Worker cutting cables with an electric cutter
Photo by Anamul Rezwan from Pexels

Mistakes when cutting back and the cause of high unemployment – the most common ones.

When businesses cut back, the idea is that they save enough money to cover future losses. That money is called profit. Since the middle of the 19th century, it has been common in the US to appropriate the profit to pay out shareholders’ dividends and to pay directors an (excessively) high salary. This habit also fanned out to Europe at the end of the 1970s. This has generated a number of problems.

When businesses cut back, the idea is that they save enough money to cover future losses

At the close of its 2010 accounting in January 2011, a business runs into a loss and starts cutting back. Five things then happen in 2011. Twelve percent of the employees are retrenched. As a result, the company is forced to cut back its production and/or sales by 12%. As a result, turnover drops by 12%, and the added value is also reduced by 12%. The profit is about 2%.

In 2012, the company has no money to undo the cutbacks, so two things happen. The turnover is 12% lower than in 2010. The added value is 12% lower than in 2010.

An example of a company cutting costs

At the close of the 2012 accounts in January 2013, the company experiences another loss and again cuts back. In 2013, 12% of the employees are retrenched. So the company is forced to reduce its production and/or sales by 12%. The revenue has dropped by 22.5% compared to 2010. The added value is 22.5% lower than in 2010. There is about a 2% profit.

The turnover in 2014 is 22.5% lower than in 2010. The added value is 22.5% lower than in 2010. At the close of the 2014 accounts in January 2015, the company experiences a loss.

Retrenchment of employees leads to a loss of sale and a growing profit

So companies only book a profit in years in which they cut back. The profit is the result of products that employees worked on but that was sold after these employees were retrenched. A portion of the proceeds from these products was intended to pay the salaries of those employees. Since that is no longer necessary, that money remains and becomes a profit.

As long as the profit is used to pay CEOs an (excessively) high salary and to pay dividends to shareholders, these people will have an interest in cutting back. The Dutch East India Company paid dividends from the added value. This practice makes it detrimental to shareholders when a company cuts back. CEOs can pay themselves a salary based on the added value―just as happens with employees.

Budget cuts pay the salary of CEOs

Large companies have a number of tricks to appoint new employees on a regular basis. The cost of those tricks ensures that product prices increase regularly. All in all, large companies are not affected as much by cutbacks. It’s the rest of society that suffers from the high prices and huge unemployment caused by all these cutbacks.

We have explained here some of the mistakes when cutting back and the cause of high unemployment. I hope you will find them useful.

large companies are not affected as much by cutbacks

Smart savings make companies healthy

Page views