The chaotic political situation in Washington has given permission to the mentally deranged to unleash their own versions of Presidential behavior. Thus, we can expect more bombings and school shootings. We've lost control of our better instincts. The blood-dimmed tide is upon us. Youthful innocence is drowned. Even the best of us lack all conviction, while the worst of us are full of passionate intensity. Just watch Fox News.
And I want to thank W.B. Yeats for defining the human condition so succinctly. The widening gyre, indeed.
Wednesday, March 21, 2018
Monday, March 5, 2018
Tariffs, Trade Wars and Small Businesses
How does a 25% tariff on steel impact a small stove manufacturer in the US?
Here's how the business works:
Every 3 to 4 months or so, your stove Company would buy $2 million dollars worth of steel. This steel would go towards making stoves over the coming months.
With a 25% price increase, the same amount of steel that your Company used to buy for $2 million now costs $2.5 million.
Small companies (say around $50 million in sales) usually don't have $500,000 extra cash lying around in the cash register. To make matters worse, this half million dollars only represents the cost increase for the first quarter of the year.
So, assuming that your normal cost of steel is $8 million a year, then this means that your Company would need an additional $2 million to cover the cost increase in the first year of the tariff.
Where do you get this $2 million to cover this unexpected increase?
You'd have to borrow the money. This means having to get a revolving credit of $500,000 every quarter to finance the increase.
Naturally, this assumes that your Company has a solid balance sheet. A financially unhealthy Company, one that's surviving from paycheck to paycheck, so to speak, can go out of business due to this sudden and arbitrary increase in costs.
Why? Because Banks won't lend you money if your balance sheet look iffy. Marginal Companies can go out of business due to this new tariff.
But, let's say you get the loan. To keep going, you'd have to increase prices. And you'd have to hope that your customers pay you within 90 days (3 months.) But that's another issue. So let's just stick with the tariff.
Let's say there's $100 worth of steel in your gas range. Now, you'd have to charge $25 more for each range that you sell.
While a $25 dollar increase on a $1,000 range is minuscule, your Company would have to sell 20,000 units just to recover that $500,000.
If your sales projections are good, and you achieve your sales goals, then your Company will be OK. The real danger point is getting the additional financing to pay for the cost increase in the first place.
Companies with marginal balance sheets may not be able to get the additional financing; and if there's a slight slowdown in the economy, then even the healthy companies would be struggling to make ends meet. Even a slight decrease in sales will impact your ability to repay your loan.
The risks involved in increasing these tariffs seem much greater than not doing anything at all. Unless, of course, you are loaded with extra cash. But, even then, is it worth the risk?
Here's how the business works:
Every 3 to 4 months or so, your stove Company would buy $2 million dollars worth of steel. This steel would go towards making stoves over the coming months.
With a 25% price increase, the same amount of steel that your Company used to buy for $2 million now costs $2.5 million.
Small companies (say around $50 million in sales) usually don't have $500,000 extra cash lying around in the cash register. To make matters worse, this half million dollars only represents the cost increase for the first quarter of the year.
So, assuming that your normal cost of steel is $8 million a year, then this means that your Company would need an additional $2 million to cover the cost increase in the first year of the tariff.
Where do you get this $2 million to cover this unexpected increase?
You'd have to borrow the money. This means having to get a revolving credit of $500,000 every quarter to finance the increase.
Naturally, this assumes that your Company has a solid balance sheet. A financially unhealthy Company, one that's surviving from paycheck to paycheck, so to speak, can go out of business due to this sudden and arbitrary increase in costs.
Why? Because Banks won't lend you money if your balance sheet look iffy. Marginal Companies can go out of business due to this new tariff.
But, let's say you get the loan. To keep going, you'd have to increase prices. And you'd have to hope that your customers pay you within 90 days (3 months.) But that's another issue. So let's just stick with the tariff.
Let's say there's $100 worth of steel in your gas range. Now, you'd have to charge $25 more for each range that you sell.
While a $25 dollar increase on a $1,000 range is minuscule, your Company would have to sell 20,000 units just to recover that $500,000.
If your sales projections are good, and you achieve your sales goals, then your Company will be OK. The real danger point is getting the additional financing to pay for the cost increase in the first place.
Companies with marginal balance sheets may not be able to get the additional financing; and if there's a slight slowdown in the economy, then even the healthy companies would be struggling to make ends meet. Even a slight decrease in sales will impact your ability to repay your loan.
The risks involved in increasing these tariffs seem much greater than not doing anything at all. Unless, of course, you are loaded with extra cash. But, even then, is it worth the risk?
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