Cheque’s in the Mail

We’ve all extended the courtesy of trading terms to a customer only to have to chase up a payment after it has gone beyond the due date.  It’s an old cliché that they have posted the cheque and is used to avoid the embarrassing conversation that they haven’t or can’t pay us.  While still a preferred payment method  in some economies, thankfully in Australia electronic banking has become prevalent and conventional allowing us to confirm that day if a deposit has been made and tighten up our cashflow.

portalettere

We assume the burden of risk when we start our own business but that doesn’t mean that we should simply accept risk as a consequence of our enterprise.  Managing cashflow is one of the most essential tasks in  every business and if we accept poor payment habits from our customers we are unnecessarily increasing the risk and exposure to ourselves.  Failure of what may otherwise be a very good operation often happens not from a lack of profitability, but a lack of of liquidity.  Even in retail operations where it is normally payment at point-of-sale I have seen volume hunting drive poor decision making and credit extended to customers that you just know will come back to haunt you.

On the 26th July in 1775, a postal system was established by the 2nd Continental Congress of the United States with the first Postmaster General being Benjamin Franklin; access to communication in this case a postal service is a crucial aspect of commerce.  106 years later in 1881, again on the 26th July, Thomas Edison and Patrick Kenny executes a patent application for a facsimile telegraph (U.S. Pat. 479,184) and again just over 100 years later on 26th Jul in 1998  AT&T and British Telecommunications PLC announced they were forming a joint venture to combine international operations and develop a new Internet system. The joint venture, known as Concert, proved a money-loser and was shut down.

It is interesting that these events all occurred on the same date in history.  They all demonstrate the development in advanced economies  that prosperity provides access to better infrastructure such as the postal service or transportation systems.  While it may be public money that is invested, it is the taxation base we draw from prosperous private enterprise which creates the means to raise this money.  It also provides better access to ideas as we improve the means to share knowledge, it is a multi faceted benefit that we experience from successful enterprise.

Enterprise constantly seeks new and better ways to deliver value to customers, it is through constant improvement that we see better system of commerce, breakthroughs in medical science, and with it longer, wealthier and healthier lifestyles.  What it also shows in the example given is the importance of it being private enterprise that assumes the risk associated with return for effort.  We don’t always succeed when we try something new and in the case of AT&T and British Telecommunications a loss on return resulted, something we would not find acceptable in political terms if it was a public institution playing with taxpayers dollars.

The most important lesson to take away today though is not to accept poor performance by customers that are slow in paying, you either need to improve your message in communicating the value of what you do so that they want to pay you on time, or consider if you need customers that don’t appreciate your value.

 

Trevor Dixon

Chairman Small Business Foundation

For more on “Enterprise” – The Art of Freedom, visit:

www.smallbusinessfoundation.org

 

How German Reparations compares to Greek Bailouts

A friend comparing all final claims on German reparations from WWII being absolved in the final 1990 international accord after reunification started this conversation:

I feel it somewhat ironic that Germany can insist that Greece pays back its debt. The country defaulted three times in paying its debt and war repatriations in 1932, 1938 and 1948. Furthermore in January 1923 France and Belgium invaded the Ruhr to demand that Germany find the funds to pay its war debt. Helped lead to the rise of a certain Adolf Hitler!

Close up of flags of Germany and Greece

Who is Right Germany or Greece?

I don’t think that the stalling on Germany providing more bailout funds is because Greece hasn’t made payments; the conversation is all about how will Greece stop the haemorrhaging in it’s overspending and under collection of taxation revenue, a two-fold problem of it’s own creation. The Germans quite rightly don’t want to give more money if there is no prospect of any change in the conditions, which created the current crisis.

Very different consideration when making repayments to someone who has kindly lent you money to defaulting on reparations to right a wrong but you’re working hard on repairing your economy so that you can recover and then make payments.

Germany fixed it’s economy, so much so that even at the end of WWII it’s economic output was at the same levels as the start of the war and has continued from strength to strength today. A good example of getting the conditions right and perhaps worth the while of the Greeks to listen!

Given the correct analysis from you, but is it possible to fix the economy while in the Euro? Iceland bankers went back to fishing after their default.

I personally think that Greece being out of the Euro is the best way to fix their economy as they take back control over monetary policy.

