Mutually Beneficial Relationships

In addressing the overall economy we have relationships that I'm very much aware of as a business owner. I obviously have relationships with my customers because that's were the income originates. Additionally I have relationship with other enterprises (vendors and suppliers) that provide me with the materials, goods, and services necessary so that I sell my products and services to my customers. Finally I have a relationship with my employees that provide the goods and services to my customers. I would basically summarize this in a flowchart as:

Vendor/Supplier > Owner (of enterprise) > Employee > Customer

Every one of those on this flowchart is equally important because the enterprise cannot exist and be successful without all four existing. As a caplitalist I also understand that each must profit from the relationship for the success of the enterprise. As the owner of the enterprise if I screw my vendors, employees, or customers it will reduce the potential success, or worse still could result in the failure, of my enterprise. From a financial perspective the flowchart is:

Vendor/Supplier Profit > Owner (of enterprise) Profit > Employee Profit > Customer Profit (Benefit)

Everyone must "profit/benefit" from their relationship for the enterprise to succeed and reach maximum potential so it's important to understand the word "Profit" as used related to enterprise if I'm to ensure that as a component of my Business Plan.

http://www.merriam-webster.com/dictionary/profit

For the customer it is the benefit they gain from purchasing my product or service (profit) to fulfill a need that they have. It is the "value" of the product or service that the customer is concerned with and I must focus on providing that value to them.

My vendors obviously have to achieve a financial gain above all of their costs and expenses (profit) because if they don't then they won't be around for long and I will lose the sources necessary for me to profit from them.

Obviously as the owner of the enterprise I must also achieve a financial gain above all of my costs and expenses or my business won't be around very long either.

So far I don't believe I've lost anyone because everyone would agree that the vendor/supplier, customer, and enterprise must earn a profit but what about the employee that is also a key component? Just like my enterprise the employee also has bills to pay and expenses to be met.

Like my enterprise my employee has daily, weekly, monthly and/or annual expenses while others are long term expenses that must be met. Some potential financial obligations can also be addressed with insurance (e.g. I have a liability insurance for my enterprise) and the employee also has potential obligations like health care that can be met with insurance. The longest term financial expense to be addressed is unquestionably retirement because neither I nor my employees witll be able to work forever.

As the employer it is my responsibility to define the employee compensation package as a component of my Business Plan. I also know that I could create Business Plan with a compensation package that does not provide for the basic expenditures for my employees and there are those looking for work that will accept it. In short I can base my busines on the "employee working at a loss" where they do not receive enough in compensation to fund their expenditures.

I can profit from the fact that my employees are not earning a "profit" from their employment but is that good for my business? While my vendors are not affected I could profit more and my customers could profit more but it comes and the loss of profit for the employee because there is not a mutually beneficial relationship between all of those involved in the commerce.

I also know that I can create a Business Plan that does include adequate compensation for the employee so that the employee "profits" from the commerce as well as the vendors/suppliers, customers, and my enterprise each profit. I know that I can create a Business Plan where everyone profits and there are no losers

I know that a "Mutually Beneficial Relationship" can exist where the Vendors/Suppliers, Owner (of the enterprise), Customer, and Employees all profit from the enterprise. Every owner of an enterprise can write a business plan that creates a Mutually Beneficial Relationship where everyone earns a profit so why don't they?

Ulitmately why are there some that apparently don't believe the employee compensation package should ensure a "Profit" for the Employee?

 

Trying to affix 'profit' to employee compensation is an abuse of the word 'profit'. A profit is generally stated as a financial benefit that might be realized when revenues are greater than expenses. In what possible way does an 'employee' realize a profit? You can pay an idiot employee $200/hour but if they spend $300/hour how can the employer ever provide enough compensation for every worker to live how ever they desire? The answer is this IS NOT the employer's job!

Some companies have 'profit sharing' programs but even these are negative motivators. The 'share' is not as large as last year or someone else got a larger share or there may be no share when employees expect a share even when there are no profits.

You cannot hold hostage the entire private sector demanding higher and higher wages for no increase in productivity...this is what unions do and we see the results of this...

