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The real cause of unemployment

Unemployment has been rising for the last few decades, and workers are losing their benefits and pensions.

At the same time, companies have been experiencing their own problems. When the books are closed at the end of their third year in business, most companies run into an existential crisis. They find losses that are so big that they can’t pay (a major part of) February’s salaries. This situation is unacceptable. However, the companies have devised several tricks to solve this problem, which they try one by one. They all involve raising prices or cutting costs:

  • They ask for payment for services that were once free.
  • They extend the range of paid services.
  • They sell additional products.
  • They increase the prices of their products.
  • They lower salaries (which leads to salaries too low to live on; Walmart)
  • They lay off employees.
  • They repackage products and sell them as ‘new’ (and cause environment problems).

All of these tricks seem to work—for one year. But when the books are closed at the end of the fifth year, the company again faces a crisis. And again at the end of the seventh year, and the ninth, etcetera.

Most small businesses go bankrupt within ten years. A few merge with larger companies, but then their products get downsized out of existence (remember Microsoft Messenger?). Even very large corporations go bankrupt after a hundred or a hundred and fifty years. But despite all these bankruptcies, business owners and CEOs don’t seem to realize that their budget cuts only intensify their problems. Maybe they don’t want to know.

The crisis is caused by a centuries-old flaw in the business accounting system that makes it impossible to account for lost income. Errors, mistakes, and accidents mean products can get damaged or can no longer be sold. Companies miss out on revenue, but these losses can’t be included in the books. So, when companies close their books at the end of the year, they find that revenue has dropped below expenses.

You might think that losses that are the result of errors in production can’t create a very big problem. However, if you consider that a company needs a revenue of $100,000 per year to pay one worker a salary of $1,666.67 a month (plus raw materials to process into products, tools to work with, buildings to work in, and taxes, times 12), it becomes clear that a one percent loss is more than enough to cause an existential crisis.

Smart savings ensure companies become healthy

What happens when a brick and mortar company stops advertising on the internet?

They go bankrupt within a year.

Did you know that the business accounting system contains a centuries old flaw that makes it impossible to account for lost income? At the end of the year, when the books are closed, a company finds that their revenue falls behind their expenses and starts to cut costs and makes a few strange mistakes.

In this web series you’ll find all the information you need to save your company.

This mistake

Restaurant Aunt Tea (Tante Tee) in the small town of Gouda in the Netherlands stopped advertising on the internet a few years ago. At first it didn’t seem to make any difference but after three months they lost 50% of their customers.

People on the other side of the country don’t buy a coupon to visit your company today. But to visit it in three months, when they are planning to visit your town. So, when you stop advertising there are still a large group of people who bought a coupon in the last three month. They will still use their coupon. Only when most of the people that have bought a coupon, have used it. You will suddenly run out of customers.

After losing 50% of his customers the owner of Aunt Tea reacted by laying one of his chefs off. Again, at first this didn’t seem to cause any problems. But three months later his remaining chefs resigned. With one chef short it was no longer possible to schedule days off. After three months loyalty ran out.

Three weeks after losing his remaining chefs the restaurant filed for bankruptcy.

Problems caused by losses and budget cuts

How billionaires extract wealth rather than create it

Which Interventions Can Be Paid For: The Explanatory Power of “Prasad’s Law”

Google is not a search engine, it’s an ad engine Google’s losses amount to about $3,40 billion for 2019. They are trying to increase profit to cover those losses. Sadly companies never do.

The Senseless Ambiguity of North American Turn Signals (YouTube)

Prime Power: How Amazon Squeezes the Businesses Behind Its Store

Vatican Uses Donations for the Poor to Plug Its Budget Deficit

Paid Cerberus ‘lifetime’ licenses are expiring, customers are mad Company runs into a loss and needs more money. One to get that is to sell a product twice.

How did Jeff Bezos get away with robbing his employees?

Everyone knows Jeff Bezos is the richest man in the world, and everyone knows there are hardly any companies where salary and work conditions are as bad as at Amazon. Many suspect that Jeff Bezos has found a way to steal from his employees.