Still a lot of pains involved as assets are lost to their creditors as part of the debt absolving in that scenario. Many people think that a default means that the debt if absolved and the world is good… There will be state securities in place that the creditors will take over and the Drachma once reinstated will be very weak. A weak drachma will be excellent for exports and tourism but will be very bad for investment in all domestic enterprise until confidence in the Greek government and new Greek bonds recovers. A huge risk however is hyperinflation and the potential requirement for humanitarian aid.

Perhaps most important of all either way is that sensible conversations take place that allow the Greek people to start electing good representatives that implement conditions to create incentive and reward for effort in their economy instead of populist policies designed only for their personal reelection.

 

 

It’s Shakespearean Tragedy not Greek…

Firstly, I don’t agree with Government bailing out private enterprise regardless of how big they are, a market only works if bad businesses are allowed to fail.  I made that comment and the following explanation to a friend who had posted this image on Facebook outlining the massive funds injected into the Corporate world as a form of statement that Greece’s demands were reasonable and insignificant in comparison…

Screen Shot 2015-07-07 at 8.18.19 pm

That said, Governments will have entered into bailouts with the bankers outlined on the basis of providing cash and with an expectation of getting their money bank on a short term basis; to be fair I don’t know of the top of my head who and how much has been paid back yet. Lehman Brothers of course failed but they had a net trading profit when they went down so it wasn’t bad management it was cashflow ie a liquidity problem that broke them, they couldn’t get cash because the other banks had a run on their reserves…

I think people are missing the main problem in the Greece situation. Since the 2008 crisis, Greece has had bailouts provided on the basis that they undertake measures to get their economy back on track and despite all the discourse on austerity their economy was showing signs of recovery 5 months ago – that is until Syriza was elected and plunged them back into the depths of recession with their policies. This exact same scenario occurred in 1933 when Franklin Delano Roosevelt was elected on the back of the “New Deal” and plunged the US economy back into the Great Depression.

The point that is being missed is that Greece needs to take action to fix its economy, regardless of whether the current debt is forgiven or multiple generation repayment terms are offered etc; no-one in their right mind is going to give them money if they know nothing has been changed and that they will only have to give more money when the next tranche simply runs out.

So I went and did some research to find out how paying back the corporate bailouts had turned out…   It seems that 951 entities received bailout funds in the USA, to date the US Govt has recovered all the funds bar 9.38% including losses from companies that still failed in spite of the investment. The US Govt will also receive an ongoing dividend from the shares it acquired investing in these firms.

In the same time Greece has struggled to make their meagre repayment schedules and still require another bailout in the magnitude of $380 bn as has been suggested. They want more funds to pay the debt on the debt of the credit card without making structural change in their economy.  It’s massively different investing in someone who won’t help themselves and constantly asking for more money after their last lot went bad and you have no expectation of the next lot of good money being any different.

PrintI can’t see much light at the end of the tunnel for Greece; my personal opinion is that they are best exiting the Eurozone and re-floating the Drachma; they will have to do that or issue IOU’s in the next week if no bailout arrives as they have no liquidity left in their banks now! The consequences of that are likely to be hyperinflation and a need for humanitarian aid until such point as Greece gets control of their monetary policy and restore their economy. The only other alternative is massive injection of bailout, forgiveness of most of the debt (unlikely) and still have to restore their economy.

What is needed to restore their economy?

  1. Massive reduction of pensions and age of attaining a pension.
  2. A restructure of their progressive taxation system to start collecting revenue while maintaining an incentive for investment in enterprise.
  3. A broad based consumption tax to simplify direct taxes and collect revenue from everyone spending in the economy.
  4. Reduce Govt services and allow the private sector to deliver them ie a smaller public service.

The third element is essential because you cannot overtax individuals engaged in enterprise and eliminate the incentive to invest more. ie high taxation will drive expenditure to expense items and minimise taxation so Government still does not collect. You want someone to keep their money if investing in enterprise as that creates growth but if they take the fruit of their labour you want to capture revenue at point of sale. In short, the restructure needs to collect revenue, reduce Government expenditure and encourage growth.

NONE of these requirements are palatable as the Greek economy has sailed along on false pretences for so long it is difficult to accept the necessary change hence the OXI vote on the weekend, but whatever your politics, cold hard reality will ultimately dictate no other option for Greece.