Cash Flow

Posted by PITHOCRATES - March 24th, 2014

Economics 101

New Complex and Confusing Regulatory Policies require Additional Accounting and Legal Fees to Comply

There have been demonstrations  to raise the minimum wage.  President Obama even called for Congress to raise the federal minimum wage to $10.10 an hour.  He also wants employers to pay salaried people overtime.  There have been demands for paid family leave (paying people for not working).  Unions want to organize businesses.  To get employers to pay union wages.  Provide union health care packages.  And union pensions.  Obamacare has made costly health insurance mandatory for all employees working 30 hours or more a week.

Environmental regulations have increased energy costs for businesses.  Sexual harassment training, safety training, on-the-job training (even people leaving college have to be trained before they are useful to many employers), etc., raise costs for businesses.  New financial reporting requirements require additional accounting fees to sort through.  New complex and confusing regulatory policies require additional legal fees to sort through them and comply.

With each payroll an employer has to pay state unemployment tax.  Federal unemployment tax.  Social Security tax (half of it withheld from each employee’s paycheck and half out of their pocket).  Medicare tax.  And workers’ compensation insurance.  Then there’s health insurance.  Vehicle insurance.  Sales tax.  Use tax.  Real property tax.  Personal property tax.  Licenses.  Fees.  Dues.  Office supplies.  Utilities.  Postage.  High speed Internet.  Tech support to thwart Internet attacks.  Coffee.  Snow removal.  Landscaping.  Etc.  And, of course, the labor, material, equipment and direct expenses used to produce sales.

The Problem with Guaranteed Work Hours is that there is no such thing as Guaranteed Sales

The worst economic recovery since that following the Great Depression has created a dearth of full-time jobs.  In large part due to Obamacare.  As some employers struggling in the worst economic recovery since that following the Great Depression can’t afford to offer their full-time employees health insurance.  So they’re not hiring full-time employees.  And are pushing full-time employees to part-time.  Because they can’t afford to add anymore overhead costs.  Which is hurting a lot of people who are having their own problems trying to make ends meet in the worst economic recovery since that following the Great Depression.  Especially part-time workers.

Now there is a new push by those on the left to make employers give a 21-day notice for work schedules for part time and ‘on call’ workers.  And to guarantee them at least 20 hours a week.  Things that are just impossible to do in many small retail businesses.  As anyone who has ever worked in a small retail business can attest to.  You can schedule people to week 3 weeks in advance but what do you do when they don’t show up for work?  Which happens.  A lot.  Especially when the weather is nice.  Or on a Saturday or Sunday morning.  As some people party so much on Friday and Saturday night that they are just too hung over to go to work.  Normally you call someone else to take their shift.  Then reschedule the rest of the week.  So you don’t give too many hours to the person who filled in.  In part to keep them under 30 hours to avoid the Obamacare penalty.  But also because the other workers will get mad if that person gets more hours than they did.

The problem with guaranteed work hours is that there is no such thing as guaranteed sales.  If you schedule 5 workers 3 weeks in advance and a blizzard paralyzes the city you may not have 5 workers worth of sales.  Because people are staying home.  And if no one is coming through your doors you’re not going to want to pay 5 people to stand around and do nothing.  For with no sales where is the money going to come from to pay these workers?  Either out of the business owner’s personal bank account.  Or they will have to borrow money.  It is easy to say we should guarantee workers a minimum number of work hours.  But should a business owner have to lose money so they can?  For contrary to popular belief, business owners are not all billionaires with money to burn.  Instead, they are people losing sleep over something called cash flow.

Cash Flow is everything to a Small Business Owner because it takes Cash to pay all of their Bills

To understand cash flow imagine a large bucket full of holes.  You pour water in it and it leaks right out.  That water leaking out is expenses.  The cost of doing business (see all of those costs above).  A business owner has to keep that bucket from running out of water.  And there is only one way to do it.  By pouring new water into the bucket to replace the water leaking out.  That new water is sales revenue.  What customers pay them for their products and/or services.  For a business to remain in business they must keep water in that bucket.  For if it runs out of water they can’t pay all of their expenses.  They’ll become insolvent.  And may have no choice but to file bankruptcy.  At which point they’ll have to get a job working for someone else.

Cash flow is everything to a small business owner.  Because it takes cash to pay all of their bills.  Payroll, insurance, taxes, etc.  None of which they can NOT pay.  For if they do NOT pay these bills their employees will quit.  Their insurers will cancel their policies.  And the taxman will pay them a visit.  Which will be very, very unpleasant.  So small business owners have to make sure that at least the same amount of water is going into the bucket that is draining out of the bucket to pay their bills.  And they have to make sure more water is entering the bucket than is draining out of the bucket to pay themselves.  And to grow their business.

This is why business owners don’t want to hire full-time people now.  Because full-time people require a lot of cash (wages/salary, payroll taxes, insurances, training, etc.).  They’re nervous.  For they don’t know what next will come out of the Obama administration that will require additional cash.  For every time they want to make life better for the workers (a higher minimum wage, overtime for salaried employees, guaranteed hours, etc.) it takes more cash.  Which comes from sales.  And if sales are down future cash flow into the business will also be down.  Leaving less available for all of those holes in the bucket.  So they guard their cash closely.  And are very wary of incurring any new cash obligations.  Lest they run out of cash.  And have to file bankruptcy.  Which is why they lose sleep over cash flow.  Especially now during the worst economic recovery since that following the Great Depression.

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Tim Gunn is under the Gun for Thinking Models Modeling Women’s Clothing should have Curves

Posted by PITHOCRATES - March 2nd, 2014

Week in Review

Tim Gunn of Project Runway fame is under the gun for making some very sensible statements.  Anyone looking at this from the standpoint of business (for fashion is a business to sell clothes) can see no ignorance in what businessman Tim Gunn said (see Tim Gunn says he feels “conflicted” about transgender models by Katie Mcdonough posted 2/24/2014 on Salon).

In an interview with the Huffington Post that ran Monday, “Project Runway” mentor Tim Gunn said he feels “conflicted” about gender nonconforming and transgender models in the industry. Gunn framed his comments as being in support of positive body images and diverse representation in modeling, but he actually just reinforced destructive (and false) body norms and revealed his own ignorance about trans people, both in fashion and outside the industry.