 

If an employee makes a dollar more than it costs them to get to work and return home, then they have made a profit.

 

"Profit" is associated with revenues in excess of "necessary expenditures" and not "unnecessary expenditures" and that relates to both the enterprise and the employee.

For example both the enterprise (assuming a brick and mortar business) and the employee have to pay "rent" (or mortgage) for a physical location to operate from. That doesn't imply that either needs an expensive and lavish establishment of luxury but instead that both need a fundamental physical building that provides for the basic shelter of the enterprise and household respectively. There is a basic cost for each and that is a "necessary" expenditure. Both the enterprise and the employee require basic utilities. Both the enterprise and the employee need basic goods and services. Those are "necessary" expenditures.

When it comes to lavish (unnecessary) expenditures you're correct but not when it comes basic expenditures. The employer controls the enterprise and is responsible for ensuring that the assigned tasks that the employee performs produce the revenue necessary so that both "profit" from the enterprise. The employee only performs the tasks the employer assigns and is not responsible for the outcome. It's the employer's responsibility to ensure that the tasks result in the revenue necessary for the enterprise which, first and foremost, must ensure a "profit" for the employee.

I would call this a fundamental prerequisite for the employment contract. The employer, before even hiring the employee, has to ensure that the enterprise will support the basic needs of the employee. If it can't then the owner is not entitled to the labor of the employee. The employer controls the business and with that comes the responsibility to ensure that the labor of the employee provides for the basic needs of the employee.

On the flip side the employee is responsible for carrying out the tasks assigned because those tasks generate the revenue based upon the business plan created by the employer. All revenue is ultimately generated by labor of the worker(s) and the amount of revenue is determined by the tasks assigned by the employer.

Some profit sharing plans are fair while others are nefarious. It all depends upon how the employer structures the profit sharing plan.

No one is demanding across the board higher and higher wages. What needs to be addressed is that there has to be a minimum level of compensation that ensure a "liveable wage" that meets the basic necessary expenditures of the employees. Just as we don't expect a business to operate at a loss we shouldn't expect the employee to operate at a loss. If the person requires outside assistance to meet their basic needs then they're "operating at a loss" and that's unacceptable. So we're not addressing the entire range of compensation but instead just the lowest acceptable level of compensation.

Of course unions did not demand ever increasing compensation without a corresponding increase in productivity. The negotiations between unions and enterprise always focused on the productivity of the employee that resulted in revenue for enterprise and the compensation negotiated was always based upon the productivity. It can also be noted that when the enterprise agreed to the contract it did so voluntarily based upon it's business plan where the productivity would support the compensation to the employees. No enterprise I'm aware of ever agreed to a union contract where the business plan didn't support the compensation package based upon the productivity of the workers. It would be stupid for an enterprise to agree to a contract where the productivity of the workers didn't fund and support the contract.

BTW - The "union" enterprises always represented a minority and those enterprises always had to compete with the non-union enterprises. What we generally find is that lower pricing is established by the non-union enterprises while higher employee compensation was determined by union enterprises. There is actually a market balance between the two but that's only if there are enough union enterprises to positively affect employee compensation.

Because of "right-wing" economic policies implemented since the 1970's that favor the enterprise over the workers that balance has been lost. We need to restore balance like we had in the 1950's and 1960's.

 

That is, of course, absurd. That's like claiming if the enterprise sells a product for one dollar more than the shipping cost it made a profit.

 

The problem is "cost of living". The reason its a problem is that this cost is almost impossible to define accurately. Ideally you should have a working base who have very few expenses. As they progress up the ladder their accustomed cost of living should change, as should their wages.

 

MIT actually created a "Living Wage" calculator that is based upon State/County that can be referred to.

http://livingwage.mit.edu/

It provides a breakdown of necessary expenditures for a minimum liveable wage. Because MIT created the calculator we can assume it's not political biased and that most of the information it provides is somewhat accurate.

