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GFY Economists, MBA's, CEO's and who ever thinks they have an answer
Can anyone hear explain how business are in trouble because they can not get loans from the bank to
" Pay Employees " Head this one a few times on the news. " Buy equipment for production " head this one a few times as well " Pay off orders they made from other companies " Now maybe Im wrong, but I thought that all this sort of thing came OUT of the income BEFORE there was a profit for the Owner. Just read today that the price of Coffee will be going up because the coffee companies can not as easily get loans to purchase Fertilizer. Hrm. Maybe the owner should that thought that over BEFORE he got the new Boat or Truck. Anyone? |
Larger companies with thousands of employee's have projected profits and costs thier accountants go by and pay roll is often based on credit to stream line the pay roll process.
But ultimatly its the bigger pay roll checks that top executives paid themselves and thier supposed yearly bonus cash was the real deathnail. Many companies relied on over payed assholes that run companies into the ground and out of the wreckage these executives come crawling out with millions of dollars without a worry nor any interest in investing there ill gotten gains to the future. American business is about to get an enema. Glory days are over and until American business can prove that are worthwhile for investments we as Americans are going to be in the poor house. |
Simple. Cash flow.
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Honestly I passed all my business classes and even got a finance degree but I never could quite grasp accounting practices for manufacturing businesses. Accounting is such a convoluted POS system I don't see how anyone gets paid. It's all about where the numbers are on a piece of paper and has nothing to do with actual cash so it's pretty easy to get fucked if you can't get credit to cover a supposed 'expense' based on accounting principles.
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Many companies these days are highly leveraged, causing them to rely on a constant supply of cheap credit for growth. Unfortunately, quite a few of them have overdone it, up to the point where they rely on cheap credit for their continued existence, not just their continued growth.
The problem isn't so much that people purchased luxury products, but that companies invested more than they could afford. They expected there to be enough cheap credit and growth to bridge the gap, but the dimished supply of credit and the lessened growth means that acquiring the liquid funds required for bridging the gap has become harder, while the gap itself (ie the time it will take to recoup investments) has grown enormously. |
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If a company makes 1 million dollars a year and spends 2 million why on earth would a bank loan them money in the first place. It seems a bit on the obvious side that they can not manage their money, and that they are over spending their income. |
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yup cash flow
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For many manufacturing companies it works like this:
1. Company sales team bids on and is awarded a job by another company. 2. Money is then spent by Company to buy what they need in order to do the job they were just awarded. 3. The job is worked on. 4. The job eventually gets finished and the order is filled, or if it is an ongoing job the first batch of products due are shipped to the customer. 5. Company then gets paid. During this process the company often has to cover all the costs of production including payroll, equipment/tool purchases and any outside contractors they may have to hire. When they get paid for delivering the product they recoup their costs, but if the company doesn't have a decent cash reserve they may have to rely on short term credit to cover their costs while they do the work. |
Well these companies, unlike yours, have more than one person working there and more than one thing going on at a time....so let me try to give an example.
