice skill to have, if one has it.
Also remember the mustard seed, and don’t give up.

Cash Flow, Larger Organizations

Cash flow control for larger companies is generally a bit different from what we discussed in our "Cash Flow--Small Business" entries. (Also keep in mind that "large" and "small" are relative terms. What seems large on Cape Cod may be small in Boston.)

This is just a bare-bones outline of how it is done.

Cash flow control for a larger organization generally begins with a sales forecast for the coming year. Such forecasts are usually based on what has happened over the last five to ten years. An average rate of year-over-year sales increase is derived and used to estimate what the coming year's sales may be.

From the sales figure, a projected profit and loss statement can be put together. Many of the expenses can be estimated using the rate of sales increase. For others there may be specific data that can be used.

Once a projected net income figure has been calculated, it can be plugged into a projected balance sheet. Some of the assets and liabilities will naturally increase at about the rate of the sales increase. Others can be determined in other ways.

When the assets, liabilities and equity have been totaled up, it may come to light that additional funds are needed, for example to acquire new capital equipment. Then decisions need to be made about how to acquire the funds, and the costs of the funds (e.g., interest) have to be added to the profit and loss statement.

With these projected financial statements in hand, they begin to construct the cash budget. Various cash flow factors are taken into account, such as the average lag in collecting receivables and the lag in paying bills. A cash budget for the coming year is calculated, then it is broken down into monthly amounts. The monthly budget is for planning. Then a more detailed daily or weekly budget is drawn up for actual cash control during the coming month.

Then they have to lay the numbers out on a spreadsheet and figure out what their cash position will be each month for the next few months. A seasonal business may have large fluctuations in cash requirements. During some months there may be shortfalls that require short-term borrowing.

This is a lot more complicated than the small-business methods outlined in earlier posts, and it would likely require extensive attention from specially trained people.

Bonanza?

Possible tax-break bonanza for Cape businesses that hire a lot of students and other seasonal workers:

Employers who hire people who worked for a total of less than 40 hours in the previous 60 days can get an exemption from the 6.2% social security tax that would otherwise be due on the employee's wages. This is effective for wages paid from March 19, 2010 to December 31, 2010. The employee must start working after February 3, 2010.

People who were in school during the previous 60 days are not disqualified, and there is no minimum age.

New hires who qualify must fill out form W-11 (or equivalent) to enable the employer to take the credit. The credit will be claimed on form 941 starting with the second quarter of 2010.

The exemption is for the employer's matching 6.2% and does not affect the 6.2% withheld from the employee's pay.

Credit for employers who offer health insurance

The IRS recently sent out postcards to employers who might qualify for a new credit established by the new health care law. It is a credit worth up to 35% of health insurance premiums paid by employers who have less than 25 “full time equivalent” employees and pay an average of less than $50,000 per year to each employee.

The full 35% credit will be realized only by employers with less than 10 “full time equivalent” employees who are paid an average of less than $25,000 per year. The credit is gradually reduced above that level.

“Full time equivalent” means that you have to divide the total hours worked during the year by part-timers by the number of hours they would have worked if they were full time. (The simplest example is that is you have two employees who each work 20 hours per week all year, you have one full time equivalent employee.)

The average wages are determined by dividing the total wages by the number of full time equivalent employees.

To qualify, the employer must pay at least 50% of covered employees’ health insurance premiums, if they have coverage as a single individual. If they are on a family plan, the employer only has to pay the amount equal to 50% of the single plan.

The credit has a number of other complicated rules, as you may have guessed.

The credit is taken on the employer’s annual income tax return. For example, a sole proprietor will take the credit on form 1040. For a corporation that files form 1120, the credit will be taken on that form.

Tax-exempt organizations can also claim the credit. For them, it is a refundable credit (subject to certain limitations).

For employers other than non-profits, the credit is not refundable; it can only reduce the income tax down to zero.

Times A-Changin'?

According to a recent (last month) report in The Economist, the US economy is undergoing a transformational change that will make it more viable in the long run. There will be more exporting and less production targeted for domestic consumption, they say. We will change our spendthrift ways and start saving more. There are already signs of that, since the recession and last year's meltdown have scared us straight.

Apparently not all economists agree, but if true, it is big news and perhaps something for optimists to hang their hats on in their persistent belief that all is not lost for the American economy. The title of the lead editorial on the subject is: "Hope at Last."

Ethics

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.