With that said I did find problems with it when I reviewed my local state/county because it underestimates some costs and omits some costs in my opinion. For example one category was "medical" expenses where for a single person it estimated the costs at only $110/mo but a single person can't even purchase a reasonable health insurance policy for only $110/mo. (without an Obamacare subsidy). Of course if the employer is providing group health insurance as a "benefit" then perhaps the person only has a $110/mo expense but that can't be assumed in all cases and the total cost must be included as a part of the calculation even if it's not provided for as a wage per se. It also failed to account for "retirement investment" and I'd consider that a fundamental expenditure that a person must make because they can't anticipate being able to work forever. Most financial experts recommend a minimum 10% of wages be invested for retirement and that should be accounted for as a basic and necessary expenditure. Once again this is based upon my opinion of the calculator and what needs to be covered and we all have opinions.

So we can nitpick the MIT calculator but also assume in general that it's fairly accurate for what it addresses and if anything it probably underestimates some necessary expenditures. Check it out and see what you think.

Once agian we're referring to basic expenditure and not working one's way up the economic ladder where they have more income than is absolutely necessary. This is the bottom rung of the ladder and only addresses how much it costs to live and not how much money a person could possibly spend.

 

No your example is absurd because it did not include the production and overhead cost. The first minimum wage was a quarter.

 

Pretty accurate. Slightly low but for a ballpark figure pretty awesome.

Some factors that seem a bit askew are cost of higher education (and carried debt) and healthcare, as you mentioned. A surprising number of college grads are working min wage jobs these days.
The other issue is part time employment, which is much more available than full time these days for min wage workers. So scrapping together a full forty hours at two or more jobs and still seeming like a dedicated employee to all of them is pretty challenging. Not impossible, but when thinking about a whole population its unfair to expect them to all be in the top 10 percent productivity wise (not to mention that those 10% should be quickly moving up and out of this condition).

Part timers are also often assumed to be not as loyal or dedicated and thus deserving of less consideration by their employers. Many times the part time position is made to be as uncomfortable as possible in order to make the full time position seem more like a promotion, despite a lacking a wage raise. Other companies, terrified of having to supply benefits, dole out hours to part timers as if they are preforming a charity, and the worker should feel guilty if they ever exceed the company defined limit.

Its a weird world out there for workers today.

 

The individual also has production and overhead costs just like the enterprise. Both have to pay for "shelter" and "utilities" and both have basic requirements for "goods and services" that they must pay for from revenue before they have any profit left over. The person even has "shipping costs" because they have to "ship their ass from home to work and back agian" daily.

There is vitually no difference between the individual and the enterprise when it comes to basic expenditures required for both.

 

I tend to agree and I really like the source because MIT has an impeccable reputation fundamentally unblimished by political agendas. MIT and Caltech are probably the two most distinguished universities when it comes to scientific studies. If you want to know the facts get MIT or Caltech to investigate because they will come up with the facts. Neither of these universities can be called either liberal or conservative because they focus on science and ignore the politics.

Key is the fact that we can't say "We don't know" because we do have the means to know and even a calculator to use that provides at least a reasonable evaluation even if it is perhaps low on some estimates.

 

A business can deduct its utilities, you cannot. "virtually" no difference is a hell of a lot of difference.

 

You are confusing a person's living expenses with his business expenses.

If I run a business, my profit is equal to revenues minus expenses. But only the expenses associated with operating my business. Of course I, like all people, have other personal expenses that are not business related, such as rent, food, entertainement, etc. These are not included in calculating the profit of my business.

Likewise, if I am in the business of working for an employer, the profit of that business is the same: revenues (wages & benefits) minus expenses associated with my employment. Perhaps these expenses are uniforms, or tools, or dry cleaning, or transportation. And again, I would, like all people, also have other personal expenses not associated with my business, like rent, food, entertainment, etc. These are not included in calculating the profitability of my employment, since they are not associated with it in any way.

Don't conflate our personal expenses with our business expenses.

 

Please state the 'minimum level of compensation' that you believe ensures a 'livable wage'??