Discussing Andrej Pejic, who self-identifies as gender fluid and prefers to use feminine pronouns, Gunn said, “The fact that fashion designers would put basically adolescent-shaped boys or men in women’s clothes is head-scratching for me because, anatomically, women and men have different shapes. So, to be looking at women’s fashion on a tall, skinny guy with no hips, there’s no way you can project yourself into those clothes…

When asked about his thoughts on out transgender models in the industry, Gunn called it a “dicey issue.”

“On one hand, I don’t want to say that because you were a man and now you’re a woman, you can’t be in a women’s fashion show. But I feel it’s a dicey issue. The fact of the matter is, when you are transgender — if you go, say, male to female — you’re not having your pelvis broken and having it expanded surgically. You still have the anatomical bone structure of a man.”

This is a very important point.  A transgender model who is modeling women’s fashion is not going to have the same curves as the women who may buy these clothes.  Which is not going to help women see what these clothes may look like on them with their more curvy frames.  Or help the clothing line sell their clothes.  What sells fashion is showing curvy women how their glorious curves will be even more glorious in their clothes.  From a business standpoint it makes no sense to use transgender models to model women’s fashions.  For the vast majority of their market has curves (according to a 2011 Williams Institute study only 0.3% of adults identify themselves as transgender).  You can make a political statement by using a transgender model.  But it’s probably not going to help sell your line.  Which is ultimately the business of fashion.

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Businesses and Jobs tend to move from Countries with High Regulatory Costs to ones with Low Regulatory Costs

Posted by PITHOCRATES - February 23rd, 2014

Week in Review

A business is an investment.  Business owners invest capital and labor to make money.  Just like people buy government bonds to make money.  Of course, investing in government bonds is safe but it doesn’t create any jobs.  So we prefer when investors invest in a business.  Because a business will create jobs.

So where would investors prefer to risk their money?   That depends on the expected return on investment.  Historically there was always more money to be made in a business.  But higher regulatory costs have reduced that return on investment.  Leading a lot of investors to turn to government bonds.  Or to move their businesses to another country.  One with a less costly regulatory environment (see The rich world needs to cut red tape to encourage business posted 2/22/2014 on The Economist).

Singapore has come out on top as the least burdensome for the past eight years (see chart 3), whereas many EU countries are bumping along near the bottom. Of the 148 countries surveyed in 2013, Spain was ranked 125th, France 130th, Portugal 132nd, Greece 144th and Italy 146th.

Americans who complain about the Obama administration’s unhelpfulness towards business will also note ruefully that over the past seven years their country has slipped from 23rd to 80th place…

Broadly speaking, in recent years emerging markets seem to have been cutting their red tape whereas the rich world has been strengthening its regulatory regime…

But not all labour laws are equally useful. In much of Europe the problem is that regulations designed to protect existing workers from unfair dismissal often make employers reluctant to take on new ones. One international executive recounts the tale of a French worker who had been with his employer for just three years but was entitled to five years’ compensation for dismissal. “We wouldn’t put anyone in France if we can possibly avoid it,” the executive said…

The danger is that, once European companies come to expand capacity again, they may do so outside the euro zone, where employment contracts are more flexible and wages and social costs are lower…

The EU not only has inflexible labour markets and high costs; it has slower growth prospects than most emerging markets. That will tempt many businesses to move elsewhere. “Western Europe is at a severe disadvantage because of the costs when you have to restructure your operations,” says Martin Sorrell, the boss of WPP. By contrast, Singapore has a low tax rate, a light regulatory regime and an enviable location at the heart of Asia. Sir Martin thinks some multinationals will eventually move their headquarters to the city-state.

The best way to protect workers is with a robust economy.  Not regulations.  If you lower the tax burden and regulatory costs the return on investment on businesses will soar past the return on investment from government bonds.  And investors would put their money into businesses to make more money.  This is how you help workers get better pay and benefits.  You create such economic activity that there are more jobs than people to fill them.  Forcing employers to offer higher wages and better benefits.  The way it was when the United States became the number one economy in the world.  Not the way it is currently in the EU.  Or the United States.  Where the Great Recession lingers on.  Thanks to an anti-business economic climate.  And the mother of all costly regulatory policies.  Obamacare.

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Corporate Politics, Bureaucracy and Obamacare

Posted by PITHOCRATES - September 5th, 2013

Politics 101

(Originally published April 4th, 2013)

You won’t find many Union Workers filling out TPS Reports

In the movie Office Space we see how frustrating it is to work in a big corporation.  The office politics.  The bureaucracy.  The policies and procedures.  The frustration of having to answer to 8 different bosses after making a mistake.   Bumping heads with management at all levels.  And the mind-numbing frustration of getting your paperwork right.

Anyone who has ever worked in an office no doubt had their own TPS report moments.  And dealt with their own Bill Lumbergh.  So we laugh at poor Peter.  For we’ve been there.  And know his frustration.  For there is nothing worse than trying to work through a company’s bureaucracy.  Or dealing with layers of management that often appeared to be working at cross purposes.  And suffering under bad bosses.

Which is the whole purpose of labor unions.  To protect their workers from a business’ management.  And bad bosses.  Because unions say if they don’t management will just abuse their workers.  So unions shield workers from these unfeeling and inefficient bureaucracies.  Who are always introducing new policies and procedures to improve business efficiencies.  Things like TPS reports.  Which unions say only makes things worse for the worker.  So you won’t find many union workers filling out TPS reports.  Just the non-union office workers.

Dealing with a Bureaucrat is like a Grizzled Sergeant with 20 Years Experience reporting to a Junior Officer

Junior officers get no respect.  Comedian George Carlin served in the Air Force.  And said a common joke was to say when someone broke wind, “Captain who?”  They get no respect because they are bureaucrats.  They come out of their officer training with only book-learning.  While enlisted people have been gaining experience and learning how to do things on the job.  Then these junior officers come in with their book-learning.  And start telling these enlisted people how to do their jobs.  Despite these junior officers having never done their jobs.  Or understanding how to do their jobs.  But they will tell these people how to do their jobs better.

This is less of a problem in combat.  As junior officers typically have a short lifespan in combat.  For all the book-learning cannot replace the experience gained in actual combat.  Which is why lieutenants may command units but it is the grizzled sergeants with the combat experience that lead men into battle.  And a smart junior officer will learn everything he can from his senior sergeants.

