Today I was listening to the radio on my way to lunch and once again it was pointed out that President Obama, in talking to small businesses found that the biggest problem for small business in the United States is their inability to get access to credit.
I sat in my car, wondered for a moment and continued to listen. President Obama continued to say that the problem was that small businesses could not hire because they could not find loans to expand their payroll. I sat there wondering what he truly meant.
I’m the VP of Operations of a small 60 people company here in Western Missouri. We manufacture here in the US as well as in China through contract manufacturers. We have a successful business, and we have very knowledgeable investors. We’ve earned their trust because we manage our business very closely.
I asked myself after the short news clip at noon on a local radio station: Why do small businesses use lines of credit? Why does any business use a line of Credit?
Keep in mind that there are two types of credit that companies use (more but I just want to keep this simple). One is the long term debt. This type of credit allows a company to invest in plant, property and equipment so that they may grow to meet future demand, based on sound reasoning, good rates of return on projects and knowledge of the business cycle.
Then there is the revolving line of credit. It is primarily used to cover the time between the purchase of goods to be sold, and the collection of money from customers: The balance between Accounts Payable, and Accounts Receivable. It is not uncommon for suppliers to require payment in 30 days, and large customers to demand 60 day terms. So, for 30 days, plus your lead time, you have a cash flow issue that you have to manage.
Notice that in the credit discussion there is nothing about using borrowed money to pay for new workers: it makes no sense. No sound business goes out and hires excess people and puts them to work, goes to the loan officer at any bank, and says: “I need to make payroll for the next twelve months, so I need to borrow money to make my payroll.” You’d be laughed out of the bank, and the bank officers would call into review your whole line of credit.
President Obama, if you ran a small business you’d know from first hand experience that the only way to run a business is to make sure that every dollar counts. The purpose of a business is to make money. We buy something, we add value, we sell it, and we figure out how much we received, and how much we paid, and we have a profit. If people keep buying, we keep doing it. If they stop buying, we stop. Simple.
People are hired to do the things we cannot do ourselves, but they are factored into the overall cost of the business. For profit business is relatively simple to model. We buy things (raw material money goes out), we use those things to add value to them (labor money goes out), we sell the products (whether service or actual manufactured parts) and the money comes in. At the end of the day, week, month or year, we tally all the money that came in, we tally all the money that went out, and the difference is gross profit. That gross profit has to pay for the buildings, the loans, the people not directly involved with the product making, benefits, and taxes. What’s left over can be used to grow the company, or to pay investors or both.
What frightens all in business is uncertainty in cost structure. That is the real culprit behind why companies are not hiring. If we know that lead prices are going up, we make adjustments and we quote my customers accordingly. If we know that copper prices are going up, then we quote my customers accordingly. If we know that healthcare costs are going up [while we don’t like it] it is somewhat predictable, so we quote my customers accordingly. No uncertainly, just change, we can adjust and continue to plan for the future and grow my business.
However, if we have no idea what the political winds are going to do to Capital Gains, then the investors in the company will play it safe. If we have no idea what the income taxes for the company are going to do, then we have to play it safe. If we don’t know what our labor costs are going to do, then we also play it safe. Business, even though it thrives on taking risks, those risks are taken over a backdrop of certainty. If we know we have a 4 year window in which my costs are going to be predictable, we can invest in 3 year projects, knowing that we’ll have a full year to reap the benefits of my risk taking; but if we don’t know what the cost structure for next year, and the next and the following; then my risk taking window becomes three to six months. Not a chance to invest in the future, but we manage the here and now.
Mr. President, if you want to create jobs, give us certainty. Don’t give us credit lines that will do more harm than good. Give us a 5 year moratorium on Capital Gains, give us a 5 year extension on the Bush Tax Cuts, let us plan our way out of this situation, and we’ll start hiring again, and we’ll start moving the economy.
Mr. President, if you want things to continue as they are, then continue to do what you’ve been doing and we’ll sit in the sidelines and see what happens in 2010 or even worse, what happens in 2012.
Waiting out uncertainty is the safest course for business, and in these troubled economic times there is sufficient uncertainty without having to worry about what the government is going to do to our cost structure. We all can wait, but can the economy afford it? Can the deficit spending continue? Can the engine of our economy withstand a year long wait, or a three year wait, to find out what the costs are going to be?
The Lee’s Summit Conservative
p.s., If you didn’t get it clearly enough, let me paraphrase Bill Clinton “Its Uncertainty….” I’ll let you finish the rest.