Business accounting contains a flaw that makes it impossible to account for lost income. At the end of the year, when closing the books, a company will find that revenue falls short of expenses.
As unemployment continues to rise, companies regularly encounter problems that threaten their survival. The solutions they have for this, always seem to only work for one year.
To cover losses without the need for budget cuts, a company needs to apply three techniques:
- During the year, it has to gain an insight into its profits or losses.
- It has to have reserve capital to which it regularly adds funds to cover losses.
- It needs a way to prevent business owners and CFOs from inadvertently spending this reserve capital.
Altogether, 99.9% of companies will encounter losses at the end of the third financial year. After that, companies incur losses annually, and never use their profits to cover losses. Based on the turnover and age of a company, it is possible to make a fairly accurate estimate of their loss.
About 800 years ago, the Dutch guilds developed a method to control losses. But the method was so complicated entrepreneurs didn’t understand what it was doing. In a changing society, in the late 1960s, they no longer wanted this extra work and abolished it.
When cutting back, a number of unexpected mistakes are made, which means the loss is never covered. Instead, the money goes to shareholders.
In healthy companies, workers have a high salary so that they can buy high-quality products and keep the economy running.
Unhealthy companies retrench as many of their actual workforce as possible, increasing unemployment and increasing the size of the government.
Because entrepreneurs make mistakes in spending their money, the Dutch guilds have developed a management method that ensures companies always have enough money to survive.
A mistake in entrepreneurs and CEOs earnings back in 1985, led to them putting the proceeds of the cuts into their own pockets. This creates problems when their business stops cutting back.
Entrepreneurs and CEOs carry a lot more responsibility than the average employees. If that great responsibility is not expressed in their regular salary, they would rather continue making cut-backs.
Billionaires also go bankrupt on a regular basis. Often due to the same problems that also cause bankruptcies in companies.
Prior to 1980, three methods were used to allocate salaries. The methods were aimed at ensuring that the people who were most important in generating the turnover, earned the highest salary. Workers who master a lot of skills and do creative work are more important than workers who do regular routine work. But they are more important than employees who do administrative work.
How do you count $100,000,000,000 in cash? Because they did not have safe methods of counting their money, governments have relied blindly on their accounts for centuries. When that went wrong, officials were sent home without pay. When officials had had enough of this, they introduced an accounting method that guarantees them a salary, but it turns out to also cause budget deficits.
In order to deliver a high-quality production, employees require at least food, clothing, housing, and transport to their workplace. This also applies to slaves. Entrepreneurs who did not take this into account created a situation in which their companies suffered large losses. Slavery was abolished not only because it was the decent thing to do, but also because it was better for the economy.
To avoid losses, the sales market needs to grow by more than 2% per year. Immigration in America and the other colonies had exceeded 2% for centuries. Which increased their internal market by more than 2% and they never faced losses. That changed when immigration was abolished in the 1950s.
The author likes to gather information. An investigation into the cause of an industry’s many problems led to the discovery of the cause and solution of losses.