Running on your income?

The other day I was listening to a discussion about how the government could not function without being able to borrow.

The “expert” being interviewed put it this way: “Just imagine trying to run a business with only the money you earned. If all you had to work with was your daily take.”

Now, I might invoke a storm of “you don’t understand economics” comments here but this makes absolutely no sense to me. I have always run my business on the money I earned. I never borrowed to pay my bills. I did use credit for leasing and/or buying equipment and a couple of times for upgrades to the workplace. But my power bills, rent, materials and hardware were always paid out of existing revenue. OK, we had accounts with a few materials suppliers and hardware vendors, but these were more for convenience and the bills were always due and paid at the beginning of the next month. I never considered borrowing to make payroll or pay my rent. These were paid with money we earned.

These days, it seems like the common consensus is that a business cannot possibly survive on its earnings and must continually borrow, steadily increasing the debt load, in order to keep the doors open. I cannot shake the idea that any business that cannot generate enough capitol to operate, that must constantly borrow more money to make ends meet, cannot possibly survive. Ultimately, the debt load is going to become too great and the business will collapse under the weight of it.

D.D.

COMMENTS

  1. Chuck R wrote:

    You got it right, David. A growing business might divide it into two piles: operating expenses and capital expenses. If capital spending will lead to increased revenues, then borrowing for that purpose should grow the company. Unfortunately, that is not what Washington does – they spend tomorrow’s money to operate today. That can’t continue forever – go ask Greece…

  2. Aaron Sikes wrote:

    You are exactly right, Dave. The collapse has begun and will only get worse as time passes. What kills me is that most people will want to blame the current administration rather than step back and take an honest look at what’s going on and what’s been going on for centuries.

    The US economy relies upon the strength of the stock markets, which are based on speculation (i.e., gambling).

  3. Lydia wrote:

    To stay out of debt, act your wage.

  4. Steve B wrote:

    I too have always stayed within my means, but I can appreciate the other side of this situation.

    If the business is large and complex enough, especially if it sells to resellers not the public, receivables can lag significantly behind unavoidable payables, notably payroll. You may pay your bills on time, but not everyone else does! Faced with borrowing versus stiffing the employees, the choice is usually simple.

    Matters also change if you have ambitions to grow or to expand into a new area. If you frugally save up instead of borrow, you will significantly delay your plans and could miss an opportunity.

    But both of these situations are instances of timing, The debt is a balance between cash outflow now and cash income later. I believe that a good businessman shouldn’t plan to run up a “steadily increasing debt” unless it is counterbalanced by an equivalent steadily increasing value in the company!

  5. Ed wrote:

    You’re not wrong in your understanding of economics. It’s simple math; what goes out can’t exceed what comes in. The issue you describe is probably the number one reason businesses fail (and governments – just look at Detroit).

    The problem is that the morons running this country, at all levels of government and in either party, don’t understand or care about the reality of economics. An even greater offense, that lies squarely on the shoulders of the electorate, is that we keep re-electing these idiots. Ultimately, it’s our fault.

    Yeah, yeah, I’ve heard the arguments, “but you don’t understand, the government’s not a business”.
    To that I say “Bull”

    Sorry, you hit my hot button today.

  6. Jesse Tutterrow wrote:

    I agree. Except for property or a vehicle I can’t see the need to borrow. I don’t consider having a Net 30 account with a supplyer borrowing, it is just a way to simplify bookeeping.

  7. John Gresko wrote:

    Yet our government/congressman/white house think otherwise. Why praytell, they use ” our ” money for everything and as they think, easy come easy go. America as we once knew her is done.

  8. Andy wrote:

    D.D.

    C’mon now. We both know that there was context around those comments. I ready all of your posts and only responded one other time. I love the old school nature heart that you have that this world has lost (a lot anyways). But I help run a business and for sure for the business to be where it is at Today took some large loans paid back over many years. This capitol is what it takes to grow just the same as you have used it. A business is able to grow under it’s own profits but with two main points; the growth will be slow and hampered, and I hope that who ever started the business had a large chunk of cash to start it!!

    Any background would be helpful to paint the complete picture of where the quote came from. Have a good one and God bless,

  9. Jeffery wrote:

    I agree, when has borrowing ever gotten someone out of debt.