 

We're not addressing tax laws but even if we were then the "standard deduction" is supposed to cover necessary expenditures for the household that would include utilities. Those expenditures must be itemized by the enterprise. I have addressed the tax codes in another thread if you want to discuss them as that is not a topic of this thread.

 

An excellent question.

As MIT addressed it varies by local economic conditions and household size/composition. If we were to "ensure a liveable wage" then, in one sense, it requires a broad brush that would provide more than the minimum necessary compensation in some cases to ensure that it adequate compensation in all cases.

But let's take an example using the MIT liveable wage calculator. I'm going to be moving to Yavapai County, Arizona next month so let's use it as a random example.

http://livingwage.mit.edu/counties/04025

As noted the results are somewhat confusing if we try to apply a one-size-fits-all criteria because it provides the following results.

1 Adult = $9.41
1 Adult, 1 Child = $19.66
1 Adult, 2 Children = $25.23
1 Adult, 3 Children = $33.43
2 Adults = $14.11
2 Adults, 1 Child = $17.98
2 Adults, 2 Children = $19.35
2 Adults, 3 Children = $23.80

This would be virtually impossible to sort out because of the differences in family composition. The "liveable wage" varies from a low of $9.41/hr to a high of $33.43/hr so how do we, as the owner of an enterprise, determine what is the necessary liveable wage for our employee?

We need to be pragmatic in establishing the "starting wage" based in principle upon the "liveable wage" but as your question points out this can't really be a "variable starting wage" because we need to create our payscale upon it. We require a single starting point and, personally being somewhat simplistic in addressing compensation, I'd simply take the average between the high and low as the initial "starting wage" for calculation purposes. It this case it would be $21.42/hr for Yavapai County, Arizona. That's for calculation purposes though and not the actual starting wage.

In reviewing the necessary expenditures there are some that are variable but that can also be targeted as a "benefit" as opposed to a "wage" but that provide the same "compensation" to the employee. Foremost among these is the "Medical" expenditure that is highly variable based upon family composition. As the employer I want my employees to receive proper medical services including preventative care because nothing is more costly to the enterprise than the employee not showing up for work because of a preventable illness. I don't want to give them money per se because they could use the money other purposes so instead I'd choose to provide them with group health insurance. Group health insurance is less expensive than individual health insurance and so I actually save money by providing it as opposed to providing enough in wages for the employee to purchase it. Group health insurance does require an employee co-pay on the premium and normally the enterprise subsidizes about 80% of the costs of the premium.

The next most identifiable variable based upon family composition is child care that can vary from $0/mo to $1,475/mo and many employees don't require it at all. Instead of covering this by wages I'd provide it as a benefit subsidized by the enterprise. To ensure that the employee seeks out the most reasonable child care from a cost perspective, and similar to health insurance, I'd probably only provide 80% of the funding as an employee benefit.

With the above considerations that provide the "benefit" as opposed to the "wage" while effectively addressing the two most significant variables due to family compensation I would reduce the "starting wage" slightly to $20/hr for all employees, off-setting some of my costs, and then build my wage scales starting with that baseline.

The payscale and employee development (both my responsibilitities as the owner) will allow every employee to earn more than the starting wage over time so even if they start out below a "liveable wage" they will soon be able to obtain it based upon personal initiative. There should be nothing that prevents any new hire from earning more than the $33.41/hr, the highest identified liveable wage, over a reasonable period of time working for the enterprise. The payscale and employee development needs to ensure that is not just possible but planned for all employees and is incorporated into the business plan.

It is simplistic and not a perfect solution but it is pragmatic in creating a "one-size-fits-all" starting wage based upon the principles of a "liveable wage" for the employees of the enterprise. It ultimately meets and exceeds the needs of the employees and creates a usable cost calculation for the purposes of the business plan were both the enterprise and the employee will profit and mutually benefit from the employment contract.

Once again the employee and the enterprise are treated the same. Just like the enterprise some employees may start out "operating at a loss" but they will eventually operate at a profit based upon the business plan created by the owner/manager of the enterprise. The enterprise may also start out operating at a loss but will eventurally operate at a profit and that is also based upon the business plan created by the owner/manager of the enterprise.