Small business owners feel the same way about government.  For a lot of small business owners often go into business after working for someone else.  They’re like those grizzled sergeants in the military.  They’ve learned and done pretty much everything in a business.  Then decided to quit and start their own business.  And one of the first things they have to deal with is the mind-numbing bureaucracy of government at all levels.  City, county, state and federal.  A bunch of bureaucrats who never ran a business.  Who have no experience in their field.  And here they are.  Telling them how to run their businesses.  Like a junior officer out of the academy trying to tell a grizzled sergeant with 20 years experience how to do his job.

Under Obamacare Professional Bureaucrats will tell our Doctors how to administer our Health Care

In these complicated times if there is one thing everyone can agree on it’s this.  Bad managers, bosses, and officers are insufferable.  No one likes putting together ‘TPS reports’.  Or being told by 8 different bosses that they did something wrong.  And they sure don’t like people who don’t understand the first thing about their job or business telling them how they should do their job or run their business.  They especially hate people that can cite rules and regulations by chapter and verse who mete out some penalty or fine because they can’t cite those same rules and regulations by chapter and verse.

This will be the world of Obamacare.  And as much as EVERYONE hates these things at their workplace there are some who still want these same clueless bureaucrats and politicians to take over health care.  As if somehow these people who don’t know the first thing about treating sick people can do a better job than the grizzled veterans working in the health care industry.  Who spend more and more time filling out paperwork these days than actually seeing patients.  And the last thing they want is an even more bureaucratic system where they will have to report to 8 different people and agencies to treat a patient.  Where bureaucrats at the Department of Health and Human Services as well as the IRS will have their own coversheets for their ‘TPS reports’.

In the movie The Usual Suspects the character played by Kevin Spacey said, “The greatest trick the devil ever pulled was convincing the world he didn’t exist.”  For if you don’t fear the devil you may live a life more in line with the devil’s wishes.  Making it easier for the devil to get your soul.  Government is a little like that.  For it has a horrible track record of doing anything right.  Even in the finest military in the world the bureaucrat side of the military pays $100 for a $15.00 toilet seat.  And yet the government has tricked so many people into believing they want more government in their lives.  Even though government is nothing but the managers and bosses people hate where they work.  Bureaucrats who tell others how they should do their job by citing rules and regulations by chapter and verse.  But who really don’t know what you do.  Or how you do it.  Now these professional bureaucrats will tell our doctors how to administer our health care.  And God help you if you get sick and put the wrong coversheet on your Obamacare health care services requisition form.  Or leave an important income tax field blank.

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Restaurants and Franchises

Posted by PITHOCRATES - August 5th, 2013

Economics 101

Changing a Restaurant Name can be Costly and hurt the Marketing of your Brand

What is the number one business most likely to fail?  Restaurants.  About half of all new restaurants fail within the first 5 years.  Why?  Because people who can cook typically open up restaurants.  And that’s all they know.  Cooking.  Sadly, cooking is the smallest part of owning a restaurant.  And it’s these other areas that people who can cook fail miserably.  Because when they open up a restaurant there’s no operating manual that comes with the building they buy or lease that clearly tells them everything they need to know or do.

Chefs in the finest restaurants are masters of their craft.  Because they study how to master the art of cooking.  They didn’t go to business school.  They went to culinary school.  But running a restaurant is more than cooking.  It’s a business.  A business that must produce revenue to cover all of its expenses.  Which is kind of hard to do when you don’t know how to market your restaurant to get people to walk through the doors.  Without which there is no revenue.  Or when you don’t know all of your expenses.  Which starts with the restaurant’s name.

A good name will not guarantee success.  But a bad name can hurt business.  It should not confuse people.  Such as ’57 Chevy, for example.  Which may be your favorite car.  But people will think cars instead of food when they hear it or see it.  And it shouldn’t discourage them from eating there.  Like Average Joe’s, for example.  Because people rarely go out to restaurants that have just received an average review.  So a name is important.  And if you start with a bad one it can be very costly to change.  There’s building signage.  There could be a pylon sign near the road.  Signage inside the restaurant.  Not to mention replacing all of your menus.  These things cost.  And cause confusion with the identity of the restaurant.  Which could hurt the marketing of your brand.

Getting Menu Prices just Right is often the Difference between Success and Bankruptcy

Choosing a good restaurant location is critical, too.  A nice building you may be able to easily afford will do you no good if it isn’t near people.  As people aren’t going to travel great distances to dine at an unknown restaurant.  Which means choosing a good location may require choosing a costly location.  The purchase price/lease price may be much higher than anticipated.  Property taxes may be higher.  Both real (the land) and personal (the equipment inside).  And may be a cost item that a person who can cook didn’t even know was required.  Like the additional expenses to get all the permits and licenses to open for business.

Once opened there’s payroll.  Which you have to pay even when you’re not doing much business.  And a sit-down restaurant requires a lot of people.  Kitchen help to cook, clean and prep food.  Someone to bus tables and wash dishes.  A hostess to seat customers.  And cash them out.  A wait staff to wait on customers.  A bartender (if you have a bar).  A restaurant needs a general manager, a front of house manager and a back of house manager.  And an executive chef.  If the owner is the executive chef he or she will have to hire others to manage those other areas.  Have a spouse split all management duties with the executive chef.  Stressing the marriage.  Or risk poor service that will prevent customers from returning.

Then there are the utility expenses.  Electric, gas, water and telephone.  A point-of-sale system to track sales and manage inventory.  Or longer hours to allow manual bookkeeping and inventory control.  Dishes, cutlery, napkins, toilet paper, light bulbs, dish soap, filters, grease disposal, etc.  And a pleasing interior design.  As people want to enjoy a good meal in a pleasant environment.  Things that cost.  And things revenue must pay.  Which brings us to the menu.  The thing that will make or break your restaurant.  If you have a 10-page menu to appeal to as many people as possible you will have too much of your money in your food inventory.  And you’ll end up throwing away a lot of slow moving product.  If it’s not unique enough people will have little reason to come into your restaurant.  As will menu prices that are too high will, too.  But if those prices are too low you won’t have enough money to pay for all of these expenses.  Getting these menu prices just right is often the difference between success and bankruptcy.

