Political Fiction and the Economy 2011

We want to balance the budget.

Who Tells It: Republicans: Despite the fact the claims that Republicans want a balanced budget, it's clear from the nature of their actual proposals that they aren't serious.  If they were, their proposals would insist, among other things, that the government bring the pointless wars in Iraq and Afghanistan to a screeching halt, end the ineffective and absurd war on drugs, completely terminate oil subsidies, and radically reduce military spending.  Instead, what they surface are nickel and dime ideas (like defunding NPR) and budget-breaking absurdities, like tax cuts for the super-rich.

The gender pay gap is real

Who Tells It: Democrats: Liberals pander to the feminists by insisting that men are paid more than women.  But here's the truth: when you factor out the time that women spend having children and caring for them, and then compare apples to apples (i.e. same job, same start date), the gender pay gap shrinks to statistical insignificance.  This lie is pernicious because it distracts people from looking at the REAL pay gap, which is insane accumulation of wealth and earnings between the super-rich.  As long as politicians can keep middle-class men and women squabbling over table scraps, nobody will notice that ALL of the economic gains of the past three decades have gone to those who were already obscenely wealthy.

The U.S. has high corporate tax rates

Who Tells It: Republicans: While it's true that the U.S. tax rates (on the books) is among the highest in the world, there are so many tax breaks available to businesses (especially large ones) that the ACTUAL tax rate is lower than many third world countries. The only companies that pay the full tax rate are small businesses that can't pay accountants to squirrel away money overseas and can't pay politicians to enact preferential treatment and special breaks.  The result is a huge advantage for large companies, even though they employ a tiny (and declining) fraction of American workers.

We support small businesses

Who Tells It: Republicans and Democrats: Politicians give lip service to small businesses, because small businesses actually comprise most of the economic activity in the United States. But small businesses have no political power and therefore no influence.  A small business can't raise enough money to get on the radar screen of any one politician (except maybe the hometown congressman), which means that the interests of small businesses will always get short shrift.  The problem is made worse by the fact that many small business owners foolishly believe that the CEOs of huge firms will influence politicians to become more "business-friendly".  What they don't understand is that a business climate that's friendly to huge multinationals can easily be one that's toxic to small businesses.

We have the best healthcare in the world

Who Tells It: Republicans: The way the Republicans talk about it, you'd think that any substantive change in the current healthcare system would bring American businesses to utter rack and ruin.  But the truth is providing the current system in the United States is extraordinarily inefficient, with costs that are higher (relative to actual results) than anywhere else in the world.  While the current system is great for two industries -- insurance and healthcare -- every other industry operates at a disadvantage in the United States because either they, or their workers, have to pay for the inefficiency of a system where expensive procedures are more profitable than keeping people healthy.

Free trade creates jobs

Who Tells It: Republicans and Democrats: Free trade creates jobs...in places where labor is cheap.  In the United States, free trade has created massive outsourcing that has, in turn, gutted entire sectors of the economy.  It's not just the manufacturing jobs that have gone away.  There are hundreds of thousands of highly trained engineers, for example, who are being put out of work by engineers abroad who will work for what in the United States would be minimum wage.  The collapse of the American job market was hidden for years by a massive glut of borrowing and consumer spending, but now it's come home to roost, to the point where gaining back a tiny fraction of the jobs that were lost is considered a huge victory.

Nobody is above the law

Who Tells It: Republicans and Democrats: Corporations that are deemed "too big to fail" are routinely given a free pass when they commit crimes.  The executives who commit criminal acts are allowed to walk and the companies themselves given a nominal fine; in order to make certain that the company survives.  As a result, executives at huge firms know that they can continue to commit crimes, because they know they will not be held accountable. Any attempt to regulate such firms so that they can't wriggle out is quickly squelched, primarily by Republicans, but aided and abetted by those Democrats who are also sucking at the corporate teat.

What's good for big business is good for the country

Who Tells It: Republicans and Democrats: It used to be that "What's good for GM is good for the country."  But that was when large companies actually employed a large number of American workers. Today, many huge companies are deployed so heavily overseas that they're not really American at all. Many multinationals are, for all intents and purposes, sovereign states. Some even have their own standing armies.  Even so, U.S. politicians in both parties continue treat such corporations as if they were American entities, and are more than happy to accept their campaign contributions, even though this is tantamount to accepting money from a foreign country.

We feel your pain

Who Tells It: Democrats: Politicians at the federal level, including Democrats, are so far removed from poverty, or even from the middle-class, that it's impossible for them to have any idea what it is actually like to try to survive in the current economic climate.  Many members of congress are millionaires and multi-millionaires, as are most of the senators.  Many come from families with inherited wealth.  They are all highly paid, with the world's best health insurance, and lifetime job security as lobbyists or industry consultants.  The idea that anyone in this position can "feel the pain" is sickeningly absurd.