But CEO’s and shareholders are not allowed to cut employees’ salaries and to pocket the proceeds. Still, Jeff Bezos managed to do just that. Not just Jeff Bezos, but every entrepreneur, CEO and shareholder in the world has been robbing their employees for centuries. They are getting away with it thanks to a boring flaw in accounting.

During the production process, products are accidentally damaged. So these products cannot be sold and the company loses out on sales. An flaw in the business accounting system makes it impossible to post an entry that expected revenue has not been received. At the close of the accounting, a company discovers the turnover was 2% less than spending. In the case of Amazon, that means revenue is about $1.2 billion less than spending. This is called a loss of $1.2 billion.

Then the company will start cutting back, and that’s where the theft takes place. When employees are laid off and their salary no longer needs to be paid out, of course, money remains at the end of the year. The company had funds reserved for salaries but did not pay this out, so that money remains at the end of the year.

When Amazon closes its accounting after a year of cuts, the income turns out to be $1.2 billion higher than expenses. Why? Because the expenses for which it has reserved, had not been paid out because employees were retrenched. This is the proceeds of the cuts. This is the money that’s left because employees who have been retrenched, no longer need to be paid a salary. If a company’s turnover is higher than the expenses, the difference is called the profit. This is called a $1.2 billion profit.

Now it’s up to the entrepreneur or CEO to determine what he’s going to do with that profit. If he is smart enough to look at the loss of the previous financial year, he may notice that the profit is equal to the previous year’s loss. Or, that this amount is equal to the amount the company wanted to cut back in order to cover the loss. So he can use that money to cover his loss of the previous year.

But if he’s not so smart, he’ll overlook this. In that case, he can pay the money out to the shareholders. Or if he’s a shareholder himself, like Jeff Bezos, he can put the money in his own pocket.

This flaw is very old. For centuries, CEOs and shareholders have been using the proceeds of the cuts to pay themselves an extremely high salary or profit distribution. They have no interest in stopping that at all.

They will only stop when employees force them to do so…

Personal income of a million dollars or more

Entrepreneurs and CEOs who have experience in economizing are facing the problem that they are accustomed to a salary that is much higher than their company can afford to pay. They could lower their expenses, of course, as so many employees have been forced to do for the last 40 years, but they’re afraid that they would then go bankrupt themselves.

That fear is not without reason. Billionaires do go bankrupt regularly. When you search the Internet for “billionaires that went bankrupt” you’ll encounter entire lists of them. Millionaires and billionaires are going bankrupt because of the same problems that cause companies to go bankrupt. They encounter losses, and start cutting back.

When a billionaire appoints a domestic assistant, they become in essence a small company with one employee and one customer. That one employee makes mistakes that cause losses. The more household assistants there are, the bigger the losses. At the end of the year, the domestic assistance budget appears to have less money than the billionaire thought. He’s a few thousand dollars short.

He has the option to supplement those few thousand dollars from personal funds, or to cut back. It turns out to be just as tempting for billionaires to cut back to cover losses as it is for companies. And it leads to the same mistakes. In particular, the proceeds from the cut-backs are never used to supplement the deficit. Fatal economizing mistakes lead to the deficit increasing by a factor of 10 to 100 per year.

As the deficits rise, millionaires and billionaires will try to supplement those shortages with wild investments and speculations. In their haste, they make lots of mistakes and the problems just keep getting bigger. Cutting back on taxes often proves to have fatal consequences for their financial life.

The solution to this problem is the same for them as it is for companies. People with a private income or a private equity of a million dollars or more must include a general ledger account for profit and loss and a reserve account in their private accounting, to keep their deficits under control.

Smart savings ensure companies become healthy

The director’s crisis

Since hourly salaries for directors have been introduced, many companies and organizations have been democratized. Although the directors still bear the risk of bankruptcy, they are no longer the “boss” who makes all the difficult decisions and who are responsible for everything. These days, most directors do not even carry much more responsibility than the average department manager.

