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What is the real cause of unemployment and business losses? 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:

All of these tricks seem to work—for one year

  • 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.

A company needs revenue of $100,000 per year to pay one worker a salary of $1,666.67 a month

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 revenue of $100,000 per year to pay one worker a salary of $1,666.67 a month, it becomes clear that a one percent loss is more than enough to cause an existential crisis. This is because, besides salaries, companies also need to pay for raw materials to process into products, tools to work with, buildings to work in, and taxes times 12.

Smart savings make companies healthy

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