Cash flow management is an important component of economic success for both individuals and businesses. During upturns in the economy, cash flows freely and there is a temptation to be lax in the management of cash flow. However, in times of economic downturn or recession, cash flow management takes on a much more important role. In this posting, we will explore how cash flow is generated and how government policy can either increase or decrease cash flow.
Cash flow comes to individuals and businesses in one of three ways. Operations which for individuals is when they work in either their own business or for someone else and earn either an hourly wage, salary, or commission. For businesses, operational cash flow is generated by selling the goods or services the business provides.
Cash flow is also generated through investing. This involves the purchase of capital assets, holding them for a period of time, and selling them, hopefully for a profit. Capital assets are defined as anything owned that is used for personal purposes, pleasure, or investment. This definition includes most anything we own. For businesses it includes anything that appears in the asset section of the business' balance sheet.
Finally, cash flow can be generated through financing. We can always put up an asset we own as collateral, and borrow money to generate cash flow. Of course the downside of this type of cash flow generation is that the cash has to be repaid. However, in a crunch, it may be the best method available.
Government economic policy can have either a positive or a negative affect on the cash flow for both individuals and businesses. The Federal Reserve Bank has a vital role in controlling cash flow in the economy. When economic activity is high and cash is flowing freely, they tend to implement policies that restrict cash flow in order to prevent inflation. This is generally done by increasing interest rates. When economic activity begins to slow down, they will implement policies to free up cash flow generally by reducing interest rates.
In the last eight years we have witnessed the Federal Reserve Bank in action managing cash flow. In the days after 9/11, they began to reduce interest rates in order to get the economy moving again. As the economy began to grow and cash was freely flowing, the Federal Reserve became concerned about inflation and raised interest rates. Recently, the Federal Reserve has been lowering interest rates in an effort to keep the country out of a recession brought on by the mortgage crisis. This time, however, the strategy did not work and the market continued to go down. This leads a commonsense economist to deduce that there might be deeper concerns in the market besides high interest rates. So what might these deeper concerns be?
In addition to the Federal Reserve Bank's policies, the Federal Government can also increase or decrease cash flow through its tax and regulation policies. If the government decides to raise taxes, or let previous tax cuts expire raising taxes to their previous levels, cash flow for individuals and businesses will be restricted. Increased regulation of businesses and individuals also affects cash flow. This is because individuals and businesses are required to spend additional money to insure compliance with these new regulations rather than investing this cash in expansion and job creation.
Is it possible that the market continued to go down due to its speculation that the new administration will increase taxes and regulations on businesses and individuals? If this is true, what should the government do to calm these fears? I believe President Elect Obama needs to let the market know that it will place a moratorium on any tax increases and increased regulations until the economy comes out of the recession. In addition, he needs to let the markets know that he will extend the Bush tax cuts for an additional two years. This will calm these fears and return the markets back to where they should be.
This calming of the markets will begin to restore individual retirement accounts and provide increased liquidity for businesses as their stock values increase. Increased liquidity for businesses will mean fewer lay-offs and even the creation of new jobs as businesses invest their excess cash provided through increased operational cash flow.
This will calm individuals’ fears of job loss freeing them up to spend or invest their excess cash. The side benefit for government in this scenario is that revenues to the treasury will actually increase giving the government the tax increase they were initially seeking without the disastrous side effects that would have occurred had they actually increased taxes during a recession.
I am therefore encouraging everyone reading this posting to contact the president-elect and urge him to announce a moratorium on any tax increases, extend the Bush tax cuts that are set to expire on December 31, 2010, and not to place any more regulations on business during this time. I have provided a link to President Elect Obama's webside at the left so you can contact him. If enough of us make our voices heard, they will not be able to ignore us. So I urge you to take a few moments to respond and share the results of your contact with the president elect by posting a comment to this blog. I also encourage you to share your opinions whether positive or negative.
Saturday, November 29, 2008
Sunday, November 23, 2008
What is Bankruptcy?
Many of us have experienced difficult times in our lives. Due to recent economic events, many people are experiencing tough economic times. For some of the younger people in the population, this is the toughest time they can remember. For those of us who have been around for a while we can remember tougher times. However, when we find ourselves in the middle of economic tough times, we often do not know where to turn. Many of us will turn to our faith at these times and others will seek help from friends, family, or even the government.
Companies also experience hard times not knowing where to turn either. The recent bailout mania in Washington has demonstrated that many of these companies are turning to the government to bail them out. In last weeks posting “Bailout Mania” we determined that simply bailing out failing organizations is not a good idea. This week I want to take a few minutes to explain why bankruptcy is a viable option for organizations finding themselves in difficult times but there is much confusion as to what bankruptcy is. So, let us begin by explaining what bankruptcy is.