Supply side economics really works

Who Tells It: Republicans: It's been decades since George H.W. Bush gave Supply Side Economics the "Voodoo" sobriquet, and yet there are still politicians (Republicans mostly) who insist that this crack-brained idea is valid, even though there is not a single shred of evidence that this is the case.  Why the persistent denial of reality?  It's a classic case of wanting to have your cake and eat it, too, combined with willingness to belief any old thing that makes you feel good.  It's probably not a coincidence that the most vocal proponents of this particular brand of economic snake oil also hold other absurd beliefs contrary to history and observable reality.  Show me a tried and true supply sider, and I'll show you somebody who believes that every word of the Bible is accurate, that global warming is fictional, and that Obama was born on the planet Mars.

Understanding What Someone Is Really Saying

I’ve been struck recently by just how nuanced our business language has become. In grim times - like the ones we’re living through - nobody really wants to face up to the actual horrors, never mind potential horrors, of events around us. So we find ways of talking about our woes without actually, well, talking about them.

So for those who still fondly imagine that what they hear is what they get, here is a translation guide:

“I have an issue with him”

Translation: Issues means problems. “I have an issue with him” means, “I really can’t stand this employee and think termination is the only solution, but I don’t have the authority required.”

“We have a problem”

Translation: Problems are disasters, as in “Houston, we have a problem.”  Understatement is supposed to convey cool in a crisis, but it doesn’t really work any more because everyone’s trying so hard to understate everything that no one believes any of it.

“Status Update”

Translation: Uh, oh. This meeting is normally held for senior managers, behind closed doors. It is the first meeting at which you will learn that the company has been bought/is merging with a rival/is moving to North Dakota/is being down sized or shut down. No, you can’t do this one from home on the speakerphone.

“Yes”

Translation: This really means “maybe.” Why? Because management today is so profoundly risk averse that no one person has the power to approve anything. So if someone says yes, don’t break out the champagne yet. At the very least, you need the yes-person to stay in their job long enough to come through for you.

“Maybe”

Translation: This really means “no way.” Since anyone you deal with is, or feels, on the brink of termination or resignation, they know better than to annoy anyone. They want to keep as many people on their FaceBook pages and LinkedIn networks as they can. That means that they never want to be caught absolutely turning anything down.

“No”

Translation: This really means “get out of town!” If anybody feels confident enough to say ‘no’ to your face, it is because your idea is such a stinker that even imminent downsizing can’t disguise the fact.

“Let’s Be Honest”

Translation: This means let’s not be honest; instead, let’s forget the gloom and imagine everything in the garden is rosy. After all - if we can’t cheer each other up, we’ll never hang in long enough to change the future.

There is a lot to be said for euphemisms.

When You Are Not Ready To Start Your Own Business

You most likely have read the books, heard the cautionary tales, worked through some standard checklists, and talked to friends.  You think that you have done your homework and feel owning your own business is right for you.

Great — but why not be sure?  If you recognize yourself in any of the following, reconsider before taking the entrepreneurial plunge:

You still play fantasy sports at work. When revenues and profits are a distant dream, managing a fantasy team is the last thing you’ll have time for.  Starting a business is overwhelming.  Exit your fantasy leagues now.  Spend that time thinking about how you’ll make money.

You spent a lot of time personalizing your office. I know; you dreamed of a bigger office, you’re proud of your bigger office, you deserved that bigger office, and by gosh you want it to reflect your personality.  Say you plan to open a retail store; since customers will never see your office the only thing it should reflect is “cheap.”  Money should never be spent on anything that won’t touch the customer.  You will be too busy chasing customers to worry about whether your office befits your stature or aligns with your personality.

You don’t empty your own trash, even when you’re going that way. “Someone” takes care of that, you say?  Your job is to focus on more important tasks?  Not anymore.  Entrepreneurs wear every hat.   Besides, efficiency is everything:  No movement should be wasted, no timesaving’s are too small, and no expenses too minor to eliminate.  If doing whatever needs to be done isn’t something that comes naturally, stay where you are.

You feel you could be a lot more productive… if you only had that new (insert latest technology here). Think about the last computer, smart phone, software, etc. you purchased.  Did it really make you more efficient?  Can you quantify the gains?  Or was it just fun to have?  In your own business you’ll be lucky to get the “must have” stuff.  Even if you have the funds, “nice to have” is money wasted.

You are still “ticked” your department got shorted during the last budget cycle. Unless a Venture Capitalist comes calling or your dad funds your start-up, you won’t really have a budget.  Money spent doesn’t come from an invisible corporate pot.  It comes from your pocket.  If you hate struggling with limited resources, hate seeing your great initiatives unjustly compromised by budgetary concerns, and can’t wait until you’re in charge… when you find out how limited resources are in a start-up, you’ll hate running your own business.

You can discuss work-life balance issues with intelligence and passion. I feel the concept of work-life balance is an artificial construct, but let’s pretend one does exist.  If you think a lot about the conflict between work and life, and you feel work is winning the battle, just wait until you start a business.  Work will eat your life for breakfast.

