Bill Gates, Microsoft, Dot-Com Companies, Dot-Com Bubble, Green Energy and Green Energy Companies

Posted by PITHOCRATES - December 18th, 2012

History 101

Investors poured Money into Dot-Com IPOs to get in on the Ground Floor of the next BIG Thing

Cash is king.  It is the lifeblood of a business.  The most serious business issues are discussed in blood metaphors.  When a company’s operations are losing money the company is ‘in the red’.  When the company’s losses are so great that there is a high probability of bankruptcy business analysts may say the company is ‘bleeding (or hemorrhaging) red ink all over their balance sheet’.  Indicating the death of the business is imminent.  For if the company is bleeding too much cash it simply won’t have the cash to pay its people, its vendors, its taxes, etc.  And it will cease to be.  Like any living organism that loses too much blood.

Healthy cash flows in a business are so important that analysts, investors, bankers, etc., will review one particular financial statement, the statement of cash flows, for an immediate assessment of a business’ health.  This statement shows the three sources of cash a business has.  Operating activities, investing activities and financing activities.  A successful business can generate all the cash they need from their operating activities.  To get there, though, they need startup capital.  Which comes from their financing activities.  The companies that are preparing for a surge in growth will look for venture capital.  And the inevitable initial public offering (i.e., going public).  For many companies the IPO is the measure of success.  Because going public is what makes these entrepreneurs millionaires.  And billionaires.

In the Eighties one such entrepreneur that became a billionaire is Bill Gates.  Mr. Microsoft himself.  Who made a fortune.  And is now working to give it away.  Just like Andrew Carnegie.  And John D. Rockefeller.  This geek made so much money with his software company that he made a lot of people wealthy who were smart enough to buy Microsoft stock early.  How these stockholders loved Bill Gates.  And every investor since has been waiting for the next Bill Gates to come along.  So they can get in on the ground floor of the next BIG thing.  And they thought they found him.  Rather, they thought they found a whole bunch of him.  Pouring their money into IPO after IPO.  Just waiting for the nascent dot-com companies to take off and soar into the stratosphere of profits.  For the Internet had arrived.  Few knew what it did.  But everyone knew it was the next BIG thing.

The Dot-Coms survived on Venture Capital and the Proceeds from their IPOs as they had no Sales Revenue

And these dot-coms took their money and spent it.  They hired programmers like there was no tomorrow.  They built office buildings.  Cities even offered lucrative incentives to attract these dot-coms to tech corridors they were building in their cities.  And splurged on infrastructure to support them.  The dot-coms bought advertising.  They spent a fortune to develop their brand identity.  Making them common place names in the new high-tech economy.  There was only one thing they didn’t do.  Develop something they could actually sell.

Those on the Left keep talking about how great the Clinton economy was in the Nineties.  Despite higher marginal tax rates than we have now.  These people who don’t even like Wall Street say the stock market did better under Clinton.  Apparently getting rich in the stock market was okay in the Nineties.  Today it only attracts occupy movements to protest the evil that stock profits now are.  But there was one subtle difference between the economy in the Nineties and the boom of the Eighties.  Most of the Nineties was a bubble.  A dot-com bubble.  It wasn’t real.  It was all paper profits that sent stock prices of companies that had nothing to sell soaring.  As all those stockholders sat and waited for these companies to sell the next BIG thing.  Taking them on a whirlwind ride to riches that never came.  Because once that startup capital petered out so did these dot-coms.  Leaving George W. Bush to deal with the resulting Clinton recession.

A review of their statement of cash flows for all of these failed dot-coms would show the same thing.  They would show tremendous flows of cash.  But it all flowed from their financing activities to their operating activities.  Which was nothing but a black hole for that startup capital.  All of these companies survived on venture capital and the proceeds from their IPOs.  They paid all their programmers, bought their buildings, paid for advertising and developed their brand with money from investors.  A healthy business eventually has to replace that startup capital with money from their operating activities.  Businesses that don’t fail.  Because even the most diehard of investors will stop investing in a company that can’t do anything but bleed red ink all over their balance sheet.

Instead of Investors taking the Loss on Green Energy Investments it’s the American Taxpayer taking the Loss

Bill Clinton had his dot-coms.  While President Obama has his green energy companies.  Which are similar to the dot-coms but with one major difference.  Instead of investors pouring money into these companies for a whirlwind ride to riches they’re sitting out the green energy industry.  Because it is a bad investment.  There will be no Microsoft in green energy.  Because it is a horrible business model.  The cost to harness the free energy out of wind and solar is just prohibitive.  The amount of infrastructure required is so costly that there can never be a return on investment.  Like there can be for a coal-fired power plant.  Which is something investors will invest their money in.

Green energy cannot compete in the marketplace unless the government subsidizes it with tax dollars.  Green industries cannot even build a factory.  While they have some private investors it is never enough.  Most green investors typically support these companies with a token investment.  But the real investors who expect a return on investment look at a green energy prospectus and say, “Thank you but no.  It is a horrible investment.”  And the people who want to build these plants know they’re horrible investments as they want to risk other people’s money.  Not theirs.  Which leaves but one source for startup capital.  A source that is so inept about business that they will pour money into a horrible investment.  The government.