Then there was a time when if the company suffered a loss, it made cut backs but the director still put the company proceeds in his own pocket. But now directors not only pay themselves for the additional risk that they still bear, but also for the additional responsibilities that they have not been carrying for decades.

However, hourly salaries for directors have also caused another problem. It is no longer possible to replace entrepreneurs and the directors of small organisations. As a consequence, most small businesses and organizations are now going bankrupt within five years after the founder/director’s retirement.

Traditionally, ten years before his or her retirement, a director would appoint a substitute which they would then train. In those ten years, the substitute would receive regular salary increases, and when they took office as the director, their salary would increase even further.

Nowadays, the substitute’s salary still increases during their training, but not when he or she takes over as a director. However this leaves the case that around five years later, he or she may arrive at the curious situation that, based on their increased experience, he or she can earn more at another organisation as a regular employee than as the director of the organisation they head. As a result, it has become impossible to educate replacement directors.

To solve the replacement problem, boards often appoint directors from outside. Unfortunately, they often lack the knowledge and experience in the specific field of work that are required to be able to solve many of the company’s problems. This creates a director’s crisis, whereby one of the employees may grab hold of the power while the rest of the employees are off looking for another job. These events signal the end of the organization.

The solution to the director’s crisis is to introduce democratization. In a crisis, the director asks the employees for advice. Based on their knowledge and experience, every manager makes a proposal that, from their perspective, will offer the best solution to the problem. The director then makes a choice between the proposals, and settles the issue.

In this scenario, the director still bears the risk, but only part of the responsibility. This means a director is entitled to a higher salary than ordinary employees. But not as high as the case would be when he or she would be the “boss.”

It is important for people to realise that entrepreneurs and directors play an essential role in companies. Without entrepreneurs, companies would never get off the ground. Without directors, these companies would go bankrupt when the entrepreneur calls it a day. This essential function is therefore highly valuable, a fact that is to be expressed in the salary the director takes.

Should directors be punished for the forty years during which they abused their power to increase their own salaries? Maybe. But with this demand, employees would be cutting off their own noses too.

The alternative to large companies who are cutting salaries and creaming off employee benefits, are medium-sized companies with a few hundred employees, managed by entrepreneurs who have an interest in paying their employees a good salary, allowing them to attract good employees.

But there is not a single soul in the world who would do all the work necessary to set up a medium-sized company if he doesn’t know beforehand that he would be earning considerably more than his employees.

Only when employees are willing to pay entrepreneurs and directors more, will it be possible for them to also earn more in the future.

Smart savings ensure companies become healthy

Entrepreneurs and CEOs’ salaries after cutting back

Once entrepreneurs quit cutting back, they’ll likely notice a considerable drop in their salaries. That’s because they tried to solve a problem that was caused by cutbacks, by using the proceeds of the cutbacks to increase their salaries.

Hourly wages based on training were introduced as an austerity measure in 1980, and were intended to reduce the salary of workers. But over the years, entrepreneurs seem to have forgotten about this, and they started using this system to calculate their own salary. Today, most entrepreneurs feel it’s just not right for them to earn the same salary as an employee in the same function. And rightly so. Since they also carry the ultimate responsibility for the company, and the risk, it is only reasonable that they should pay themselves a higher salary.

The same also applies to the CEOs of large companies. They too carry more responsibility, and are more at risk than ordinary employees. For that reason, it is reasonable that they should pay themselves a higher salary than regular employees in a similar function.

As we wrote in Dutch Money Management, entrepreneurs and CEOs can, as long as the company is healthy, fulfil any role they want and pay themselves any salary they want. The problem with cutbacks didn’t lie with the entrepreneurs and CEOs paying themselves too high salaries, but that they never thought about the cutbacks. As a result, they erred while economizing, ultimately leading to the bankruptcy of their companies and high unemployment.

The idea that a measurable phenomenon is needed to determine salaries is a response to the introduction of hourly wages. Prior to 1980, entrepreneurs and directors could pay themselves as much as they wanted, the only limitation being that if their salary was too high, it could damage their business.