Buying a Franchise is like Buying a Restaurant that comes with a Complete and Detailed Operating Manual

A big reason why restaurants fail is because owners don’t understand their costs.  And because they don’t understand their costs they don’t know how to size their food portions.  Or how to price their menu items.  Portion sizes that are too large require a bigger inventory.  Which costs more.  Leads to more waste.  And that waste leads to more costs.  While prices too low won’t generate enough revenue to cover those portion sizes.  As well as labor and overhead costs.

In a restaurant the menu is everything.  A person highly skilled in cooking can populate a menu with some delicious dishes.  But a menu too large can confuse customers who don’t want to read a book before ordering.  It could expand the inventory to include a lot of frozen and canned items because they will last longer.  But are more costly than buying fresh.  Whereas a large inventory of fresh items will not last as long.  Leading to a lot of waste.  So a shorter menu allows a smaller inventory of fresh product.  Which increases the quality of the food served.  And keeps costs down.

The restaurant owner can get all of this right but if they can’t get people to walk through that door it’s all for naught.  And getting people to walk through your door can be the hardest part.  There are many options but they all require more time and more money.  And these are things a restaurant owner has little left to spare.  Which is why so few restaurants succeed.  But there is another way to own a restaurant.  One that has a much better chance of succeeding.  And you don’t even need culinary training to succeed.  You can do this by buying a restaurant franchise.

Buying a franchise is like buying a restaurant that comes with a complete and detailed operating manual.  That tells you everything you need to know and do.  It gives you your menu.  Your portion sizes.  Your menu pricing (or at least a starting point that can be adjusted for your geographic location).  And something even more valuable.  A built-in, extensive marketing program.  So that you can have a flow of people coming through your door the day you open for business.  Because people already know everything about your restaurant because it’s part of a great national (or international) chain.  And they may have just been waiting for one to open near them.  Something a chef opening his or own restaurant can only dream about.  But that franchisee can’t have the satisfaction of bringing their dream to life like that chef can.  As long as he or she is not in that half that fails in the first 5 years.

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The City of Detroit Bankruptcy

Posted by PITHOCRATES - July 22nd, 2013

Economics 101

There is nothing more Dangerous to a City’s Finances than a Shrinking Tax Base

The federal debt is at record levels.  Because federal spending is at record levels.  But those on the left say there’s nothing to worry about.  And try to expand federal spending further.  With more government benefits to hand out to the people.  And an ever growing federal bureaucracy.  Full of new jobs with generous pay and benefits.  All funded by the taxpayer.

Businesses in the private sector cannot operate like this.  Because businesses have to pay their costs with the things and/or services they sell.  That people willingly buy.  So there is a limit on the costs a business can incur.  But not so with government.  For the government has the power to tax.  To forcibly take more money from the people against their will.  Something businesses just can’t do.  And when that fails they can borrow money by issuing bonds.  Which are generally easy to sell.  Because governments have the power to tax.  All but guaranteeing that they will repay those bonds.  And when that’s not enough the federal government has one other benefit businesses don’t have.  They can print money.  Further guaranteeing that they will be able to redeem their bonds.  Making them that much easier to sell.

Government below the federal level, though, doesn’t have that last option.  So when they want to spend more money than they have they have no choice but to borrow.  And hope that their tax base doesn’t erode over time.  For there is nothing more dangerous to a city’s finances than a shrinking tax base.  Especially when the city has a huge and growing public sector.  Enjoying generous pay and benefits.  Especially pension and health care benefits for retirees.  Where promises made must be kept decades into the future.  During which time a lot of things can happen.  Such as that tax base shrinking.

Detroit’s Tax Base plummeted while the Size of the Public Sector did not for Government Never grows Smaller

This is the problem the City of Detroit has.  And it is why they filed the largest municipal bankruptcy in U.S. history.  Thanks to the automotive industry and World War II destroying most of the industrial economies of the world, Detroit became an economic power house.  And one of America’s grandest cities in the 1950s.  Paris of the Midwest they called Detroit.  Automotive capital of the world.  The Motor City.  The mecca of American manufacturing.  Having one of the richest middle class.  And one of the largest black middle classes.  Everyone was doing well in Detroit.  So the City of Detroit did the only rational thing a city could do with a swelling tax base.  They exploded the public sector.  All paid for with higher taxes.  Including a new city income tax.

But that growing public sector soon turned Detroit into a business unfriendly city.  With more red tape, regulatory costs and a corporate income tax.  And rising union demands during contract negotiations made it even less business friendly.  So businesses started leaving the city.  Taking their jobs with them.  And people followed.  Then the race riots hit in 1967.  Five days of unprecedented violence.  Thus beginning the great white flight from the city.  And the great population decline of the City of Detroit.  Culminating in the nation’s largest municipal bankruptcy in history.

At Detroit’s peak her population topped out at about 1.8 million people.  Today there are but 680,000 people remaining.  A loss of 1.12 million people.  About 62% of her peak population.  So Detroit’s tax base plummeted.  But the size of the public sector didn’t.  For government never grows smaller.  So Detroit continued on with the overhead expenses of a city with a population of 1.8 million people.  With the tax revenue of a city with a population of 680,000 people.  Making bankruptcy inevitable.

The Problems of the City of Detroit are the Problems of the Nation Writ Large

At the height of Detroit’s industrial might there were approximately 300,000 automotive or manufacturing jobs in the city.  Today there are a mere 27,000.  That’s a loss of 273,000 jobs.  That’s 273,000 breadwinners whose families are no longer in the city.  If each of them had on average 2.5 children who remained in the city with their parents that would have added about 1.2 million to the city’s population.  Which corresponds pretty closely to the 1.12 million the city actually lost.  So we can see how the loss of the jobs devastated the population.  But we can also see what it did to the city’s finances.