The business plan is the key that ensures the mutually beneficial relationship.

 

Today the median wage is approximately $17/hour or about $35,360 per year. This means approximately 75 million workers earn $17/hour or below and approximately 75 million workers earn $17/hour and above. Two comments about your $20/hour livable wage; First, this immediately forces a raise in wages to about 80-90 million workers. Second, when the dust settles, 80-90 million workers are earning the minimum or starting wage. Additionally, your recommended action requires that the wages for the remaining 60-70 million workers to also increase proportionately. You can never condense the pay scale range as it exists today, therefore, if $7.25/hour increases to $20/hour then those already earning $20/hour must increase to something like $55.23/hour. You cannot take those currently earning $20/hour or $35/hour or $50/hour, etc. and not give them equal pay increases! To not do this will of course cause a labor riot, it will cause lethargy in the workplace, etc. and most importantly make it impossible for business to succeed and/or compete in the global markets...an industry and economic disaster the size of Oprah's ass...not to forget that thing called inflation!

You can't pay child care to 'some' employees and not others who are in the same job and pay scales. A job position is given a total compensation including wages, benefits, bonuses, etc.

I think one of the dumbest and certainly political decisions ever forced on industry was demanding that industry pay for health care! In what possible way does it make sense for a business to expense health care costs against their revenues? Health care costs have absolutely nothing to do with producing the products and services and/or management of the company...nothing. The reason we don't have universal health care in this nation is because politics forced health care onto industry...and this has never worked for a huge percentage of workers.

 

The median hourly wage in the US is only $10.55/hr or slightly less than $22,000/yr and I'm addressing hourly wages and not salary wages.

Yes, a higher starting wage can result in higher wages for other positions but it's not proportionate to an increase from $10.55/hr to $20/hr.

For example we use certified welders and that typically pays up to about $28/hr and we've increased that to $30/hr in our business plan and would raise it more based upon experience and productivity up to $38/hr and the business plan supports those wages. We'll still be able to maintain labor costs at roughly 25% of gross revenue which is within the 20%-30% of gross revenue necessary for a successful business plan. The welder earning $30/hr or more really isn't concerned about the new-hire starting at $20/hr because they're earning substantially more than that amount in wages. There is a caveat to this. Currently we contract out our production welding and we're paying $120/hr for welding so the belief we can't pay $30-$38/hr without raising prices is absurd. In theory we would actually be able to reduce prices when we bring the work in-house although we project additional overhead when we do that.

No, higher wages do not necessarily increase the costs of goods and services provided and it's up to the management to ensure that they don't.

This leads us to the question to following question. Will the "new-hire" will be worth $20/hr to the enterprise? I don't believe anyone would argue with paying someone $20/hr if they're earning more than that per hour. Based upon our business model (as reflected in the business plan) the new-hire will receive the on-the-job training necessary to be generating over $80/hr in production by the end of their first week. As the owners/management of the enterprise it's our responsibility to train the new-hire and to assign the tasks that generate the revenue for their compensation. We've organized our enterprise to ensure that the new-hire will "earn their keep" from the beginning and we assume that they will not know how to do the tasks necessary when we hire them. That's called good management.

I often wonder why social conservatives today are opposed to employer provided health insurance based upon it's history. Predominately because of the ability of unions to negotiate mutually agreeable contracts with employers in 1958, at perhaps the height of union power in the US, roughly 140 million Americans had employment based health insurance. This was not based upon any government mandate but instead was based upon negotiated compensation contracts. The union contracts that included health insurance were so good that many "non-union" enterprises also voluntarily added group health insurance to their employee compensation package.

Employer provided group health insurance can be cited as one of the greatest successes of the rise of the middle class in America and it made sense from a financial standpoint. All we need to do is apply the laws of physics where there is a frictional loss of energy every time there is a tranfer of that energy to understand the financial savings of employer provided health insurance. We need only understand the frictional loss of money whenever it changes hands.

