Public Policy, Economics and Entrepreneurship: May 2008 Archives

The Tax Foundation estimates that on average Americans spend about 2.5 hours of a typical eight hour work day working to pay their taxes.  Or, if you want to think of it in terms of a typical work week, you spend all of Monday and Tuesday up until the end of your morning coffee break working to pay your taxes.

Think about that when you hear the calls for even higher taxes!

Thomas Frank of the Wall Street Journal offered a rather harsh analysis of the economic boom that was the past two decades. 

It is, in other words, a political disaster, with tax cuts, trade agreements, deregulatory measures, and enforcement decisions all finely crafted to benefit one part of society and leave the rest behind. Few of the voters who gave Ronald Reagan his landslide victories, it is fair to say, intended for this to be the outcome. They wanted their country to stand tall again, certainly; they wanted the scary regulators off their backs, maybe; but I can recall no conservative who trumpeted those long-ago elections -- or any of the succeeding contests, for that matter -- as a referendum on plutocracy.

Say what?  Have no fear....  James Pethokoukis sets the record straight in his column at US News.

American politicians are talking about higher tax rates, bigger government, and intervention by bureaucrats in markets to pick winners and losers (what I call socialized entrepreneurship).  As the US drifts toward socialism, could we see our neighbors to the north passing by us heading away from such policies?

From the National Dialogue on Entrepreneurship (emphasis added):

A new study from Canada's Institute for Research and Public Policy seeks to understand why and to see whether any potential solutions are available. The author, Donald McFetridge, fingers the business sector's lack of innovation and entrepreneurial spirit as primary cause for Canada's productivity lag. While the Canadian government has introduced multiple programs to stimulate innovation, the national innovation culture is still quite weak. McFetridge contends that new innovation policies should focus on supporting "market incentives for entrepreneurship" through reduced taxes and regulation.

A new global study from The Global Entrepreneurship Monitor (GEM) reports that women entrepreneurs are a key contributor to economic growth in low/middle income countries, particularly in Latin America and the Caribbean. Among the findings:

• There is no gender difference in the survival rate of women's businesses versus those of men in high-income countries.
• Women who are employed and have built a social network of entrepreneurs are more likely to become entrepreneurs. The social and economic benefits of working are driving women's entrepreneurship more than increased education or household income.
• Women tend to be less optimistic and self-confident than men about starting a business. But once involved in entrepreneurial activity, women's confidence builds, and they are more likely to know other entrepreneurs, and exploit viable opportunities just like their male counterparts. Given difference in how various cultures around the globe view economic independence among women, the initial lack of confidence is not surprising. The good news is that once they take the entrepreneurial plunge, they gain confidence. Entrepreneurship has not only economic implications, but social implications for women as well.
• Fear of failure is also higher for women in all country groups compared to their male counterparts. Women in Europe and Asia low/middle income countries had the highest fear of failure rates (40.3%) compared to women in Latin America and the Caribbean (34.2%), and women in high-income countries (27.1%).

A good way to help women entrepreneurs is to join with those of us who give micro-loans through Kiva. I just made eight micro-loans to aspiring women entrepreneurs around the globe.

I remain somewhat concerned about the current slow down and/or recession. I remain very concerned about inflation. If you are an entrepreneurs, it is time to prepare for the worst. Here is a summary of a talk I gave to a group of printing company owners yesterday. To get prepared for any economic downturn, it is best to think in terms of getting your financial statements in order. First let's look at the Income Statement.

Revenues
Even though budget cutting is part of getting ready, do not cut back on marketing efforts. Now more than ever you need to stay front and center in the minds of your customers. Competition is going to get even tougher, so you need to keep your competitive edge by reminding the customers that you want their business. Many of your competitors will slash marketing budgets to save money. That will give you an advantage if you keep getting your message out there. As part of this effort, take special care of your best customers. Make a personal sales call on them to let them know their business matters. Pay particular attention to those customers who are loyal, as their loyalty could get tested during difficult times. As soon as you observe any increases in your costs of doing business, begin an aggressive campaign to increase prices. Frequent small price increases usually work best. Focus on revenues that generate good margins. The goal should be to grow profits, not sales. Get rid of business that is not making good margins. When inflation heats up these accounts can quickly become money losers for you.

Expenses
Cut your overhead expenses. This will lower your break even and help buffer your profit margins from sudden price increases from your suppliers or if a major customer suddenly is forced to cut or even cancel orders from you. Overhead is your enemy right now. Get back to basics. Look around your business to see what could be cut without having a drastic impact on your business. This may involve staff. This is painful, but may be necessary to protect the jobs of those that remain. Cut any fluff that you have allowed to creep into your expenses. I even go so far as to tell folks to get back into your start-up mentality. Bootstrap, bootstrap, bootstrap!! This may be particularly effective in marketing. I said earlier that marketing should not be cut back. But it can almost always be done more efficiently. Now let's turn to the Balance Sheet.

Cash
Cash is King. Improve your cash flow. The steps outline above can help. Also pay attention to accounts receivable. During difficult times your customers will begin to slow down payments to take care of their own financial strains. Stay aggressive on collections. Use carrots and use sticks to keep their payments coming in a timely basis. Build your cash reserves. The larger the cash war chest you have the better you can make it through sudden price increases from suppliers and sudden losses of key customers. It provides a shock absorber that you will definitely need more than once in the coming months.

Debt
In addition to building cash reserves, pay down debt as aggressively as you can. There are two reasons for this. First, as inflation heats up interest rates may go up even faster than they have recently come down. This will effect your new loans and all of your existing debt, such as lines of credit, that have variable rates. Second, banks will become much more strict when it comes to the covenants and performance requirements built into your loans. If you miss these numbers, the odds have increased that you will feel pressure from your bank to get in compliance. They can call in a note even if you make every payment on time if you start to fall below some of the financial ratios that are part of your loan agreement. If I sound urgent, it is because many of these things will take some time to get in order. If I am right about the economy, you need to take action now. If I am wrong, the worst that happens is that you have significantly improved your financial conditions. That is not a bad thing even in good economic times.

According to the 2008 American Express OPEN Spring Monitor, small business owners have made the following changes since the 2007 American Express OPEN Fall Monitor, released in September.

• 34% do not offer healthcare coverage to employees; 29% didn't offer coverage in September 2007
• 6% have reduced coverage in the last six months; 4% reduced coverage in the six months preceding September 2007
• 6% have eliminated coverage altogether in the last six months; 2% eliminated coverage in the six months preceding September 2007
• 9% have required employees to pay a larger share of healthcare costs over the last six months; 5% required employees to pay a larger share in the six months preceding September 2007
• 20% have been shopping for a new healthcare carrier in the last six months; 15% were shopping for a new carrier in the six months preceding September 2007

The healthcare solutions will not address the underlying problem behind much of this -- the cost of healthcare is a main contributor of inflation. If people had to pay for their own healthcare out of pocket (we all pay for it, but this gets hidden in lower net pay, taxes, and in the cost of goods and services) and if we tracked the cost of healthcare like we pay attention to the cost o gas the outrage would deafening. While they may address the issue of access, all of the "reform" proposals on the table right now will only increase the total cost of healthcare. Access and cost are both fundamental problems that need to be addressed. Employees are not the only ones feeling the effects of -- small business owners' health is also suffering. - 71% of small business owners said being an entrepreneur meant they were so busy that they took their health for granted. - 90% said there are aspects of their life that suffer as they seek to maintain work/life balance - 20% indicated maintaining their health/fitness was the area that suffered the most. This is also alarming to me. Poor health is a major cause of people leaving the world of entrepreneurship.