Let’s assume these breadwinners had their children when they were in their 20s.  So the breadwinner was still in the workforce when their children were 20 and had entered the workforce.  Let’s say this happened over a 40-year period.  So, on average during that 40-year period, there were an additional 136,500 jobs per year.  Let’s say they each owned a house and paid property tax of $750.  Over 40 years that’s about $4.1 billion in lost property tax revenue.  If each of these workers earned $35,000 on average over those 40 years and paid a 3% city income tax that’s about $9.8 billion in lost personal income tax revenue.  Finally, if we figure a 50-50 split between labor and material, a 15% overhead and a 2% net profit we can extrapolate that $35,000 average personal income into approximately $448 billion in lost corporate revenue over those 40 years.  At a city corporate income tax rate of 2% that’s about $9 billion in lost corporate income tax revenue.  Adding these all together we see a total loss of tax revenue to the city of approximately $18.8 billion due to the loss of 273,000 jobs.  Plus or minus.

This is a crude guesstimate with an emphasis on crude but it could be close enough to explain what happened in Detroit.  For with the falling tax base Detroit turned to borrowing more and more money to pay for an oversized public sector.  To service a disappearing population.  With those pension and retiree health care benefits being especially burdensome.  Which forced the city to borrow so much it left them with a debt of $18.5 billion (very close to the $18.8 billion in our little exercise above) that they don’t have a chance in hell of ever repaying.  Leaving bankruptcy as the only option.  Unless the federal government steps in.  Which probably won’t happen.  And shouldn’t happen.  For Detroit is not the only government suffering under the weight of unfunded pension obligations and retiree health care benefits.  If they bail out Detroit then they’ll have to bail out all other states and municipalities.  Which they can’t afford to do.  For the federal government has its own problems with pensions (Social Security) and retiree health care benefits (Medicare).  And they’ve just added a new government benefit that will dwarf the costs of Social Security and Medicare.  Obamacare.  All while burdening the economy with a slew of anti-business regulations that has chased jobs out of the economy.  And out of the country.

So the federal government can’t step in to save Detroit.  For the federal government is working to ‘out Detroit’ Detroit.  As the problems of Detroit are the problems of the nation writ large.  What’s happening in Detroit will happen in other states and cities across the country.  That are spending more money than they have to support an oversized public sector.  And in time what’s happening in Detroit will happen to the federal government.  Bailing out these states and cities will only hasten the downfall of the federal government.  Which the federal government will do whatever it can to prevent.  For while the nation can survive a city like Detroit going bankrupt the nation cannot survive a federal bankruptcy.  Because the numbers are just too big at the federal level.

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Washington D.C. and Detroit say ‘No’ to Wal-Mart because they don’t need Jobs or Shelves full of Low-Priced Goods

Posted by PITHOCRATES - July 20th, 2013

Week in Review

The Democrats hate Wal-Mart.  As do unions.  Because Wal-Mart stores do not have union labor.  Unions hate that.  And because Democrats and unions are joined at the hip, Democrats hate what unions hate.  Which is why you won’t find Wal-Mart stores in big Democrat cities.  Because the Democrats do everything they can to keep them out.  Even writing laws specifically targeting Wal-Mart (see Trouble in store: Why Walmart has failed to woo Washington by Rupert Cornwell posted 7/21/2013 on The Independent).

Walmart has been wooing [Washington D.C.] for years, and in 2010 announced plans to open four stores there, a number subsequently raised to six. Everything was going swimmingly, with work already started on three of the sites, until earlier this month, when the council passed its Large Retailer Accountability Act, otherwise known as “Get Walmart”.

Under it, non-unionised stores with a commercial space of 75,000ft or more – ie Walmart – will henceforth have to pay employees at least $12.50 (£8.20) an hour, compared with the city’s existing minimum wage of $8.25, and the national one of just $7.25 an hour. The company retorted by threatening to scrap three of the planned stores at once, and perhaps abandon the three where construction has begun too, causing the loss of up to 1,800 new jobs…

The case for Walmart is strong – that its stores provide working-class Americans (and many wealthier ones too) with good service and a broad selection of goods “at the lowest prices possible”, to use the words of old Sam Walton, who opened his first store in Rogers, Arkansas, in 1962. And it provides jobs: 1.4 million of them in the US alone…

Nor is Washington DC alone in feeling that way. Five of the country’s other largest cities – San Francisco, Detroit, Seattle, Boston and, above all, New York – have also said no. “As long as Walmart’s behaviour remains the same, they’re not welcome in New York City,” says Christine Quinn, the New York City council speaker who may well be the next mayor. “New York isn’t changing. Walmart has to change.”

Not by coincidence all those cities, like DC, are Democratic strongholds where unions are strong. They are liberal, socially “progressive” and, by definition, urban, while Walmart’s genes are southern, conservative and suburban.

Detroit said ‘no’ to Wal-Mart?  The city that just filed the largest municipal bankruptcy in history said they don’t need jobs or low prices on food, clothing, pharmacy and household goods?  If you’re looking for the answer to why Detroit is in the mess it is in this is your answer.  The Democrat stronghold in Detroit got so anti-business that it chased all the jobs out of the city.  Once the jobs left the people soon followed.  First the whites.  Accelerating their ‘white-flight’ following the Detroit riots.  While the blacks held on.  But after 20 years (1974 – 1994) of Coleman A. Young they gave up, too.  For they don’t come further left than Coleman A. Young.  And when you’re that far left you’re no friend to business.  So businesses stay away.  As do their jobs.

The black middle class followed the whites out of Detroit.  In pursuit of greener pastures.  And jobs.  Leaving Detroit with half the population it once had.  Impoverished.  And more anti-business than ever.  Which is why they said ‘no’ to Wal-Mart.  Because Wal-Mart isn’t union.  And the two largest employers in the city, the City of Detroit and the Detroit Public Schools, are union strongholds.  So they protected their high pay and benefit packages.  By keeping nonunion jobs out of the city.  While thinking nothing of the unemployed masses in the city.  Helping to keep the unemployment rate in Detroit well above the national average.  While the unemployed masses would have loved to see up to six new Wal-Mart stores (or more) opening in the city.  The 1,800 new jobs (or more) that would have came with them.  And shelves full of food, clothing, pharmacy and household goods at low prices that their Wal-Mart paycheck could easily afford.  But no.  Wal-Mart is not union.  So the people of Detroit have to stay unemployed.  And impoverished.

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The Rise and Fall of the American Textile Industry

Posted by PITHOCRATES - July 2nd, 2013

History 101

Inventions and Innovation gave the United States a Burgeoning Textile Industry

The American textile industry was founded by businessmen.  And inventors and their inventions.  Not by any labor movement.  For before there could be a labor movement there first had to be industry to employ laborers.  And laborers weren’t creating these industries.  They were just selfishly waiting for others to do this so they could get a job in them one day.

We may never know which came first.  The chicken or the egg.  But we do know which came first when it comes to industries and laborers.  The mind came first then the muscle.  Rich people with a keen eye to judge a good investment.  Businessmen and entrepreneurs unafraid to take a risk.  And who will throw their body and soul into their business.  Then the non-risk taking people come along.  The laborers.  Who have no skin in the game.  Who wait until the minds come together to create something in which they can apply their labor.  And get a paycheck.

Samuel Slater built cotton mills in New England (1800ish).  Slatersville Rhode Island, the town he established, bears his name.  Francis Cabot Lowell and Paul Moody created a more efficient power loom and a spinning apparatus (early 1800s).  Elias Howe invented the sewing machine (mid 1800s).  And the lock-stitch.  Throw in a few more inventions, some improvements on past inventions and some innovation and you have a burgeoning U.S. textile industry.

The Luddites went about England smashing the Machines of the Mechanized Textile Industry

Cloth-making used to be a labor-intensive activity of highly skilled artisans.  For those who had the money to afford the costly clothing they made.  Many could not.  And made their own clothing in the home.  Women would spin fiber into yarn.  And weave the yarn into cloth.  Which was very labor intensive.  Allowing only a meager production of clothing for the family to wear.  Which meant a lot of darning for worn out clothing.  Hand-sewing patches to cover holes.  Sewing ripped seams back together.  And sewing together rips and tears.  Until the clothing was so worn that it couldn’t be darned anymore.

It is hard to fathom how important this was during early America.  A time of a mini ice age.  In the north the winters were long and they were cold.  This homemade clothing may not have been pretty.  But it could keep you from dying of exposure in those brutally cold winters.  The mechanization of the textile industry changed all of that.  Smart inventors and business owners used machines to automate the cloth-making process.  Allowing less skilled people to operate smart machines.  Producing more clothes for less.  Bringing the cost of clothing down.  So anyone could afford to buy clothing.

Of course, this did not make everyone happy.  As those machines replaced the need for highly skilled artisans.  Who demanded high prices for their craft.  Allowing only the rich to afford their wares.  They didn’t like these machines cutting into their high wages.  And did something about it.  A group of people called ‘Luddites’ went about England smashing the machines of the mechanized textile industry (1811-1817).  Hoping to force a return to the old ways of making clothing.  By skilled artisan.  Where only the rich could afford to buy clothing.

Unions have Exported Entire Industries to Emerging Economies to Escape Soaring Labor and Regulatory Costs

Just as the textile industry was modernizing and mechanizing two seamstresses formed the first all-women’s labor union in 1825.  The United Tailoresses of New York.  Protesting 16-hour workdays.  And the lack of a living wage.  Strikes followed.  The Lowell, Massachusetts, mill women’s strike in 1834.  The Manayunk, Pennsylvania, textile strike in 1834.  The Paterson, New Jersey, textile strike in 1835.  And the Llowell, Massachusetts, mill women’s strike in 1836.  In 1844 women formed and ran the Lowell Female Labor Reform Association.  Then more strikes.  The Cohoes, New York, cotton mill strike in 1882.  The Fall River, Massachusetts, textile strike in 1884.  The Augusta, Georgia, textile strike in 1886.  The Fall River, Massachusetts, textile strike in 1889.  In 1890 New York garment workers won the right to unionize.  Close their shops to nonunion workers.  And fire any nonunion workers on the payroll.  In 1900 the International Ladies’ Garment Workers Union was founded.  In 1901 the United Textile Workers was founded.  Then came the New York shirtwaist strike in 1909.  Massachusetts passed the first minimum wage law for women and minors in 1912.  Then came the Lawrence, Massachusetts, textile strike in 1912.  Giving us the walking picket line.  Then the Paterson, New Jersey, textile strike in 1913.  The Amalgamated Clothing Workers union was founded in 1914.  Then the Fulton bag and cotton mill strike in 1914.  The Passaic, New Jersey, Textile Strike in 1926.  And so on.

The Luddites hated the machinery of the modern textile industry.  As they didn’t like the idea of replacing many highly skilled and well-paid artisans with automated machinery operated by fewer low-skilled laborers.  So they tried to smash the automated machinery.  To try and save their jobs.  Which the labor movement was happy to see go away.  For they would rather pack as many low-skilled laborers into those Dickensian factories as possible.  For the more members they had in their unions the more powerful they were.  And the more they could demand from the business owners.  They demanded a lot, too.  Higher wages, shorter hours and better working conditions.  So much so that the cost of labor rose while productivity fell.  Throwing the door open to foreign competition.

The big labor movements used their friends in government to protect their generous union contracts.  By passing pro-union legislation.  And placing tariffs on imported textile goods.  Keeping clothing prices high.  So business could earn enough to pay those generous union pay and benefits.  But this left these businesses uncompetitive in the world’s markets.  Which they wanted to sell in.  For it wasn’t only Americans that wore clothes.  Those union contracts increased labor costs so much that businesses found it hard to remain in business let alone remain profitable.  So they started leaving the United States during the 20th century.  Which is why today there is no U.S. textile industry.  Because of the high cost of labor.  And costly regulatory policies.  Where is the textile industry today?  In the emerging economies.  Where labor and regulatory costs are lower than in America.  While the standard of living for those employed in these factories are often higher than their fellow countrymen.  Which is what unions have often done in the United States.  Create good jobs in emerging economies.  By exporting entire industries from the United States to these emerging economies.  Where they can escape soaring labor and regulatory costs.

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How a 12-Year Old Canadian and U.S. Unions see Business Differently

Posted by PITHOCRATES - May 12th, 2013

Week in Review

Advancing technology has greatly increased productivity.  Allowing fewer workers to do what workers a generation earlier did.  Causing our workforce to age.  Fewer workers are entering the workforce than are leaving it.  And costly union contracts paying pensions and health care to those who have left the workforce has decimated union membership.  For the costs they place on business have made these businesses uncompetitive in the market place.  Chasing manufacturing jobs out of the country.  Leaving union membership in the private sector at its lowest rates since the heyday of the labor movement.  To understand why let’s take a business lesson from the Canadians.  Who are trying to encourage their kids to become entrepreneurs.  Unlike in America.  Where business and profits have become a 4-letter word (see Canadian entrepreneurs: Born or made? by BARRIE McKENNA posted 5/10/2013 on The Globe and Mail).

