Here is a little primer for all the politicians and economists who are having a tough time figuring out how to get Americans working again.
The one word that best sums up the difference between being an employee and an owner of a small business is “risk.” If you own the business, you are always last in line to receive your paycheck. If the business fails, of course, employees will lose their jobs, but that is the extent of their risk. Owners, however, stand to lose not only their jobs but everything they own, including their homes and retirement savings.
Why do owners put themselves at such risk? In general, it’s to create better lives for themselves and their families and become financially independent. One universal law is that the more risk a person takes, the more opportunity there is for gain or loss. This especially applies to opening one’s own business. Out of every four businesses started, only one survives for more than five years.
Small business owners must be “jacks of all trades.” They need to possess the technical knowledge of their profession or industry, have the skills to manage budgets and personnel, and be entrepreneurs. Very few are skilled at all three of these necessary components of success.
One of the financial skills an owner must possess is the ability to keep expenses below revenue. Generating a profit is necessary to pay down debt, keep equipment up to date, and expand the business. Only if a business has profits can it expand and hire new employees.
So the bedrock of creating jobs is sustainable business profits. Read that again, out loud if you’re sitting next to a politician. If businesses are not making profits that they can reasonably expect to sustain, they will not have the money or the confidence to expand and hire new employees.
Right now, many business owners are seeing profits decline or disappear. They aren’t feeling confident enough to risk hiring new employees. Why?
Increased regulations and higher taxes.
It’s really that simple.
Higher regulations reduce profits. For example, one of my small business clients generates about $50,000 a year in profits. She currently spends $1,500 a month complying with various regulations. Next year, new regulations could double that amount, adding another $1,500.
A new bill to raise S corporation taxes, already passed by the House, will increase her federal income taxes by $1,000 a month. In 2011, the sunset of the 2001 Bush tax cuts will cost her another $2,000 a month. That’s $3,000 a month in new taxes and $1,500 in new regulatory costs, for a total of $4,500 a month, or $52,000 a year. This exceeds her entire profit.
She tells me she is currently understaffed and really could use a new employee that she would pay $50,000. However, she has no confidence her business will be profitable enough in the next few years to afford a new hire.
How can we get Americans working again? So far the government’s answer is to make loans available and encourage businesses to borrow and spend. That is no help to a successful business. Most small businesses don’t need loans. They need sustainable profits.
We’ve got to cut, or at the very least not raise taxes. In turn, we must cut, and I mean really cut, government spending. This means cutting Social Security, Medicare, education, and other political sacred cows. We simply can’t afford them at their current benefit levels. Finally, we must get rid of regulations that do nothing to protect the public and instead add unnecessary barriers and costs to creating jobs.
It’s really that simple.