Anyone who has ever run a business knows there are three basic levers they can pull to improve profitability. This wisdom excludes all elected officials in this country. Most business people don’t run for office. Most politicians have never run anything. Hence, we business people need to refresh how this works for our elected officials.
First lever. If profits are shrinking cut expenses. This is always a quick response to profit problems. You can do it now and get a response tomorrow. Government has a deficient gene and they are missing this lever. This lever is being pushed hard all over the world in the business community. Hence, the mounting unemployment and lower demand problem.
The second lever is revenue. If you can increase revenue without increasing expense, you make more money. With Americans saving and not spending, this lever is not working well for most businesses. The auto industry is not going to make this happen in the near future. Nor are most other businesses.
Last is margin. You can improve margin by raising prices. Or, you can improve margin with capital investment. This assumes the investment went into productivity improvement or technology gains that reduce cost but keeps revenue constant.
If you are running a business, big or small today, what levers can you use to keep your business healthy? If a tax cut occurs, it goes right to the bottom line. Cuts expenses without cutting people or other expenses that might cut revenue or margin.
The economy is so bad, demand is dropping for most products every day. Will government spending boost demand? Washington thinks so, the investment community does not. What will stimulate demand? Consumer confidence must go up. Unemployment must go down. Asset values must go up. People must have money to buy things.
As more expenses get cut, more demand reductions will occur.
When businesses can’t cut any more expenses, they close. When they close, more demand goes away. The employees they lay off can’t buy as much. The business owner can’t buy much.
Right now we have government shoving their lever, spending more. If the spending doesn’t create more demand, the business community does not benefit. As the government tries to increase revenue by raising taxes, business has an expense increase without a revenue or margin offset.
This economic situation will not turn around unless government finally finds the third lever. Expense reduction. Until they reduce the burden they are putting on business and consumer demand, this economy will continue to tank. Instead, the present government wants to spend three times more than any government has ever spent before them.
Businesses will fail in record numbers. Demand will not pick up. Taxes will go up. Unemployment will go up. Savings will go up. Spending will crater.
No levers are working now.