[Entrepreneurial Adventure] pairs students with local business people to create a business, design a product, sell it and then give the profits to charity.

Why?

Evidence suggests Canada suffers from a weak entrepreneurial culture. While it’s relatively easy to start a company, the record of turning start-ups into fast-growing and successful enterprises is less convincing.

A 2010 study by Industry Canada…

… found that Canada generates a lower proportion of fast-growing companies than other developed countries, that relatively few small companies export and that the age profile of business owners is getting older…

Many business schools, including McGill University and the University of Toronto, now offer special entrepreneurship programs.

This is a problem.  For the number one job creator in any free market economy are small business owners.  People who go into business for themselves.  Taking great risk.  And hiring people as they grow.  This is the entrepreneurial spirit.  People who start out small.  And become someone like Steve Jobs.  Most people don’t understand the entrepreneurial process.  And the importance of having a business-friendly environment to encourage entrepreneurialism.  To create jobs.  To grow a healthy economy.  Creating new products that make our lives better.  And to do that one of the first things an entrepreneur must learn is what this 12-year-old learned.

“Some things work and some don’t,” acknowledged Alim Dhanani, 12, who worked on project management and Web design for the company. “To sell something, you have to have the right price. Not too small, so you have a profit, but not too big, so people will buy it.”

A 12-year-old can understand this.  The role of prices in the economy.  They have to be high enough to pay the bills.  But low enough to encourage people to buy from you.  Often times it’s not a matter of a business owner determining the price he or she wishes to charge.  They have to figure out how to pay their bills (and earn a profit) at the prevailing market price.  Something labor unions don’t understand.  Or they simply don’t care (see Fast-food workers in Detroit walk off job, disrupt business by Steve Neavling and Lisa Baertlein posted 5/10/2013 on Reuters).

Hundreds of fast-food employees in Detroit walked off the job on Friday, temporarily shuttering a handful of outlets as part of a growing U.S. worker movement that is demanding higher wages for flipping burgers and operating fryers.

The protests in the Motor City – which is struggling to recover from the hollowing out of its auto manufacturing sector – marked an expansion in organized actions by fast-food workers from ubiquitous chains owned by McDonald’s Corp, Burger King Worldwide and KFC, Taco Bell and Pizza Hut parent Yum Brands Inc.

Fast-food workers, who already have taken to the streets in New York, Chicago and St. Louis, are seeking to roughly double their hourly pay to $15 per hour from around minimum wage, which in Michigan is $7.40 per hour…

“People can’t make a living at $7.40 a hour,” said Rev. Charles Williams II, a protest organizer. “Many of them have babies and children to raise, and they can’t get by with these kind of wages.”

Those workers face high hurdles in their fight for better pay. Low-wage, low-skill workers lack political clout and face significantly higher unemployment than college graduates…

The Detroit action was put together by the Michigan Workers Organizing Committee, an independent union of fast-food workers, that is supported by community, labor and faith-based groups such as the Interfaith Coalition of Pastors, UFCW Local 876, SEIU Healthcare Michigan and Good Jobs Now.

The unions want to do to fast-food what they did to the automotive industry.  In this case the union basically gave unskilled workers the wages and benefits of skilled workers.  Sounds great if you’re an unskilled worker.  But the UAW priced the U.S. auto manufacturers out of the market.  The Big Three are a shell of what they used to be.  With both General Motors and Chrysler requiring taxpayer bailouts to avoid bankruptcy.  And pay for their crushing pension and health care cost obligations.  For GM was paying for more people not working than they were paying to work.  Even a 12-year-old can understand that this is a business model that just won’t work.

So what will happen in fast-food restaurants if you raise the labor wage from $7.40 per hour to $15 per hour?  That’s a labor cost increase of 103%.  In the restaurant business the rule of thumb for calculating your selling prices is as follows.  You calculate your food cost then triple it.  For in general one third of a menu price goes to food.  One third goes to labor.  And one third goes to overhead (utilities, rent, insurance, etc.) and profit.  Now let’s take a typical combination meal (sandwich, fries and beverage) price of $7.50.  One third of this price is $2.48 which represents the labor portion of the price.  The increase in labor is 103%.  So we take 103% of the $2.48 ($2.54) and add it to $7.50 to get the new selling price of the combo meal.  Bringing it to $10.04.

What will customers do?  Now that the combo meal will cost $2.54 more will they just continue to eat fast-food like they once did?  Will they stop adding an extra item from the dollar menu?  Will they just buy a burger and eat it with a beverage from home?  Will they just buy from the dollar menu instead of buying combos?  Of course, with the increase in labor costs that dollar menu will have to become the $2.03 menu.  Will people stop going to fast-food as often as they once did?  Some may decide that if they’re paying for a $6 hamburger the may go to a diner or bar for a $6 hamburger.  Worried about the lost business would fast-food owners try to cut their costs elsewhere to try to continue to sell fast-food at the market price?  By hiring fewer people?  Pushing current workers to part-time so they don’t have to give them costly health insurance?  Or will they just close their restaurant.  As people just won’t pay fancy restaurant prices for fast-food.

That 12-year-old in Canada would understand how the higher labor costs would affect business.  Causing changes in buying habits.  And changes in business practices.  He would not start up a fast-food franchise if labor prices were 103% higher than they are now.  For he would have to raise prices high enough to pay the bills.  But when he did they might be too high to get people to come in and buy food.  Causing a fall in business.  And a loss in revenue.  Making it more difficult to pay the bills.  That 12-year-old would see this as bad business.  Because he understands that a business owner can’t charge whatever he wants to charge.  He has to figure out how to stay in business while selling at the prevailing market price.  And though he may love fast-food he knows that his allowance won’t be able to buy as much as it once did.  So he would reduce his purchases at fast-food restaurants.  Just as his father will probably take the family out less often because of the higher prices.  Just as single mothers struggling to pay their household bills will, too.  But the unions don’t understand this.  Or simply choose not to.  Instead they just tell the workers that their employers are greedy.

