Monday, March 7, 2011

How to make money in Business

This basic principle of business seems to have been lost somewhere in the political rhetoric, so let me explain how you actually make money in business:

You produce a product as cheaply as possible, create interest and sell it for as high a price as the market will allow or people will pay.

The largest part of the cost of a product is its production expense which is NOT the raw materials, but the workers that produce the product. So, the cheaper you can get workers, the more profit you make on the product. Your raw material expense is fixed or unchanging. Thus to make money, you have to reduce production cost.

Corporations do not sit on profit. Corporations are made up of people who bought and hold the shares of stock in the corporation. These shares of stock are what provided the original money to start and set the company up and get production started. The people who hold most of the stock make up the Board of Directors.
In the old days, the Board of Directors was ruled by the person who had the most stock and this person made the major financial and business decisions. Today, this person is hired by the Board of Directors and is called the CEO, Chief Executive Officer. Along with this individual may also be a CFO, Chief Financial Officer and a variety of 3 letter people all starting with C. They make salaries in excess of a few million dollars a year guaranteed whether the company makes money or not.
They also have a guaranteed employment contract so they can not be fired. In addition to that, they have bonuses loosely based on how much money they make the company by reducing expences and what is called a Golden Parachute. That means if the Board of Directors should have to get rid of them because say, they are convicted of murder, they get several million dollars for giving up their position in addition to their guaranteed salary and bonuses.
At the end of the quarter, 3 months, the profit made by the company less the salaries of these "big boys" is divided up among the stock holders and paid to them. This check is called a dividend. You may remember, you gave these people a vitual free ticket taxwise earlier this year on dividends. A dividend is nothing more than the paycheck a stock holder gets for risking their money by buying the stock in the first place. Dividends are how the rich get paid. You  may get a few dollars on your savings' accounts and it is called a dividend. They get a few million and it is also called a dividend.
Now, the reasoning behind a lower tax rate on dividends is the corporation has already paid taxes on the money "it" made. However, you may remember you gave corporations a huge tax break at the beginning of the year and the "big boys" like Bank of America even with all our tax payer money, paid no taxes the last two years. In fact, only small companies commonly called small businesses actually pay any taxes. The big ones have a variety of tax dodges like shipping their money off shore.
So, the big companies make a lot of money and are trying to make even more money. Since they can not reduce the cost of raw materials, they have to reduce the cost of production and the only way to do that is to eliminate people.
For example: an ATM costs around 15,000.00 and works 24/7 and replaces two tellers (people) than make around 30,000.00 a year. The ATM will last at least 2 years at a total savings of 105,000.00 in 2 years on the surface. However, an ATM requires no contribution to FICA, insurance or pensions, so it actually saves the bank way more money than that. They no longer require deposit slips, so that puts a paper manufacturerer and a printer out of business. Banks can now be a small store front with a couple of ATMS outside and maybe 3 people inside, reducing the rent, electricity and cleaning costs for the branch, making the bank even more money. Now multiply that by a few thousand branches and you are talking a significant chunk of change.
The lesson here is that businesses do not make money hiring people. They make money getting rid of jobs, i.e. people. So, when the government gives your tax dollars to big companies they do not create jobs, they eliminate jobs with your money. When you reduce government, you reduce the number of people employed by the government and once again, unemployment rises. The private sector does not absorb these newly unemployed because you just paid the private sector to elminate existing jobs.
This is how Trickle Down Economics works. The top 3% of the country, who do not work at any job but just collect a check from "dividends" on stock they bought with inherited money that they paid no taxes on because they made a deal with the IRS to place it in a "public trust" of some kind,  take your job away so you can now not work also and collect welfare which is now your dividend check that your few neighbors who still have a job slinging hamburgers pay for. It's easy. Why are you having a problem understanding it? Just remember, thank your neighbor with a job. They are supporting you and your children.

No comments: