Wednesday, October 08, 2008

The Debate: Obama's Business Ignorance Noteworthy

I listened to the debate last night which held no surprises. Two statements by Sen. Obama left me scratching my head, however. I was amazed by the ignorance he showed about small business. Two items, taken directly from the transcript:

Obama: Oliver, first, let me tell you what's in the rescue package for you. Right now, the credit markets are frozen up and what that means, as a practical matter, is that small businesses and some large businesses just can't get loans.

If they can't get a loan, that means that they can't make payroll.

and

Obama: Now, Sen. McCain talks about small businesses. Only a few percent of small businesses make more than $250,000 a year. So the vast majority of small businesses would get a tax cut under my plan.

First, with some exceptions, very few businesses, and in particular small businesses, can remain going concerns if they have to borrow to make payroll. If you aren't bringing money in the door to pay the employees, you are in trouble, big time. That is fundamental. Even at the height of the dot.com craze, money for payroll came from working capital--not loans--raised through taking a company public (or from angels or investment banks who believed that given some time, a viable product would be developed.)

Second, in 2006, Salary.com reported that the average small business owner compensation was $258,400. We would note that this historical compensation is more than what Barack Obama thinks the average small business makes per year, and I admit that I was amazed that Obama was so out of touch. The traditional definition of a small business as one with fewer than 500 employees is still pretty much the definition adopted by the Small Business Administration.

But all this aside, the Obama campaign has several initiatives that it has announced for small business. We are left wondering just what definition is the campaign using? Obviously, something very different from any traditional definition.

4 Comments:

Anonymous Anonymous said...

On your first point, that is an empirical question as to whether smaller businesses borrow or use cash on hand to make their payroll. I really doubt that you have any support for this beyond just asserting it, which is largely all the "support" you ever provide.

Regarding your second point, lets assume that the figures from salary.com are accurate. The issue is how evenly distributed the numbers are. If they are not evenly distributed, then a small number of very successful small businesses can make a substantial amount in excess of $250k. If that is the case, then the statistic you want to look at is the median not the average owner compensation.

If the distribution is skewed, which it is very likely to be, then it may well be true that most small business owners make less than $250k, even though the average compensation is slightly greater than $250k.

It would be the same as looking at North Shore housing prices and discussing an average, even though home prices can get very high on the upside but cannot be anywhere near as low on the downside.

Just a suggestion to consider. I would not think to suggest that you are using your data inappropriately or playing with statistics in an effort to discredit Obama. That would certainly be unethical.

Oct 8, 2008, 12:24:00 PM  
Blogger Praguetwin said...

I would take issue with the first point as well. Every small business I have worked for carries some short term debt: usually because of accounts receivables. Especially growing companies usually need to borrow as their receivables swell.

The tightening of the credit markets is certainly putting a strain on all business, large and small.

On the other point, though, you are right, and although you do write average (in your post) the link is actually citing media, which your anonymous commenter suggest you use.

Well you have, but perhaps you didn't know it.

Very interesting point made here.

Oct 9, 2008, 8:18:00 AM  
Blogger Publia said...

Anonymous,

Was that you who I heard the other day singing that old hymn "Immortal, Invisible, Obama only wise?"

Discrediting Obama, me? He just happened to have his facts wrong, and he has a long history of doing just that.

Generally speaking, when the word "average" is used, it is understood to be the mean. If one is using a skewed distribution and wants to be perfectly clear that the number is the median, which is also a useful statistic and sometimes more helpful than the mean, then "median" should be the word of choice, not "average."

Prague Twin,

It's good to see you! Hope the family is well!

My issue with Mr. Obama is with the verbiage of borrowing "to make payroll," not that access to credit doesn't play a vital role in financing business. Here in the US it is becoming more clear than ever in light of recent developments that basic education in economics seems entirely missing among average Americans, including average politicans.

Growing receivables can be the sign of a growing business; it can also be the sign that credit has been too freely given to purchasers; just ask people who have experienced with failed businesses.

Young people look up to candidates of both parties; I wouldn't want them to think that the way to make payroll is continued borrowing. That's a really risky practice, and is the same mentality that brought on this worldwide credit crisis.

Oct 9, 2008, 9:43:00 AM  
Blogger Praguetwin said...

Family is good thanks. Sounds like you had a good night the other night with yours!

With the short-term debt, it really is used mostly to make payroll. It is the one expense you can't put off (other than taxes of course). You can pay your suppliers late, you can make that investment later on, but you gotta make payroll on-time, every time.

Generally businesses have a line of credit with their bank with very favorable terms up to a certain point. Many use this to pay payroll and then as the receivables come in, that account goes down. Seasonal businesses rely on it in the slow part of the year to pick up the slack.

Sure, receivables going up might indicate that you are being too loose, but my point is that when you are growing quickly, your receivables are going to grow quickly too, and just exactly how do you finance that (assuming your profit margin is average)?

Short-term debt. What has happened is that the interest rate has gone up on the short term paper, and the limits are being reigned in.

I'm not talking about continued borrowing month after month to make payroll, I'm talking about floating debt that gets paid off by the end of the month each month generally, but is used precisely to make payroll. Every company I've ever worked for does it this way.

All the best,

michael

Oct 10, 2008, 10:01:00 AM  

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