What a field day for the heat
A thousand people in the street
Singing songs and carrying signs
Mostly saying, "hooray for our side"

Monday, July 18, 2011

Hypothetically speaking

In my post about business people claiming "uncertainty" is keeping them back, Anonymous Cassie poses this hypothetical (and my answer would be longer than a comment should/can be):
I own Business A. I need to upgrade my lighting in my business. I prefer incandescents for a variety of reasons - my product looks better under them, my fixtures currently work with them, I like them better, what-have-you.

Right now, there's a repeal working its way through Congress. Hey, if it goes through, I get to continue to buy the product I like best. If it doesn't, and I don't want to use CFLs and halogens have some side issues that concern me. LEDs aren't an option because of their poor quality of light.

What do I do?

Okay, let's add a little more to make this close to what I was talking about. You also have the cash to go in a few directions.

Now, here is what I would tell you in the real world (in case anybody is in or knows someone in this position), call up Nela Park (GE) And their Lighting Institute and ask to speak to them in a consulting position. The lighting were talking about here is the shittiest kind available. It is cheap. That's THE only reason they still sell it. Trust me on this.

But, okay, let's say there is someone's real world case and we don't have standard incandescent bulbs that meet the new standard (hint, we do, it wasn't that hard to make them, seriously, I can't stress this point enough, the bulbs being phased out are crap, they're specifically manufactured to be crap).

Okay, you have a choice. See, the bulbs we're talking about won't last you a year in a retail/business environment (unless you don't turn them on, and this question is moot at that point anyway). And let's say you and all your employees and customers are the minority of people who can see the flickering of the cfls/incandescents. And for some reason buying a warm light LED bulb is, I don't know, not an option (the argument about not liking the light is non-sensical, you've just been buying the cheapest bulb available and you get the crappiest light, you aren't noticing it with the incandescents because you're used to it (but I can tell you that as bad as those cfls and cheap LEDs look, the same is the case with your incandescents if you're buying those that can't meet the new standard, and for a business, crappy light is deadly).

Here's the solution for you, stock up on bulbs. It's an expense you would have to make anyhow. And since you're making a bulk purchase (if you're buying the cheap bulbs, trust me that you're buying in bulk here) that you should be able to itemize it and depreciate the value (this only works because you're buying in bulk). Problem solved, cash spent. You know, until 3 or 6 years down the road when you're now out of bulbs. But then your in the position you are in now. Hopefully you've planned for the conversion by now and are ready to go.

If Congress repeals the law (again, can I say how much this is a tempest in a tea pot? Seriously, this is a non-issue), well, you would have had to buy those bulbs anyway. If they don't, then you're positioned to get more of your ducks in order to make the switch (and if you were in business and haven't prepared for this, frankly, 1) you're wasting money with inefficiency and 2) you aren't really competitive). So, no matter what happens you're ahead of the game (except for not being prepared for the new regulations that were passed over 5 years ago).

I sit and wait to see what Congress is going to do. Maybe I go out and buy up a supply, delaying my decision. Maybe I hold onto the cash pending the development of a better light bulb.

If that's you're plan, you're screwed. Doing nothing, and engaging in wishful thinking is a sure way to lose. The old maxim, "pigs get slaughtered, rabbits get skinned," is true in investing and in business. Standing still in business is not an option.

What you can do (valid strategy) is plan for the worst case scenario and move forward. If things turn out better than you planned, that's great. But sitting on the sidelines is a sure way to have someone else eat your lunch. Not growin, or shrinking, or going out and finding business, or meeting your customer's needs (try and sell something in a dark showroom) is a sure recepie for business stagnation. Which leads to death. I've seen it too many times.
Uncertainity is indeed an issue. Maybe it's the MBAs running the show. Maybe it's my uncles in their businesses -not one of them is an MBA, btw - who say "Until I get a clue what's going on with the health care, I'm not doing anything."