The Bankruptcy Act was passed by congress to provide an organized procedure for, under the supervision of a federal court, dealing with insolvent debtors. It provides two methods for dealing with insolvency, chapter 7 and chapter 11. Under bankruptcy protection a means for the creditor to receive some measure of payment of the debt while giving the creditor an opportunity for a fresh start is developed.
Under chapter 7 bankruptcy, also known as liquidation or straight bankruptcy, the debtor individual or organization is required to disclose all assets they own. The individual or organization then is required to surrender these assets to the bankruptcy trustee who sells or liquidates the assets and distributes the proceeds to creditors in accordance with the relative rights of the creditors under the law. When an organization files chapter 7 bankruptcy, the company goes out of business leaving the employees unemployed and customers having to go elsewhere to purchase the products or services they previously received from the now liquidated company.
Under chapter 11 bankruptcy, also known as reorganization bankruptcy, the debtor seeks a business plan where they, under the supervision of a federal court, can solve their financial problems. The organization continues to do business but its operations may be curtailed if so ordered by the court. Under this form of bankruptcy, only those employees affected by any court ordered curtailment of operations loose their jobs. In addition, customers are still serviced by the organization but possibly at a lower level to court ordered business curtailments.
Chapter 7 bankruptcy is generally is not a viable business strategy for turnaround since the company goes away. However, chapter 11 does provide a viable option for companies in financial difficulty and many companies in business today have used this option to turnaround their operations. One example of this is Delta Airlines whose jets are still flying in our skies today.
This week we witnessed the CEO’s of the big 3 automakers flying to Washington in their private jets seeking a bailout from Uncle Sam for their financial difficulties. This prompted the members of congress, who were initially positive to the idea of bailing out the automakers, to take a second look and put any potential bailout on hold until the automakers could return with a plan for turning around their ailing companies. This also prompted President Elect Obama to issue a statement about the possibility of a bankruptcy package to rescue ailing automakers. It is unclear what the specifics of such a bankruptcy package would be, but if it involves a chapter 11 bankruptcy where the automakers, under the supervision of the court, will develop a plan to turnaround their ailing companies. The option should be seriously considered.
If nothing is done, these companies will eventually run out of cash causing them to begin defaulting on their obligations. This could force the companies into a chapter 7 liquidation situation. This would mean that thousands of people working for these companies, and employees of creditors who will be hurt financially, to go on unemployment overnight. This will not only be devastating to the finances of the laid off people but will place a strain on already strained federal and state budgets affecting all taxpayers. Before it is too late, a chapter 11 form of bankruptcy reorganization for automakers needs to be considered so that many jobs are saved. Please feel free to comment on what you think.
Companies also experience hard times not knowing where to turn either. The recent bailout mania in Washington has demonstrated that many of these companies are turning to the government to bail them out. In last weeks posting “Bailout Mania” we determined that simply bailing out failing organizations is not a good idea. This week I want to take a few minutes to explain why bankruptcy is a viable option for organizations finding themselves in difficult times but there is much confusion as to what bankruptcy is. So, let us begin by explaining what bankruptcy is.
The Bankruptcy Act was passed by congress to provide an organized procedure for, under the supervision of a federal court, dealing with insolvent debtors. It provides two methods for dealing with insolvency, chapter 7 and chapter 11. Under bankruptcy protection a means for the creditor to receive some measure of payment of the debt while giving the creditor an opportunity for a fresh start is developed.
Under chapter 7 bankruptcy, also known as liquidation or straight bankruptcy, the debtor individual or organization is required to disclose all assets they own. The individual or organization then is required to surrender these assets to the bankruptcy trustee who sells or liquidates the assets and distributes the proceeds to creditors in accordance with the relative rights of the creditors under the law. When an organization files chapter 7 bankruptcy, the company goes out of business leaving the employees unemployed and customers having to go elsewhere to purchase the products or services they previously received from the now liquidated company.
Under chapter 11 bankruptcy, also known as reorganization bankruptcy, the debtor seeks a business plan where they, under the supervision of a federal court, can solve their financial problems. The organization continues to do business but its operations may be curtailed if so ordered by the court. Under this form of bankruptcy, only those employees affected by any court ordered curtailment of operations loose their jobs. In addition, customers are still serviced by the organization but possibly at a lower level to court ordered business curtailments.
