Tuesday, January 6, 2009
Staying In The Black
How to keep the cash flowing when the economic sky is falling
Unless you’re sitting on a pile of cash and you have no debt whatsoever, you’re going to be affected. But just because you’re going to get slapped, doesn’t mean you have to fall on the ground. Quite the opposite. Understanding and action are key components to survival. It’s important to keep your eye on the horizon. All radical economic shifts eventually stabilize and reverse course.
Where Did The Chaos Come From?
This financial plummet is a culmination of several factors that have a lot of complicated facets underneath the broad strokes I’m going to draw for you here. The overall mechanisms are important to grasp so you can understand the trickle down to your business.
The United States economy is one run on credit—not just credit cards, but accounts at vendor operations and credit worthiness between banking institutions. The account you have at a rental house or lab is a typical example of a mechanism that’s crucial for the day-to-day operation of our economy. Even if you have only $500 in your bank account, because you have accounts set up with your vendors, you have the means to produce a $50,000 job without worrying about paying your vendors for 30 days. Your business has plenty of time to complete a job, get at least part of the money owed to you, give you the liquidity to pay your credit obligations and keep your business machine churning.
If you take that small example and extrapolate it out to all the businesses and all the banks nationwide, you can begin to see how crucial credit is. Now, imagine if none of that credit is available and your parents aren’t talking to you so you can’t hit them up for a loan. There’s no way you’d be able to produce that $50,000 job. Suddenly that $500 in your account becomes infinitely more valuable than it was when you had prospects for new cash inflows. Priorities like eating and paying rent far outweigh any other financial obligations you have. People who depend on you to pay your bills are going to be out of luck, just like you’re going to be out of luck as the people who owe you money adopt the same attitude and de-prioritize their payments to you.
This type of paralysis is what the government wants to avoid, which is why you’re hearing terms like stimulus package, bailout and government guarantees bandied about with such urgency. The goal is too keep the velocity of money in motion so that day-to-day commerce can transact.
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