There is always an excuse for doing nothing. Again, engaging in wishful thinking. Understand that even if you get you're way and ACA is repealed, then it'll be "will Congress extend the Bush Era tax cuts," (earliest repeal will be next year, tax cut extension expires December 2012). There's always something that you won't know. Hell, Democrats could retake state governments and the House as well as keep the Presidency, and then your uncertainty will be if they increase taxes. There's always some excuse to not do something.

Edited to add Understand the issue is if you have unproductive capital (ie. cash on hand). Now, if you're struggling with cash flow, those are different issues. But with the cash, you can do various things. However, letting it accumulate a great deal without a plan (such as short-term investments to grow cash while you're pulling together enough capital to do a big move) just isn't smart. And that's what is happening with much of this cash companies are keeping on the books. It's sitting in (at best) short term, quick liquidity vehicles.

Running your business without examination will run you into the grounds. There is always going to be uncertainty in business. It's part and parcel of the business gig (and one of the reasons I'm not running my own business at this point, btw, I understand the paralysis of not knowing which way to turn, also I hate sales). So, if you're using some future possible event as a reason for staying still, maybe being in business isn't really for you? Because, like I said, there will always be uncertainty.

If you're in a business that doesn't have that, I want to know what it is.

Letting the cash sit helps no one. Non-working capital is outside the economy (economy is the movement of cash, unproductive capital is a negative on GDP, etc). The technical recession is over, has been for over a year and a half now. Except for construction, most retail numbers are back to normal. So what's different? All those businesses are sitting on their cash instead of doing the smart thing. Because they're afraid. If it continues for too much longer, it'll become a self-fulfilling prophecy. So the goal is to get that capital moving and working. Hell, pay it as a dividend to your shareholders.

Right now is the exact opportune time to make a move. Waiting until everybody is moving it too late. You'll have missed the boat, and even if you're able to catch up, you'll be paying a premium for it (both in costs, and in any loans you may have to take). Building your business now is the smart money. In two years you'll be reading about the companies that are doing that, because they'll be the industry leaders (like I've said before, this isn't my first time on this merry-go-round).

Now, if you're facing the opposite problem (not enough cash flow), then you have different choices to make. And in either case, YMMV (not everybody's situation/market is the same as others).

3 comments:

Anonymous said...

That's what you took from my response? That I need a lesson about light bulbs?

I'm a worse writer than I ever thought.

My point was this: the economy and the government are effectively making decisions harder for business owners. Uncertainty cannot be discounted: business owners are going to look at what's best for their businesses and go from there. If they can't decide what's best, they're going to wait until they decide before they spend money. That's not hoarding - that's smart. We teach children to manage money in the same way: what do you want to buy, a candy bar now or a new bike later? If you're not sure, don't buy anything.

Imposing more taxes creates some stability yes, because then the business knows what's going to happen, but undermines the businesses' growth and thus the restoration of a healthy economy.

Tax the profits and you remove the capital to reinvest, to expand, to hire, to buy materials. Taxing the savings of a company works directly against the end goal: more jobs.

You say that the government needs more money. For what? To support people who don't have a job? Remove the constraints that hinder businesses from expanding and then you'll see more jobs.

Cut spending.

Obama's cute little political maneuver to end the wars in the Mideast in 2012, just a mere 8 weeks before the election is contemptible. We've made a huge mess in Afghanistan and I don't know that we can make up for it, but it's time for us to let these people figure out how they're going to rule themselves.

Decriminalize pot. I'd almost go to decriminalize all drugs, but from what I heard last year in innumerable high school debates on the topic, Portugal had a significant bounce up in the use of hard drugs that had worse long term repercussions so I'm less willing to experiment until we see what happens there over the next 30 or so years.

Light bulbs are, to me, the prime example of the government nannying us. We have a product with flaws but commanding a huge portion of the marketplace (85% was the last stat I saw) and the government saying "No, no, no, you have to use THIS light bulb instead because you are too unenlightened to know what's best for you." Whether or not one bulb is better than another (and I maintain that the LED light bulbs are the WORST I've ever tried), by what authority does the government have a right to ban the production and sale of a legal product?

AC

Steve Buchheit said...

My point was this: the economy and the government are effectively making decisions harder for business owners.