It’s a sad day when a 12-year-old has better business sense than our unions.  Then again if unions cared about business they wouldn’t have bankrupted two of the Big Three.

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Capital Markets, IPO, Bubbles and Stock Market Crashes

Posted by PITHOCRATES - April 22nd, 2013

Economics 101

Entrepreneurs turn to Venture Capitalists because they Need a Lot of Money Fast

It takes money to make money.  Anyone who ever started a business knows this only too well.  For starting a money-making business takes money.  A lot of it.  New business owners will use their lifesavings.  Mortgage their home.  Borrow from their parents.  Or if they have a really good business plan and own a house with a lot of equity built up in it they may be able to get a loan from a bank.  Or find a cosigner who is willing to pledge some collateral to secure a loan.

Once the business is up and running they depend on business profits to pay the bills.  And service their debt.  If the business struggles they turn to other sources of financing.  They pay their bills slower.  They use credit cards.  They draw down their line of credit at their bank.  They go back to a parent and borrow more money.  A lot of businesses fail at this point.  But some survive.  And their profits not only pay their bills and service their debt.  But these profits can sustain growth.

This is one path.  Entrepreneurs with a brilliant new invention may need a lot of money fast.  To pay for land, a large building for manufacturing, equipment and tooling, energy, waste disposal, packaging, distribution and sales.  And all the people in production and management.  This is just too much money for someone’s lifesavings or a home mortgage to pay for.  So they turn to venture capital.  Investors who will take a huge risk and pay these costs in return for a share of the profits.  And the huge windfall when taking the company public.  If the company doesn’t fail before going public.

The Common Stockholders take the Biggest Risk of All who Finance a Business

As a company grows they need more financing.  And they turn to the capital markets.  To issue bonds.  A large loan broken up into smaller pieces that many bond purchasers can buy.  Each bond paying a fixed interest rate in return for these buyers (i.e., creditors) taking a risk.  Businesses have to redeem their bonds one day (i.e., repay this loan).  Which they don’t have to do with stocks.  The other way businesses raise money in the capital markets.   When owners take their business public they are selling it to investors.  This initial public offering (IPO) of stock brings in money to the business that they don’t have to pay back.  What they give up for this wealth of funding is some control of their business.  The investors who buy this stock get dividends (similar to interest) and voting rights in exchange for taking this risk.  And the chance to reap huge capital gains.

The common stockholders take the biggest risk in financing a business.  (Preferred stockholders fall between bondholders and common stockholders in terms of risk, get a fixed dividend but no voting rights.)  In exchange for that risk they get voting rights.  They elect the board of directors.  Who hire the company’s officers.  So they have the largest say in how the business does its business.  Because they have the largest stake in the company.  After all, they own it.  Which is why businesses work hard to please their common stockholders.  For if they don’t they can lose their job.

During profitable times the board of directors may vote to increase the dividend on the common stock.  But if the business is not doing well they may vote to reduce the dividend.  Or suspend it entirely.  What will worry stockholders, though, more than a reduced dividend is a falling stock price.  For stockholders make a lot of money by buying and selling their shares of stock.  And if the price of their stock falls while they’re holding it they will not be able to sell it without taking a loss on their investment.  So a reduced dividend may be the least of their worries.  As they are far more concerned about what is causing the value of their stock to fall.

Investors make Money by Buying and Selling Stocks based on this Simple Adage, “Buy Low, Sell High.”

A business only gets money from investors from the IPO.  Once investors buy this stock they can sell it in the secondary market.  This is what drives the Dow Jones Industrial Average.  This buying and selling of stocks between investors on the secondary market.  A business gets no additional funding from these transactions.  But they watch the price of their stock very closely.  For it can affect their ability to get new financing.  Creditors don’t want to take all of the risk.  Neither do investors. They want to see a mix of debt (bonds) and equity (stocks).  And if the stock price falls it will be difficult for them to raise money by issuing more stock.  Forcing them to issue more bonds.  Increasing the risk of the creditors.  Which raises the bond interest rate they must pay to attract creditors.  Which makes it hard for the business to raise money to finance operations when their stock price falls.  Not to mention putting the jobs of executive management at risk.

Why?  Because this is not why venture capitalists risk their money.  It is not why investors buy stock in an IPO.  They take these great risks to make money.  Not to lose money.  And the way they expect to get rich is with a rising stock price.  Business owners and their early financers get a share of the stock at the IPO.  For their risk-taking.  And the higher the stock trades for after the IPO the richer they get.  When the stock price settles down after a meteoric rise following the IPO the entrepreneurs and their venture capitalists can sell their stock at the prevailing market price and become incredibly rich.  Thanks to a huge capital gain in the price of the stock.  At least, that is the plan.

But what causes this huge capital gain?  The expectations of future profitability of the new public company.  It’s not about what it is doing today.  But what investors think they will be doing tomorrow.  If they believe that their new product will be the next thing everyone must have investors will want to own that stock before everyone starts buying those things.  So they can take that meteoric rise along with the stock price.  As this new product produces record profits for this business.  So everyone will bid up the price because the investors must have this stock.  Just as they are sure consumers will feel they must have what this business sells.  When there are a lot of companies competing in the same technology market all of these tech stock prices can rise to great heights.  As everyone is taking a big bet that the company they’re buying into will make that next big thing everyone must have.  Causing these stocks to become overvalued.  As these investors’ enthusiasm gets the better of them.  And when reality sets in it can be devastating.

Investors make money by buying and selling stocks.  The key to making wealth is this simple adage, “Buy low, sell high.”  Which means you don’t want to be holding a stock when its price is falling.  So what is an investor to do?  Sell when it could only be a momentary correction before continuing its meteoric rise?  Missing out on a huge capital gain?  Or hold on to it waiting for it to continue its meteoric rise?  Only to see the bottom fall out causing a great financial loss?  The kind of loss that has made investors jump out of a window?  Tough decision.  With painful consequences if an investor decides wrong.  Sometimes it’s just not one individual investor.  If a group of stocks are overvalued.  If there is a bubble in the stock market.  And it bursts.  Look out.  The losses will be huge as many overvalued stocks come crashing down.  Causing a stock market crash.  A recession.  A Great Recession.  Even a Great Depression.

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