Southwest orders a 747 from Boeing. They do not pay for it in advance, they may put up some good faith money, but they're not paying for the entire plane. So now Boeing needs raw materials, labor, etc to build the plane (a roughly $200 million plane). They have to front the expenses until the deal is final....they do this via a credit line, corporate bonds, etc. Your local grocer may have several hundred thousands of dollars worth of inventory. That doesn't mean that he had to have that much cash on hand (above and beyond other expenses) to open the store. He used a credit line to buy the inventory. If he can't get a credit line and has to use his available cash to buy inventory, the shelves will be pretty bare. In some cases yes the vendors provide the products on credit...but in that case it's the vendor who needs a credit line from a bank or something similar, because they had to front the expenses to produce and deliver the product. Businesses like these aren't like yours where you don't order a server or order a design or buy content with money you don't have....it's alot more complicated than that. Even most cities, counties, and states require credit to function...because tax collections are quarterly or annual, but they have to pay their expenses every month. That's why the credit crunch was hurting both business, individuals, and government. |
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Let's say that your product this year is going to cost you more than last year to produce but that you also expect to be able to sell that product at a higher cost this year. In that case you might not be able to afford to purchase this year's inventory at current costs. So you finance your inventory. "Inventory-based financing". Same thing for a manufacturer with increased input costs such as fertilizer. Consider that a lot of businesses operate on a 10% profit margin. That doesn't leave much room to pay increased costs especially in a year where input costs suddenly rise. Like the last few years. High volume, low profit margin businesses often have this to consider. Thus they finance manufacturing or inventory purchases. Also, sometimes such a business needs to finance the cost of new machinery. When the operating profit is only 10% that is difficult to do without amortizing the payments out over a number of years. i.e. a loan. In addition to just the normal business needs above we are now in a recession. So a 10% profit margin might have become break-even (or worse). So the cash is not necessarily there for such purchases. Even though long-term the business might be completely viable short-term it may need financing for such things. Even for payroll possibly. |
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If you make a product and sell it at less than what it costs you to make you dont deserve a load and you dont deserve to be in business. |
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Accounts Receivable (Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for) may say they have $1 million bucks, but often times (if not 99% of the time) companies pay 30 days, 60 days, 90 days after delivery of the product. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year. On a public company's balance sheet, accounts receivable is often recorded as an asset because this represents a legal obligation for the customer to remit cash for its short-term debts --> If the person that owes them money defaults, you can see how the snowball gets going! |
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A loan being secured by property doesn't change the bank's reserve requirements, which was at the heart of the credit crisis. (i.e. house and car loans are theoretically secured also, but alot of them are worthless because the underlying assets have lost most of their value) "IF" we had a cash only economy, as you're suggesting, then there would be no interest paid on savings either, which would make it quite hard for people to accumulate capital to start a business with in the first place....capital they would have to have because in your scenario there are no loans available....see where I'm going here? |
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Did you really want an answer to the question or do you just want to argue with someone because you're pissed off about the $700 billion banking bailout? |
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Business loans have been around a long time too. Ancient Greece at least. Probably older. Commercial banks have been operating in the US since it's inception. but even outside that merchants have always offered credit terms on inventory and supply. For as far back as we have records. Even the oldest writings from Sumeria reference loans. "Akhenaton promises to pay Lesso 30 bushels of wheat at harvest time". That sort of thing. |
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Well maybe thats where the US went wrong. how a company can have profits in the BILLIONS and have a cash flow issue or the need to take a loan. If they have no cash flow, and they have to take a loan, then they have no profits. Take for instance your Boing example.. If they had a 2.2BILLION dollar Profit in 2006 they where is the money. PROFIT means the BILLS are PAID.. Where all that CASH FLOW going. |
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Let's say you are selling window scrapers and making a small profit of $200,000/year. You decide one day to make the pilgrimmage to Benton, Arkansas to pitch your product to Wal Mart. You meet with their their buyer and they say "Hey, no problem. We'll take 400,000 of them but we can only pay you $19. We need them in 60 days". Pretty sure you know what to do next. Go to the bank! This is a more extreme example of the general problem. If you are growing faster than your profit margins you are going to need to finance your manufacturing/inventory purchases. |
Check out Fractional-reserve banking -- http://en.wikipedia.org/wiki/Fractional-reserve_banking
It'll throw you for a loop, and explain what's going on. Basically, you deposit $100 in a bank, and that bank only has to keep, let's say, 10% on reserves, or $10, and can loan out the remaining $90 -- Thereby "creating" $90 and putting it back into the economy, meaning there's $190 out there (which was only really based on $100). Do that enough times, and you get billions of dollars as "assets", when only a fraction of that money actually exists. :helpme |
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Now you know why companies like BUD, CAT and so on have credit lines and loans outstanding. They have expanding businesses with large capital expenditures and large inventory needs. And in a year like this? You sure as hell know companies are going to need credit in a year where revenue is shrinking. |
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:2 cents: |
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Wal Mart profit after taxes last year. $13.7 billion Expected capital expenditures this year $15 billion Of which 35% went to opening new stores, 8% to remodels , 23% to information systems upgrade and the rest to opening stores internationally. Now that allows Wal Mart to open over 300 new stores. Each new store will bring additional profits. Part of this will be financed with debt. And why not? The expected lifetime profits dramatically exceed the capital expenditures. |
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And if they file bankruptcy before you get paid, bye bye money. I know someone who was put out of business when Barney's New York filed bankruptcy back in the 90's. She was a small biz that delivered 25k worth of product, they put the items in their windows and sold them, and she didn't get paid. She closed shop after that! business = risk |
and really, you shouldn't hate on businesses.