Chapter 7 bankruptcy is generally is not a viable business strategy for turnaround since the company goes away. However, chapter 11 does provide a viable option for companies in financial difficulty and many companies in business today have used this option to turnaround their operations. One example of this is Delta Airlines whose jets are still flying in our skies today.
This week we witnessed the CEO’s of the big 3 automakers flying to Washington in their private jets seeking a bailout from Uncle Sam for their financial difficulties. This prompted the members of congress, who were initially positive to the idea of bailing out the automakers, to take a second look and put any potential bailout on hold until the automakers could return with a plan for turning around their ailing companies. This also prompted President Elect Obama to issue a statement about the possibility of a bankruptcy package to rescue ailing automakers. It is unclear what the specifics of such a bankruptcy package would be, but if it involves a chapter 11 bankruptcy where the automakers, under the supervision of the court, will develop a plan to turnaround their ailing companies. The option should be seriously considered.
If nothing is done, these companies will eventually run out of cash causing them to begin defaulting on their obligations. This could force the companies into a chapter 7 liquidation situation. This would mean that thousands of people working for these companies, and employees of creditors who will be hurt financially, to go on unemployment overnight. This will not only be devastating to the finances of the laid off people but will place a strain on already strained federal and state budgets affecting all taxpayers. Before it is too late, a chapter 11 form of bankruptcy reorganization for automakers needs to be considered so that many jobs are saved. Please feel free to comment on what you think.
Sunday, November 16, 2008
Bailout Mania
Bailout mania has struck Washington. We are now beginning to see a procession of industries, companies, and state and local governments going up to Washington with their hands out looking for a bailout. It would appear that they see the election of Barrack Obama as a sign that Washington will be handing out money more freely than they have in the past. As commonsense economists, we must ask ourselves two questions. How are we going to pay for these bailouts and are bailouts, or simply giving money to public and private organizations, the best way to solve the problem.
In answer to the first question we need to look at how governments, such as the US government, raise revenue. Governments do not manufacture anything tangible. Governments do provide services but unlike services provided in the private sector, the individual or organization benefiting from the service, as a rule, is not the one paying for it. Let us use an auto mechanic as an example. Auto mechanics provide a valuable service for those of us who are mentally challenged as to how our cars or trucks work. When we need the service of an auto mechanic, we are willing to pay them for it. However, government services do not work the same way. When someone comes to the government looking for service, they are not expecting to have to pay for it. Instead, they are looking for a hand out, anticipating that the government will tax someone else to pay for it. Therefore, the answer to the first question is taxpayers who, most likely, will receive no benefit from the bailout, will be the ones paying for it.
Now, to answer the second question, are bailouts the best way to solve economic problems? The best approach to solving problems as to apply critical thinking. One of the first steps in the critical thinking process is determining the root cause of the problem. When we go to our mechanic with a complaint that our car or truck is running rough, the mechanic does not bail us out by taking money from someone else and giving it to us to buy a new car. No, he instead determines the cause of the problem and fixes it. He then presents us with a bill. If we are unable to pay the bill, we use our credit card, which is the same as taking out a loan. Instead of bailing out the organizations that have a deficit, we need to take the time to determine what the root cause of their deficit is. We can then come up with a solution to the problem and if necessary loan the organization the money to cover their deficit. Now that we have determined the cause of the organizations deficit, they will be able to run profitably and out of these profits, or surpluses for governmental organizations, pay back the loans.
This is exactly what the government did with Chrysler back in the 70’s. They loaned Chrysler the money it needed to remain in business but as a requirement for the loan required that Chrysler revamp its line of cars and reorganize its management. They did this, became profitable, and fully repaid the loan with interest. The common sense economist in me thinks this is a much better solution that will result in stronger organizations without over burdening taxpayers. Please send me your comments on this issue.
In answer to the first question we need to look at how governments, such as the US government, raise revenue. Governments do not manufacture anything tangible. Governments do provide services but unlike services provided in the private sector, the individual or organization benefiting from the service, as a rule, is not the one paying for it. Let us use an auto mechanic as an example. Auto mechanics provide a valuable service for those of us who are mentally challenged as to how our cars or trucks work. When we need the service of an auto mechanic, we are willing to pay them for it. However, government services do not work the same way. When someone comes to the government looking for service, they are not expecting to have to pay for it. Instead, they are looking for a hand out, anticipating that the government will tax someone else to pay for it. Therefore, the answer to the first question is taxpayers who, most likely, will receive no benefit from the bailout, will be the ones paying for it.
