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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Due to Revenue Shortfall Australia will have Businesses Estimate their Taxes Monthly Instead of Quarterly

Posted by PITHOCRATES - October 27th, 2012

Week in Review

Commodity prices have fallen.  Cooling the great mining boom in Australia.  So how does the government address this falling tax revenue?  Do they cut their spending?  No.  They make businesses gamble with their cash-flows (see Monthly tax bill to help plug budget hole – Sydney Morning Herald by Peter Martin posted 5/22/2012 on Canberra Hub).

The budget will receive a $8.3 billion boost in the three years from 2014 as the government moves to collecting company taxes every month, rather than quarterly…

In its first year the measure is expected to give the budget a $5.5 billion boost because it will collect revenue that would have been paid in future months.

Accountants say it will not result in business paying significantly more tax overall, but will increase the compliance burden and require companies to pay their tax earlier.

With businesses likely to oppose any moves to extract more revenue, Treasurer Wayne Swan said the change would provide a more timely and accurate reading of the corporate tax take, but was not a tax rise.

‘‘We think this is only fair and it’s only logical,’’ Mr Swan said in Canberra. ‘‘We don’t see why companies cannot be in the same boat as companies that pay their GST monthly.’’

Revenue raised by the mining tax has also been downgraded by more than $3 billion, to $6.5 billion from $9.7 billion.

This tax collection policy will increase tax revenues by $8.3 billion (Australian dollars) in three years but this is not a tax rise.  They’re doing this to relieve the pressures from the lost mining tax revenues but this is not a tax rise.  You can do some accounting tricks to pull revenue into earlier accounting periods and push out cost to later accounting periods.  This will help the earlier accounting periods.  But it will hurt the later ones.  When a company, or a government, plays these games they either have a revenue problem.  Or a spending problem.  Apparently Australia has both.

Corporate income taxes are estimates.  GST taxes are not.  The corporations calculate their final income taxes due after the close of the year.  When they know their final earnings on the year.  Whereas anytime someone buys something the seller knows the exact GST due.  So the GST they pay at the end of the month is the exact amount of GST due.  Even if they have no sales for the last three months of the year.  Not the same with corporate income taxes.  Should something happen, say, like a fall in mining revenue due to a fall in commodity prices, a corporation could lose money in the latter months of their earnings year.  Even suffer a loss on the year.  If they do the government will have to refund those previous estimated tax payments.  Possibly causing the corporation to borrow money in those later months because they’re short on cash.  Because they overpaid their taxes.

This will increase the cost of doing business.  It will strain cash-flows.  And just make running a business harder.  As cash is the lifeblood of a business.  It’s the only thing you can use to pay your employees.  Your vendors.  Your insurance companies.  Your payroll taxes.  This new policy could force businesses to overpay their income taxes leaving them starving for cash later in the year.  And if they can’t find money to borrow they could put their businesses in jeopardy.  Possibly in bankruptcy.  And if they do there will be even less tax revenue for the government to collect.  Monthly.  Or quarterly.

This is bad policy.  Brought on by excessive government spending.  A common problem in advanced economies.  Especially during good economic times.  When they make spending commitments as if those good times will last forever.  Something a business can’t do.  Because when the economy changes a business has to change to survive in the reality of the economic times.  Unlike government.  Who does everything within their power to pass their poor policy decisions onto the private sector.

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FUNDAMENTAL TRUTH #43: “If business ain’t selling, business ain’t hiring.” -Old Pithy

Posted by PITHOCRATES - December 7th, 2010

The Greediest People are in Government

A lot of people don’t understand business.  No big surprise considering that most people get their education from the public school system.

Our teachers ingrain it into us from the earliest days of our schooling.  Business is bad.  And they’d be even worse.  If it wasn’t for government.

Business is all about profits.  Not people.  Business is greedy.  Government takes more of our money than business does but government is never greedy.  Just business.  Funny how that works.  The lesson we learn?  If you’re really greedy and want a lot of money, be in government.

Government Earmarks and the Airport for Nobody

We deal with business on our own free will.  We choose to buy what they’re selling.  It’s a little different with government.  They take our money.  And if we don’t cough up enough of it, they’ll seize our assets.  Even send us to jail.  A business just won’t do that.  No matter how greedy our teachers tell us they are.