Every transaction (">" in a flowchart) creates a frictional loss of money and the fewer the number of transactions the lower the frictional cost. The insurance is always ultimately paid for by the enterprise either directly by purchase or indirectly as wages that the employee must use to purchase the insurance or the taxation on wages of the employee that originate from the enterprise that the government uses to purchase the insurance.

The least cost effective form of health insurance is government providing it because of the transactions required. In a flowchart it would look like this:
Enterprise>employee>government funded insurance.

The next most expensive is employee purchased health insurance (assuming they even purchase it) and the flowchart would look like this.
Enterprise>employee>private insurance

The most cost effective is enterprise funded insurance because it's a direct connection:
Enterprise>group insurance

In all cases it's the revenue of enterprise that ultimately funds the payments for the health insurance and the least expensive way of providing the insurance is to have the revenue of the enteprise fund the insurance directly. That's why government insurance (a single-payer system) is always the most expensive form of insurance. It's the frictional loss of money due to the transactions necessary to fund the insurance when the government provides the insurance. All you need to do is follow the money to understand this because money really doesn't grow on trees.

Yes, as the single-payer advocates would point out there is also the economics of scale. An individual insurance policy costs more than group insurance that covers more people and the government would insure more people than employer provided group insurance but the frictional costs of government, when compared to private enterprise, are greater than the savings generated by the economics of scale so government provided health insurance costs more than employer provided group health insurance. In fact the frictional costs of government are so high that the economics of scale can't even overcome the costs advantages of an individual insurance policy.

As a final point as addressed by my business plan that provided a liveable wage and health insurance. If every enterprise did this then there wouldn't be Obamacare or Medicaid for working households. We can rightfully complain about the trillion dollar pricetag of Obamacare and my business model eliminates Obamacare completely and cuts Medicaid down to a manageable safety net that predominately relates to just the unemployed. For those that advocate smaller government my proposal creates that by dramatically reducing the need for government welfare assistance across the board. It is assumed that of my employees would require government assistance for basic necessities including health care.

BTW - Why can't an enterprise subsidize childcare for employees that need it? Many companies do and they don't have any problems associated with providing that subsidy to their employees. By way of analogy the enterprise could also provide "vision" insurance that isn't used by someone with 20-20 vision. As long as the benefit is provided equally to all that require it there are no problems at all with benefits that some employees don't require.

 

There are two problem with this line of thought.

First of all it's wrong. Often higher expenses results in higher profits and I will give you one anecdotal case and one hypothetical case.

STP, the oil additive, is really nothing more than 90wt gear oil (with a few minor additives) that is used in the differential of most cars. STP spent 90% of it's revenue on marketing/advertising to sell what was really a very inexpensive product by the barrel to a very expensive additive in a pint can. STP made millions off of what was questionable advertising as it promoted benefits that really weren't all that special. It spent a lot of money to make tens of millions in profits.

The next case is a hypthetical. One of a key points for many enterprises is "Location, location, location" and the best locations are often many times more expensive than even the secondary locations. Highway frontage can easily cost five times more in rent that a similar property just 1/2 block off the highway. These enterprises derive far more income and profit by paying much higher rent on their facilities.

Just because a company spends more money doesn't mean it makes less profit. In many cases spending more money results in much higher profits and that includes paying more that the market rate for labor. It all depends on how the enterpise takes advantage of the higher spending.

Finally, if all enterprise is exclusively about profit then capitalism will fail.

 

A business owner and an employee are both individuals. They both have the need for water, food, shelter, etc.

Of course, a business owner has expenses related to running his business, but these are separate and distinct from expenses related to his own personal needs, which are no different from everyone else's, including employees.

Just like the employee, a business owner can't just "go out of business" as an individual. He still needs water, food, shelter, etc and will die without them.