Now, to answer the second question, are bailouts the best way to solve economic problems? The best approach to solving problems as to apply critical thinking. One of the first steps in the critical thinking process is determining the root cause of the problem. When we go to our mechanic with a complaint that our car or truck is running rough, the mechanic does not bail us out by taking money from someone else and giving it to us to buy a new car. No, he instead determines the cause of the problem and fixes it. He then presents us with a bill. If we are unable to pay the bill, we use our credit card, which is the same as taking out a loan. Instead of bailing out the organizations that have a deficit, we need to take the time to determine what the root cause of their deficit is. We can then come up with a solution to the problem and if necessary loan the organization the money to cover their deficit. Now that we have determined the cause of the organizations deficit, they will be able to run profitably and out of these profits, or surpluses for governmental organizations, pay back the loans.
This is exactly what the government did with Chrysler back in the 70’s. They loaned Chrysler the money it needed to remain in business but as a requirement for the loan required that Chrysler revamp its line of cars and reorganize its management. They did this, became profitable, and fully repaid the loan with interest. The common sense economist in me thinks this is a much better solution that will result in stronger organizations without over burdening taxpayers. Please send me your comments on this issue.
Saturday, November 8, 2008
Whats Next?
The election is over. The American people have elected Barrack Obama as their next president. Let us take a moment to look at what could begin to happen in America economically after inauguration day.
When we look at President elect Obama’s economic proposals during the campaign, it is obvious his economic philosophies are socialistic in nature. This became evident in his comments to Joe the plumber when he mentioned spreading the wealth. This philosophy comes directly from the teachings of Karl Marx.
We can also discover his socialistic philosophies in his tax proposals. During the campaign, he promised to raise taxes but he also promised to give tax cuts to individuals making less than $250,000 per year. At present 40 percent of the population pays no income tax. To give these individuals a tax cut would mean that the government would be giving them a rebate check for taxes they never paid. This is not a tax cut but a stealth redistribution of wealth another policy directly from the teachings of Karl Marx.
In order to reverse this socialist trend in American economic policy we must determine how a majority of the population could be convinced that socialism is best for the country. It is my opinion that the foundation for this trend lies in the failure of our education system to teach basic economics. Those of us who have an understanding of basic economics now have a responsibility to begin teaching those we know about basic economics. Time is short since Mr. Obama plans to implement many of his programs during his first hundred days in office.
In an effort to make this task easier, I will be making postings to this blog between now and inauguration day that you can share with others. These postings will present some basic teachings on economic fundamentals along with links to materials on the web that go into depth on these principles. If you are as concerned as I am about the economic direction of the U.S. I encourage you to send everyone in your address book a link to this blog. The wonderful thing about the web is that information can be distributed quickly.
I am volunteering to do my part by posting these teachings. I encourage everyone to do their part by learning from these teachings and distributing the information. This is a great country and we will get through this. In fact, once the American people have the knowledge they need about economics, they will never be duped into falling for a slick socialist marketing campaign again. Join me in spreading the word.
When we look at President elect Obama’s economic proposals during the campaign, it is obvious his economic philosophies are socialistic in nature. This became evident in his comments to Joe the plumber when he mentioned spreading the wealth. This philosophy comes directly from the teachings of Karl Marx.
We can also discover his socialistic philosophies in his tax proposals. During the campaign, he promised to raise taxes but he also promised to give tax cuts to individuals making less than $250,000 per year. At present 40 percent of the population pays no income tax. To give these individuals a tax cut would mean that the government would be giving them a rebate check for taxes they never paid. This is not a tax cut but a stealth redistribution of wealth another policy directly from the teachings of Karl Marx.
In order to reverse this socialist trend in American economic policy we must determine how a majority of the population could be convinced that socialism is best for the country. It is my opinion that the foundation for this trend lies in the failure of our education system to teach basic economics. Those of us who have an understanding of basic economics now have a responsibility to begin teaching those we know about basic economics. Time is short since Mr. Obama plans to implement many of his programs during his first hundred days in office.
In an effort to make this task easier, I will be making postings to this blog between now and inauguration day that you can share with others. These postings will present some basic teachings on economic fundamentals along with links to materials on the web that go into depth on these principles. If you are as concerned as I am about the economic direction of the U.S. I encourage you to send everyone in your address book a link to this blog. The wonderful thing about the web is that information can be distributed quickly.
I am volunteering to do my part by posting these teachings. I encourage everyone to do their part by learning from these teachings and distributing the information. This is a great country and we will get through this. In fact, once the American people have the knowledge they need about economics, they will never be duped into falling for a slick socialist marketing campaign again. Join me in spreading the word.