You’ve said, even once, “I’ve paid my dues.” When you run your own business you pay your dues every day.  (The same should be true if you work for someone else: The only real measure of your value is the tangible contribution you make, each and every day.)  Today, tomorrow, the next day:  You earn the right to stay in business.  No one cares about your experience or years of hard work.  Dues are paid when customers pay you.

Sound harsh?  I don't think so, but I feel sure most of you who run your own businesses agree.  If not, let me know!

Operating Leverage in Your Business

Contribution Margin Analysis is a measure of operating leverage: It measures how growth in sales translates to growth in profits.

The contribution margin is computed by using a contribution income statement: A management accounting version of the income statement that has been reformatted to group together a business's fixed and variable costs.

Contribution is different to Gross Margin that a contribution calculation seeks to separate out variable costs (included in the contribution calculation) from fixed costs (not included in the contribution calculation) on the basis of economic analysis of the nature of the expense whereas gross margin is determined using accounting standards.

The unit contribution margin is calculated by deducting the unit variable costs from the unit-selling price:

USP - UVC = UCM

Selling price per unit 100.00 -
Variable cost per unit 80.00

$100.00 - $80.00 = $20.00

Unit contribution margin 20.00 (20%)

Academic gurus are bounding about the country these days decrying the antiquity of certain accounting practices while advocating the desirability of "newer" methods. One of the techniques receiving derogatory attention is the contribution margin approach to decision making. These critics will contend that contribution margin analysis no longer provides relevant information for product costing and decision making. They cite, in generalities, the experience of Asian manufacturers, very large mass production operations and other complex production companies as proof of their claims and then buttress these claims with anecdotal corroboration normally drawn from a case study in a large complex corporation.

These critics imply that strategies for large, complex firms apply equally to all manufacturers and distributors. Contribution margin accounting, however, is more useful than ever to many small to medium sized manufacturers who find that they inherit the inventory problem from their large customers and to companies too small to gain any advantage from "cell group production" organization.

For these smaller producers, the entire production facility comprises a more tightly knit unit than many cell groups in the larger companies. As a new job starts, the production elements work together to produce the items ordered performing the tasks needed to complete the job. Elaborate reporting requirements prove unnecessary and often nonexistent for these small manufacturers. Support functions tend to exist at the shop floor within close proximity to the production facility. While multiple jobs may run simultaneously, the work force typically knows the various jobs, their importance to the organization and what resources and effort are required to complete the job.

Support services associated with smaller companies tend to be streamlined. Restructuring into cells, rather than simplifying support services, would add to support services and increase overhead. In short, practically everything the production cell accomplishes in the large mass production environment already exists on the factory floor of the small producer.

Furthermore, just-in-time (JIT) inventory concepts do not work as well for small companies as for large mass production facilities. These larger facilities can forecast with reasonable accuracy the activities and materials needed. They can schedule months in advance of the production activity. Most small producers and distributors find that precision in forecasting specific activities often proves impossible. Activities for the small producer or distributor typically follow the whims of the marketplace and prove fairly erratic.

Each shipment of parts received for short-term production (daily or weekly) at the large producer constitutes a large quantity (truckload, rail car load or train load) in the shipment. The small producer or distributor faces daily or weekly quantity needs comprising a small shipment. The transportation costs associated with the shipments may prohibit the elimination of inventories of raw materials, parts and finished products for these producers. Likewise, set-up costs for the small job shop may be significant enough to justify single runs of production and warehousing of overproduction of finished goods inventory.

Dangers of Full Costing in Small Manufacturing

A small manufacturer in Ohio recently had its cost accounting system evaluated to determine requirements for bringing it inline with JIT-type cost measures. The Chief Operating Officer (COO) complained that overhead costs were 800% of direct labor, whereas just two years prior those costs were running 120% of direct labor. The investigation revealed that the cost system measured overhead in pools and allocated both fixed and variable overhead to the products based on direct labor dollars at all stages of production.

Two years ago, the COO evaluated the fabrication operations and, based on the full cost analysis, determined that the company should buy rather than make all the parts used in production. The company proceeded to farm out all the fabrication operations to other producers while still maintaining the same operations facility. The result was fewer labor dollars to spread fixed costs over, while fixed costs remained the same.

Had that COO considered a contribution margin approach to unit costs when comparing the make vs. buy option, the company would still be fabricating all of its parts. In every case, the variable costs and incremental fixed costs associated with the fabricated parts were significantly less than the option to purchase outside. With this information, the COO would have made the decision to make rather than buy.

Since the decision was made to buy, freight charges on the finished parts increased as the packing required to protect finished parts bought increased. The unpacking and receiving activities increased dramatically, driving up handling costs. With full cost analysis, all these factors were ignored when the COO arrived at the decision to buy rather than make the parts used in the final assembly.

Small manufacturers find competition tight and difficult, while their large customers continue to put pressure on them to produce to specifications and to a time schedule that may prove difficult. Contribution margin accounting provides information essential for the small manufacturer to balance these factors and continue profitably.