The Energy Department invested heavily into these bad investments.  And a lot of them ended the same.  Just like the dot-coms.  The cash on their statement of cash flows went from financing activity to operating activities.  Another black hole for investment capital.  They spent that startup capital on plants and buildings.  Hired people.  And paid themselves very well.  But eventually they ran through that startup capital.  And were unable to get any more.  And with their operating activities unable to generate cash like in a healthy business many of the green energy companies went the way of the dot-coms.  Only instead of investors taking the loss it’s the American taxpayer taking the loss.  As it is their money that is bleeding out in red ink all over these green energy balance sheets.

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Statement of Cash Flows

Posted by PITHOCRATES - December 18th, 2012

Economics 101

No Business will be able to Repay any Loan unless their Business Operations can Generate Cash

In business cash is king.  As it is in life.  We need cash to buy food to survive.  Just as a business needs cash to pay its bills to survive.  Cash is so important to a business that there is a special financial statement to summarize cash flows in a business.  It looks something like this.

The above are made up numbers that could be similar to any statement of cash flows.  It shows the three sources of cash for a business.  Operating activities.  Investing activities.  And financing activities.  Every last dollar a business has came from one of these three sources.  And we can determine the health of the business just by seeing where its cash came from.

Not all business owners use a statement of cash flows.  Most small business owners probably don’t.  Having some other method to see where their cash is coming from.  And going to.  But if they plan on borrowing money from a bank they’re going to need one.  As bankers want to see a business’ ability to generate cash from their business operations.  For no business will be able to repay any loan unless their business operations can generate cash.

An Increase in Accounts Receivable indicates a Business’ Customers are Paying them Slower

A business generates cash from operating activities.  Which comes from sales.  Of course business have to spend a lot of money to create those sales.  So the net cash generated is basically net income with a few adjustments.  In accrual accounting we expense a portion of what we spent on an asset as a depreciation expense each accounting period.  Because although we pay for an asset in one year we may use that asset for the next 5 years.  Or more.   So we expense a portion of that asset each accounting period.  But we don’t have to write a check to pay for depreciation.  It is a non-cash transaction.  So to adjust net income to show net cash generated we have to add back this depreciation expense.

An increase in accounts payable indicates a business is paying their bills slower.  And when you pay your bills slower you free up cash for other things.  Becoming a source of cash.  With each payroll a business has to withhold taxes from their employees’ paychecks.    Social Security, Medicare, unemployment insurance, the employee’s federal and state withholding taxes.  With each payroll these liabilities accrue and are payable to the various government agencies.  You  can free up some cash by paying these taxes late.  But it is not recommended.  For the penalties for doing so can be severe.

An increase in accounts receivable indicates their customers are paying them slower.  An increase in inventory indicates they’re buying more into inventory than they’re selling from inventory.  Prepayments will conserve cash in the future by paying for things now.  But they will leave you with less cash now.  A decrease in accrued liabilities indicates they’re catching up on paying some of their accrued expenses.  Like those payroll taxes.  (In the ideal world if you add up the increase and decrease in accrued liabilities they should net out. Indicating you’re paying your accrued expenses on time.  In this example the business has a balance of $3,000 they’re paying late.)  Increases in all of these items consume cash, leaving the business with less cash for other things.

When the Owner has to put in More of their Own Cash into the Business Things are not going Well

Cash flows from investing activities can include financial investments a business buys and sells with the excess cash they have.  In this example the only investment activities is the buying and selling of some plant assets.  Perhaps selling some old equipment that is costly to maintain and replacing it with new equipment.  Even replacing a vital piece of production equipment that breaks down.  Putting a business out of business.  Thus requiring a cash purchase to replace it as quickly as possible.  Short-term borrowing may be advances on their credit line while the settlement on short-term debt may be the repaying of some of those advances.  Proceeds from long-term debt may be a new bank loan.  While payments to settle long-term debt may be repaying a previous loan.  Finally, paid-in capital is money from the business owner.  Such as cashing in a 401(k) or getting a second mortgage on their house so they can put it into their business to make up for a cash shortage.

So what does all of this mean?  Is this business doing well?  Or are they having problems?  Well, the good news is that they are meeting their cash needs.  The bad news is that it’s not because of their operating activities.  They’re meeting their cash needs by paying their vendors slower.  In fact, if they didn’t they may have had a net loss of cash for the year.  Which means had they not paid their bills late they may have gone bankrupt.  And their cash problems are evident elsewhere.   For not only are they paying their vendors slower their customers are paying them slower.  Making them wait longer to get the cash from their sales.  And with more money going into inventory than coming out of inventory it indicates that sales are down.  Leaving them with less revenue to convert into cash.  And what’s particularly troubling is that increase in accrued liabilities.  Which could mean they’re paying their payroll taxes slower.  Accessing their credit line also indicates a cash problem.  Also, having to borrow $50,000 to help repay a $100,000 loan coming due is another sign of cash problems.  Finally, when the owner has to put in more of their own cash into the business things are not going well.

These are things a business owner has to deal with.  And things a loan officer will note when reviewing the statement of cash flows.  Some people may think a net increase in cash of $18,000 is a good thing.  But it’s not that good.  Considering they had to get that cash by paying their vendors slower, paying the government slower, borrowing money as well as investing more of their personal savings into the business.  Worse, despite having all of these cash problems the government is taxing away of lot of their cash.  Because their net income passing through to their personal income tax return is $235,000.  Putting them in the top 5% of income earners.  And into the crosshairs of those looking to raise tax rates on those who can afford to pay a little more.  To make sure they pay their ‘fair’ share.

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