Saturday, November 1, 2008
Get Out and Vote
In many countries of the world, the citizens do not have the privilege of picking their leaders. However, in the United States we do have that privilege and on Tuesday November 4, we have an opportunity to exercise that privilege once again. I want to urge everyone to get out and vote so your voice can be heard. We are not only electing the next president but there are also many other federal, state, and local offices up for election as well as some important propositions.
We currently face an economic downturn. This is not the first time we have went through such a downturn. I am 52 years old and have endured many such downturns. It is never pleasant to be in the middle of the turmoil of the downturn, but it is also important not to panic by just arbitrarily making changes just so we can feel good about doing something. There is no doubt in my mind that some changes will be necessarily but we must take the time to determine what changes will be best. Experience tells us that the US economy is very resilient and will survive while we take the time to determine what changes are necessary.
The theme of Senator Obama’s campaign has consistently been change but when the senator is confronted about being specific about changes he will make, he is not specific and has changed plans regularly throughout the campaign. This has been evident this week as he has changed the income threshold he will use to determine who will get a tax increase. Initially it was $250,000. Later he mentioned that it was $200,000. Joe Biden, Senator Obama’s Vice Presidential selection later reduced it to $150,000. Finally just yesterday, Governor Richardson of New Mexico, an Obama supporter, further reduced it to $120,000 http://elections.foxnews.com/2008/10/31/low-richardson-pegs-middle-class-making. This leads us to question who will have their taxes increased in Obama’s tax plan if he is elected president.
Even if we currently do not make over $120,000 per year, we may someday; we also most likely work for someone who does. In my opinion, it is not wise economic policy to change the tax code of the country so that anyone pays more taxes during rough economic times. Changes to the tax code always have unintended consequences. Before just arbitrarily increasing taxes on any group, we must take time to evaluate these circumstances.
This, among other reasons, is the primary reason I will be casting my vote this election for Senator McCain and Governor Palin. Senator McCain has demonstrated his dedication to his country and his ability to critically think through issues before proposing or making any changes. Governor Palin has also demonstrated her ability to confront opposition, even when it comes from her own party in order to do what is right for her home state of Alaska. This type of solid leadership is what the country needs in these uncertain times.
However, you have the right to vote whatever way you want on Tuesday. The only thing I am urging is that you consider whether we need to make change just for changes sake, or do we need smart change that has been thought through. I am confident that you will make the right decision on Tuesday after you have considered this.
We currently face an economic downturn. This is not the first time we have went through such a downturn. I am 52 years old and have endured many such downturns. It is never pleasant to be in the middle of the turmoil of the downturn, but it is also important not to panic by just arbitrarily making changes just so we can feel good about doing something. There is no doubt in my mind that some changes will be necessarily but we must take the time to determine what changes will be best. Experience tells us that the US economy is very resilient and will survive while we take the time to determine what changes are necessary.
The theme of Senator Obama’s campaign has consistently been change but when the senator is confronted about being specific about changes he will make, he is not specific and has changed plans regularly throughout the campaign. This has been evident this week as he has changed the income threshold he will use to determine who will get a tax increase. Initially it was $250,000. Later he mentioned that it was $200,000. Joe Biden, Senator Obama’s Vice Presidential selection later reduced it to $150,000. Finally just yesterday, Governor Richardson of New Mexico, an Obama supporter, further reduced it to $120,000 http://elections.foxnews.com/2008/10/31/low-richardson-pegs-middle-class-making. This leads us to question who will have their taxes increased in Obama’s tax plan if he is elected president.
Even if we currently do not make over $120,000 per year, we may someday; we also most likely work for someone who does. In my opinion, it is not wise economic policy to change the tax code of the country so that anyone pays more taxes during rough economic times. Changes to the tax code always have unintended consequences. Before just arbitrarily increasing taxes on any group, we must take time to evaluate these circumstances.
This, among other reasons, is the primary reason I will be casting my vote this election for Senator McCain and Governor Palin. Senator McCain has demonstrated his dedication to his country and his ability to critically think through issues before proposing or making any changes. Governor Palin has also demonstrated her ability to confront opposition, even when it comes from her own party in order to do what is right for her home state of Alaska. This type of solid leadership is what the country needs in these uncertain times.
However, you have the right to vote whatever way you want on Tuesday. The only thing I am urging is that you consider whether we need to make change just for changes sake, or do we need smart change that has been thought through. I am confident that you will make the right decision on Tuesday after you have considered this.
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