  10. Paul wrote:

    Dave, I am with you 100%.

  11. Rich Flynn wrote:

    Obviously. You’re still in business.

  12. Sam Delp wrote:

    This is absolutely correct for small shops. I have had large purchasers use my product to finance their operations for as much as 90 days sometimes longer), and that forced me to use credit to continue operations. However those clients are now COD and continue to purchase from my shop.

  13. Lea wrote:

    The difference between your business and government is that the latter can raise its debt (i.e., credit) limit at will, and then steal the money (i.e., raise taxes) from everybody else to pay the bills. Your business, on the other hand, is restricted by what the bank and credit card company will allow you to borrow, and you can’t steal from your neighbors to pay it back.

    Unfortunately, sooner or later the government will run out of other people’s money, like any other overextended business, but then, unlike you, they have the option to just print more.

    Too bad the government can’t be held legally accountable for mismanaging its debts the way your business can. Only politically accountable, and we the people aren’t doing a very good job of enforcing that. IMHO.

  14. JIm wrote:

    You are absolutely correct in spirit. However, the principal difference is that the government has no long term expenditures. Everything is listed as a current expense. So, the government builds a new battleship and it is completed in the third quarter of the year, the entire bill is due the third quarter of the year. They do not amortize the battleship over the 540 years of it’s expected usefulness; like we do with a new CNC machine. Did you pay for that new CNC machine in the first year of it’s life (or more appropriately, did you save enough to pay cash for it?) There is no distinction between capital and current expenses in the way we keep government books. Thus the analogous position for a business would be to not only pay all the current expenses fro current income (wages, materials, the power bill, etc., AND pay all the capital expenses (new shop, additional tools, expanded spray booth, etc.) from current income. Try and combine your capital outlays and your current outlays in the year you built that new building and pay it off from income in that year. If we changed how we keep the government’s books, and allowed amortization of the capital equipment, the debt would be quite more reasonable; just like a business. Perhaps still too large, but then at lease we would be comparing apples to apples.

    Can the debt get too big? Of course it can, but the number we need to keep in mind is the relationship between debt and income – just like a business. A business with gross income of $1,000,000 per year and $2,000,000 in ling term debt is VERY different than a business with $10,000,000 in gross income and $2,000,000 in long term debt. Additionally, the government CAN be held accountable for mismanaging its debts – that is exactly what we are seeing now; the effects of you and me electing people who are bound and determined to reduce the size of government debt.

    The upshot of all this is that the question is MUCH more complicated than most of us would like for it to be, and much more complicated than most of us treat it. We seem to be asking for a return to the days before credit was so readily available. A short story is illustrative. Using the automobile as an example fo a good that can be used for non-productive purposes (unlike a drill-press for example), there was no credit available for the purchase of automobiles. Credit was only extended to “normal” folk (those other than the VERY rich) to purchase items that had within them the ability to pay back the debt (like a drill-press). For the automobile there was no commercial purpose seen and thus there was no credit. In order to buy a car on time you went to the dealer, arranged to buy the car, made payments for an extended time and when you had payed the entire purchase price of the car, you took possession. IN other words, go down to the Chevy dealer, arrange to buy a new car, work out how much you can afford per month for (say) 48 months, pay the payment for four years and THEN you get the car. To get around this the founders of General Motors (Durant and Mott) established a mechanism whereby you could take possession BEFORE you completed payment. This eventually turned into the notion of revolving debt in 1968 and the rest, as they say, is history. I am not sure that is where we want to go, either as individuals or collectively through government.

    As a former teacher of mine used to say, “even the most complicated questions have simple answers; simple, direct, easy to understand, and usually wrong.” Complicated issues usually call for complicated solutions, unfortunately.

  15. Mark Slafkes wrote:

    Truth is, Government is not business. One provides services and the other attempts to make a profit. As for the cash in = cash out argument, let’s restore some of the taxes that were abandoned because the very rich were able to get the Congress to reduce income and corporate tax levels to historical lows during the GW Bush administration.
    This is like blaming the children for needing food and clothing while we decide to only work one day a week. And, while blaming the kids, we also decide to purchase a few cool guns, a radical motorcycled, and make a trip to Las Vegas.
    If we need to money to run the government (provide services) then let’s tax ourselves enough to pay for it.

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