Sorry, gotta call BS on this one. Business decisions are always hard. You look at the landscape, work out the scenarios, and make the call. Making the decision to do nothing is still a call. However, to blame your decision to do nothing because you're uncertain if the government is going to repeal a policy you disagree with is just finding excuses.

Even if the government removed all oversight/policy/regulation/taxation on business, there is enough uncertainty in the market to justify just sitting it out and waiting. This is the same argument of, "I'm not buying this computer I need now, because in 3 months they have something better." Yes, and 3 months after that there will be something better. And 3 months after that... it's a never ending cycle and it's just an excuse to not do anything.

If you're plowing the money back into the business (your reinvest, expand, hire, buy materials comment) is perfectly fine. That takes those profits and makes them expenses which means they're no longer profits (and would have been categorized under "Profits before expenses" or "gross receipts"). Understand that I'm talking about unproductive capital. There are no plans for its use. They aren't reinvesting, expanding, hiring, or buying materials. That's all CoB (cost of business) and gets expensed out and is therefore not considered profit (after expenses). You're accepting the confusion the corporations are attempting to play into the argument.

Don't want that money taxed. Great idea. Hey, how about they actually fucking reinvest, expand, hire or buy materials? I an wholehearted behind that plan. Please, businesses, stop sitting on your realized profits and get that capital working.

But that's not what is happening.

Have you noticed in the various charts I've been linking to that ever since the "reduce government/cut taxes" crowd started getting power back with Reagan that our GDP growth has dropped, real wages have stagnated for the lower 50% of incomes, and the rich have been accumulating the majority of wealth? Think those things might be related by now? Why didn't this happen before? Because they knew that money would be taxed if they didn't do something with it.

Now, the opposite is true. With the roll back of taxes (including the reclassification of various income to not be counted as income) including repeal of the estate taxes there is absolutely no incentive for them to get that capital working. They aren't expanding. They aren't hiring. They aren't reinvesting. They aren't buying materials. It makes more sense to not do anything.

Steve Buchheit said...

Obama's "cute maneuver" to end the wars? Bullshit again. Obama is on track with what he stated in the campaign. And cutting and running in Afghanistan is the worst thing we could possibly do. I don't want to have to screw over another generation to finish this war. I already feel guilty about screwing over the current generation fighting the war.

And, again, no light bulb is being "criminalized." The government is setting a standard. It's what governments do. Why? Because "free markets" aren't the wonderful thing that some people think they are. They don't work that way.

And I'll remind you that the BULB act was passed with overwhelming majority in the Republican controlled House and Senate, and enthusiastically signed by the former Republican President. Why? Because it is good policy. However, it's become a good whipping pony of some political newbies that (IMHO) probably flunked civics class. And because they have conviction, they're convincing more people "that something is wrong here."

Think this is a bad thing? Did you really like leaded gas and paint (there's research tying the reduction of lead in the environment to the lowering of the criminal activity in the past 2 decades)? Did you really like cars that got 12mpg, didn't have seatbelts, didn't have crumple zones, had engine blocks that would impale their drivers? Do you like that some of our new wonder drugs caused more health problems than they solved? Did the market change those things or get rid of asbestos? No, it's all been government being a "Nanny State" and telling them what to do. Hell, they still are selling asbestos to other countries (and it's big business), not to mention still selling those drugs taken off the US market to other countries that don't have as tough of regulation. Why? Because that's what companies do. And these are the people you think will self-regulate?

By what right? I'm sorry, did you really miss that part of government's responsibility is to regulate markets and commerce? If you read the constitution, you'll see it right there in the commerce clause. And it's not banning a product (there are incandescents that meet the standard, how many times do I have to repeat that?). It's saying that this product needs to be more efficient. And it set a goal that was laughably easy to reach. That the market then told you that you needed to use the CFLs and then provided a cheap, low-end version for you to buy is just how markets work (and, I hate to tell you this, CFLs were coming anyway, they've been around for over 2 decades now).

Also, by definition, government banning sale of a product makes it illegal. See your argument about pot legalization. Why is it illegal? Because the government says it is. There is nothing intrinsically "illegal" in marijuana.