Having been self-employed for many years, its amazing how many people you deal with decide they don't have to pay you. All it takes sometimes is one asshole to hold up a bunch of people's money. If you are the business owner, you need things like credit to fall back on when that happens. Even big businesses deal with assholes who don't want to pay, or pay late. |
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The current problem was largely created by debts being traded with incorrect risk ratings, because they were restructured in ways that increased their rating yet did nothing to reduce risk. Basically, the artificially inflated ratings gave them an artificially inflated apparent value. This caused financial institutions to be exposed to far higher risks than they could afford (which also meant their assets were lower than had been assumed up until them), and as this became clear their value dropped. With their value dropping, other financial institutions, funds, and companies that had invested in them saw their assets disappearing, to a point at which some lost their financial viability and collapsed. This, of course, meant even more assets disappeared, etc. Basically, a chain reaction. |
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The companies with billions in profit are publicly owned, that means the profits are paid out to the shareholders OR invested in expansion of the company. To use your all caps example...PROFIT means LAST YEAR'S bills are PAID. CASH FLOW is for NEXT YEAR'S bills and payroll. You seem to think that a company was wrong for not keeping several months or even years of operating expenses as a cash reserve....but in a low interest rate environment (which we've been in for quite some time) that would be dereliction of their fiduciary duty to their shareholders. If they didn't have every dime of available capital out there working to generate a return they'd have been fired. (and rightly so) Your point of view is that if there's a sudden famine, that it's the average person's fault they're starving because they didn't have a year's worth of groceries stored in their basement....even though every week for their entire lives there was food available at the grocery store. |
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More pertinent to this discussion though, would be personal savings. If you don't have 3-6 months of living expenses socked away, again, you're doing it wrong and you *deserve* to be on the street when the easy credit dries up or your cushy job goes away. There are exceptions, but if you're eating out, buying a new TV, etc. like so many people do without savings, I have no sympathy for you. There is a reason reserves are kept. I don't think anyone is advocating anything absolutely nuts where it kills the business, but we have absolutely swung the pendulum in the opposite direction too far (where it was considered normal for companies to have NEGATIVE reserves on hand! wtf!). Speaking from experience, growing a capital intensive company is a challenge to do responsibly. You very much need to balance risk (debt) with the possible downside. If you go too far in either direction (e.g. take on no debt, or too much) you are very likely to fail either way. Just my two cents :) -Phil |
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Getting a big business loan from a bank is not an easy thing that just anyone can do. If two guys go into a bank looking for a 2 million dollar loan to start a business and one of them really has never done much in that field and does not present a solid business plan while the other already has people committed to the project, a solid business plan including how they are going to pay back the loan and a good exit strategy the bank is kicking the first guy out and the second guy has a shot at getting the loan. |
Great thread. Phil21, thanks for additional perspective.
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I was speaking in terms of the overall credit crisis (which is what brought on this thread) In that scenario we were talking about a situation that would have taken years to play out on it's own, and as has been discussed here, alot of businesses that are run well would have paid a heavy price through really no fault of their own. Alot of businesses run their operations on credit and that is standard operating practice for their industry.....they would put themselves at a competitive disadvantage doing otherwise. Of course keeping a few weeks or months of reserves on hand is wise and I can only assume most well run companies do this...but as I said earlier, the frozen credit markets would have taken years to thaw out on their own....and alot of innocent, hard working people would have been casualties of a mortgage crisis they had nothing to do with. BTW, Microsoft doesn't keep large reserves for times like this....they keep large reserves because a big part of their business model is acquiring start up companies and they need the cash on hand for when the next facebook or myspace or youtube comes down the pipe. That's not the case with your local grocer or car dealer or beer distributor. :2 cents: |
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