Tuesday, September 18, 2012

A Small Business Problem

Let's pretend that you are the sole proprietor of a small business – one that employs 15 or 20 people. Suppose you manufacture two products: shirts and widgets. Both lines are selling very well - your bottom line nets out to about $100K, on which you pay about $15K in income tax after deductions.
Now the government, in its relentless pursuit of job creation, lowers your taxes to $13K. How many new employees will you hire with that extra $2,000? (A no-brainer.)
Suddenly your sales of shirts drop 50% because your competitors have outsourced their production to India; do you keep all the employees in the shirt production line, or do you lay some of them off? (Another no-brainer.)
Your accountant tells you that the government will give you a hefty allowance if you install automated equipment (made in China) that will enable you to compete. In fact, you will need even less employees than you have now! Do you buy the new equipment? (This is almost too simple.)
Suddenly a new use is found for your widgets, and the sales double in just a few months. You absolutely must find extra equipment and employees to handle the increased volume. So you hire a consultant who fixes you up with automated equipment which can handle the entire increase, and better yet, can be run by only one new employee. You are back in clover.
Now let's take a look at what happened here. Job creation was dependent upon two variables: it was directly proportional to sales and inversely proportional to operational efficiency. Tax adjustment was useless, at least for the small business.
In the old days the mantra for business success was location, location, location. Not any more – these days success is determined by customers, customers, customers.
Mr. Romney, please take note.
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My books, “There Are Only Seven Jokes” and “The Spirit Runs Through It” are available in paperback or Kindle at Amazon.

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