 

The enterprise can go out of business and there's another difference as well. The owner of the enterprise doesn't create the income for the enterprise. The worker does. As the owner the individual is responsible for the enterprise first and foremost providing for the worker's needs so that the worker can generate the revenue necessary for the owner to "profit" and be able to pay for their personal expenditures. Of course the owner can also be a worker helping to generate revenue and their compensation can also be included as a "cost of labor" for the enterprise but they're no different than the other employees in this regard and they also have the financial obligation to pay the compensation to the worker that the worker doesn't have. If the enterprise isn't generating enough revenue then the owner should be the one receiving the least amount of compensation, if any at all, because they control the business plan and they're responsible for assigning the tasks to the other workers that generate the revenue.

I refuse to dismiss the responsibilities of "good management" by the owners of enterprise. The owner/manager is responsible for ensuring that the labor of the worker(s) produces the necessary revenue to the enterprise to fund adaquate compensation for all of the workers and not the worker that only performs the tasks assigned by the management. I find it hard to understand why so many support incompetent management of the enterprise.

 

Yes, the owner can shut down his business. However, the owner is still an individual just like the worker. Both these people cannot eliminate their need for water, food, clothing, etc. You seem to be saying that an owner, unlike the worker, doesn't have expenses associated with these needs, but this isn't the case. All people have needs that they can't just ignore, lest they die.

I'm not in favor of incompetent management. I'm in favor of people being free to engage in whatever acts they wish as long as they don't trespass against the person or property of others (or make threats to do so). This includes running their business as they see fit and offering whatever price they wish for land, labor, and capital.

 

Oh that pesky math...let's see...Revenue (-) Expenses (=) Profit

So...a decrease in revenue (=) lower profits.
And...an increase in expenses (=) lower profits

The POINT is...you cannot increase expenses and maintain the same profits unless you also increase the revenue. IF companies could at any time simply increase their revenues, as you say can simply be accomplished with a business plan, then why aren't all companies doing this? It is dangerous and reckless to arbitrarily increase expenses, like labor costs, before you know the revenues will also increase.

In italics above, it is impossible to increase expenses and gain more profits without increasing revenues! No matter if STP spends a billion$ on marketing they still must increase their revenue by a billion$+$1 in order to maintain a profit. Yes, increased spending MIGHT reap higher revenue but there is no guarantee of this.

All enterprise has been about profits for hundreds of years and it hasn't failed yet. Please explain how a business can grow and invest and survive while never earning a profit? It is profits which fund the growth and survival of a company...

 

First, I applaud you for taking your hobby, hiring 1 employee and not taking a salary yourself (revenues don't support it)

Also, you've been on a tear about the importance of a business plan and sticking to it.

Well, I'm no neophyte when it comes to being self employed/business owner and I'll offer advice to you.

The best trait is to know when to toss the plan, deviate and sometimes go with your gut. Also, the personal expenses and lifestyle of your employee is not your responsibility because as you so eloquently outlined in the supply chain, no customer or supplier is concerned about the living conditions of your employee, nor should they.

The job you need done by your employee might be one of shop manager, grunt labor, designer, buyer, janitor etc.

In those cases the one or few employees are multi-tasking and are more valuable (to the owner) than when the business grows and people get slotted into a silo.

I hope that good fortune smiles upon you and

1: all your clients pay you and do so on time and in full

2: no supplier ever provides questionable goods thus causing you to have to make repairs, accept returns and or grant refunds.

3: No employee ever loses one or more of your customers

4: no employee ever takes your IP/customer goodwill and goes to a competitor or starts their own biz

5: insurance premiums never ever rise

6: competition comes in thus commoditizing what you do and thus driving down your prices which reduces your margins/on-hand cash

7: the market remains constant or growing for you and the consumer continues to have disposable income to buy your product

You see, #6 and 7 is where your biz plan gets tossed and only experience, wisdom and your gut will get you to overcome that. Your biz plan with sale price, expected margin etc take a punch to the gut and you must immediately look to costs. That is when you decide if the biz should continue, will you do more yourself and cut hours of that employee or maybe cut him/her completely. Of course, investing more of YOUR OWN capital (if you have it) is always an option and you must honestly assess if it's a wise investment or tossing good money to bad. Bear in mind, while you expose yourself more, that employee who you feel is all-deserving, continues to be paid and their life is not disrupted.

The business owner takes ALL OF THE RISK