And more times than not, we don’t want what government is selling.  Earmarks.  Such as the John Murtha Airport in Johnstown, Pennsylvania.  The ‘airport for nobody’.  An airport nobody needs and few use.  But dump trucks of taxpayer dollars find their way to the John Murtha Airport.  Why?  Because Murtha was a member of the U.S. House of Representatives.  And that’s what representatives do.  Raise our taxes.  And take our money home to their districts.

Yet business is bad.  And government is good.  Go figure.

Government Spending Disrupts the Free Market

During good economic times, people say business is greedy.  They’re making their employees work overtime instead of hiring more employees.  During bad economic times, people say business is greedy.  They’re causing a recession by not hiring more employees. 

Businesses hire employees.  That’s key.  The more they hire the better the economy will be.  And you just can’t say that about government.  Because when they hire more people, it doesn’t stimulate the economy.  It just increases our taxes.  Leaving us with less money to stimulate the economy with.

Some people will say that government spending does stimulate the economy.  That’s what Keynesians say.  But they’re wrong.  When government spends money, they’re just spending our money.  And when they spend more we spend less.  The spending nets out.  But it disrupts the free market.  Millions of taxpayers will spend less at millions of small businesses.  Who will then sell less.  And hire less.  Maybe even lay off some employees.

We Spend Less when We Earn Less

Are these small business owners greedy?  No more so than you are.  Consider this.  Let’s say you and your spouse both work.  You make a comfortable living.  You can afford to hire a landscaping company to cut your grass.  You can hire a lawn maintenance company to fertilize your grass.  You take your car once a week to where they hand wash it.  You and your spouse sign up for ballroom dance lessons (while a sitter watchers your kids).  Now let’s say one of you gets laid off.  What do you do?

Well, if you’re like most other people, you cut expenses.  You let your landscaping contractor go.  Your lawn maintenance company, too.  You tell the people at the carwash that they can’t wash your car anymore.  You tell your dance instructors that you don’t need them anymore for lessons.  And you let your babysitter go.

Because of you some people have lost their jobs.  Are you greedy?  Or are you just adjusting your expenses to be in line with your sales revenue (i.e., your income)?  When you go from 2 paychecks to 1, you simply can’t afford to spend money like you used to.  And it’s the same for a business.

A Business Spends Less when they Sell Less

In business cash is king.  They use it to pay their employees.  Their employee benefits.  Their suppliers.  The interest on their debt.  Even their taxes.  If a business doesn’t have enough cash to pay these, they may not be a business much longer.  To be successful, then, a business must master their cash flow.

Making this more difficult is the fact that a business has to spend cash often BEFORE they get paid.  They pay employees, employee benefits and taxes often before the customer pays for the product or service of these employees.  Of course, before a customer pays they have to buy what a business is selling first.  If the business is not a ‘cash’ business, this can add even more time between the cash going out and the cash coming in.

So when economic times aren’t good and businesses are not selling, businesses aren’t spending.  They try to get by on less.  They hold onto their cash.  As long as possible.  Because they are uncertain of what the future holds.  But one thing they do know is that the future will take cash. 

Hiring People doesn’t Stimulate anything but Costs

So why doesn’t a business just hire more people during a recession?  Wouldn’t that stimulate the economy by giving people more money to spend?  Well, let’s say a restaurant hires a new cook.  The business pays the cook a wage and a benefit package.  Let’s say it adds another $1,000 per week to the business’ cash flow.  But it’s a recession.  Hiring the new cook doesn’t change the number of people coming into the restaurant to eat.  It just costs the business more.

The new cook will have more money to go out and stimulate the economy with.  But what good does it do for the restaurant owner?  Unless the new cook spends at least $1,000 per week buying meals at the restaurant (which is not likely to happen), the owner loses money by hiring the new cook.  His or her cash flow will only get worse.

This is why businesses don’t hire people during bad economic times.  Because no one is buying what they are selling.  Hiring people will only make a bad situation worse.  It will put a greater financial burden on a business that is already struggling to get by on what little cash they have.   

 Businesses and Taxpayers Stimulate Best

But our public schools still teach us that business is bad.  And government is good.  Even though it is business that creates jobs and hires people.  And it’s government that raises taxes and kills jobs.

To create jobs you need to help business make a profit.  Tax cuts are a good way to start.  With fewer taxes to pay, a business can use that cash elsewhere. With fewer taxes to pay, a taxpayer can spend that money elsewhere.  You let businesses and taxpayers keep more of their money and they will do good things.  This is how you stimulate the economy.  And how you create jobs. 

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