However, this also meant that employees could earn a much higher salary through a combination of the law of supply and demand and performance pay than based on hourly earnings. Sometimes, they could earn hundreds of dollars a day by carrying out work for which there was a great demand.

Strict rules determining entrepreneurs and workers’ salaries could thus only work if the whole world would also abide by these strict rules. But the mere fact that companies suffer losses makes it clear that the world at large does not abide by this. The work necessary to keep our world functioning properly is often heavy, dirty, and sometimes downright dangerous. The salary for that kind of work is not only determined by how hard entrepreneurs and workers are working, but also by how much money society is willing to pay to have that work done.

After years of cutbacks, much of this work is no longer carried out. This could hurt us considerably.

Smart savings ensure companies become healthy

Why do losses occur?

Types of work

There are three types of work. In product-oriented work, we are interested in the product; televisions, cars, tables and curtains. With service-oriented work, we are interested in a service; giving advice on the best mortgage, dressing and undressing the demented elderly, cleaning activities, coordinating the services necessary to build a road or receiving guests at the reception desk of a hotel. The third type of work will be discussed below.

With product-oriented work, there is a link between the work that the employee performs, the amount of resources that they use and the yield of the product. It is possible to build up stock. Employees are paid for their production. The higher the quality of the product, the higher the revenue.

With service-related activities, employees wait until customers or clients are in need of a service. There is no link between the work and the yield of products. It is not possible to build up stock. Employees are paid for their presence. There is no link between quality and revenue.

The third type of work is entertainment in the broadest sense of the word. Cut backs ensure that a lot of people lose their jobs. People have to keep themselves busy, one way or another, and need to make a living. Learning a traditional trade is impossible for an unemployed person. What is left is entertainment; writing books, writing for newspapers, TV, film or theatre performance and so on.

Losses

As said before, with product-oriented work, there is a direct link between the work that the employee does, the raw materials that they use and the proceeds from the sale of the products. When the employee makes mistakes or when accidents happen, fewer products will be sold than you would expect, based on the amount of work that was done or the quantity of raw materials used. So, the company will lose out on expected revenues.

Service-oriented activities and entertainment were traditionally paid per day, week or month. There was no connection between the work people did, the raw materials used and the proceeds. However, that changed when the hourly wage was introduced. With hourly wages, employees were paid while they were waiting for the next customer or client in need of a service, or until the next show could be given. The costs then increase as there is less work. As a result, the expenses are higher than the revenue.

With some work, the damage which occurred to the product during the production process is repaired free of charge. However, with hourly pay, the employee is paid for repairing that damage. So, the expenses exceed the revenue.

To avoid losses, employees must be paid the same way as the product. If the product is paid per unit or per order, workers must also be paid per unit or per order. If the product is paid per unit of time, workers must also be paid by units of time.

The effects of cut backs

With product-oriented work

Companies who implement cut backs use three strategies that lead to lost revenue:
– They buy cheaper raw materials of inferior quality, but do not lower their sales prices. In that situation, customers see that the quality of the products drops without the price dropping too. Customers respond by buying the competitor’s products and the revenue drops.
– They lay off employees who produce and/or sell products. Therefore, the companies produce and/or sell less products and the revenue drops.
– They let the remaining employees work harder to produce the same amount of products. This leads to lower quality. Customers are not willing to pay the same price for lower quality. As a result, revenue declines.

With service-oriented work

An elderly care home understands that it is not possible to build up a stock of dressed elderly people. Nevertheless, just like in business, institutions that cut back feel employees should have to work harder. For this reason, employees are given administrative work. This doesn’t contribute to the care, but only to the feeling that employees are employed “usefully”. Organizing the administrative work does, however, make the cost of care a lot higher.

Business tasks

Companies fulfil several tasks that are essential to the survival of the company, but for which customers don’t pay the company. In particular, accounting, maintenance and repairs of equipment and tools, product marketing and staff training.
When companies encounter problems, they tend to spend more and more time on these kinds of tasks. When the entrepreneur pays themselves or their staff per hour, this becomes a problem, because the company pays more and more in salaries for tasks which the company doesn’t get paid for. As a result, the loss grows bigger.

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