Show me your financials!
Show me your P/L and Balance sheet!
These are the standard questions I have been asking for the past 20 years as a consultant to small businesses, non-profit organizations and individual entrepreneurs. These are the questions a responsible bank or lender will ask of a prospective borrower.
The answer to these questions, however, are more often than I want admit -- is DUH!
We are experiencing a generational tipping point. A tipping point created in part by the failure of American educational philosophy. That is what I want to talk about here.
The average American has NO IDEA, NO Experience, and NO Understanding of the principles of personal finance.
One of the fasting growing business services today is credit counseling. In my 20 plus years as consultant to small business the two most common requests for technical assistance have been financial/accounting and marketing assistance. This mirrors the experience of the Small Business Administration.
These are the areas where most small business fails.
Why is this?
While our economy has been shifting from a mass production and wealth creating economy to a service and mass consuming economy our educational system is still based on the industrial production model.
In an industrial society we need workers, workers who can carry out a set of specific tasks, consistently and continuously. The worker must be trained not only in the skill set required for the task, but for the psychological perspective to accept regimentation. American education has been structured to produce this type of worker. This psychological dimension is building a “positive work ethic,” or “An honest day’s pay for an honest day’s labor.”
Yet today American industry has become global. The type of worker we train here is also available cheaper in the developing world. Or the task itself can be done with technology with fewer workers producing more, more efficiently.
In a service oriented consumer economy very different skill sets are required. These are: Human relations skill, critical thinking and language skills, and artistic and analytical skills. Yet these are the very areas where the educational system is fail and even contracting. Where it is succeeding is producing an oversupply of under-trained consumers.
This is Reagan’s supply side economics at its best and worst. Increase the supply of goods and services and prices will drop and efficiency will result. But as we see today, the world is producing more goods and services than we can consume. We have an oversupply of consumers but the quality of these consumers is deteriorating. That is, their consumption potential is weakened by the quality of their training as consumers.
A consumer can only perform the tasks of a consumer if he or she has the resources seller/producer demands for their product. Those resources are earning from their own product labor (wages and salary), their savings (what they have set aside or has been set aside for them by early generations), and their credit (their ability to borrow against future earning to meet current consumption goals).
All business is based on a relationship between a willing buyer and willing seller. All good business is based on transactions between two informed and rationale parties.
While sellers are trained to sell, they are not necessarily trained to make an intelligent sale. Buyers (general public) are trained to consume, but they are not trained to be informed buyers.
In a consumer society, the educational system should be focusing on training students to become intelligent and informed consumers. It should be training students with the skills and the psychological orientation to be effective and efficient consumers.
So how do we do that?
I am proposing that we reorient the educational system to reflect the need of society for an educated and informed consumer. This can be done by focusing on training build around the personal finance model. Consumers need to be trained in the business skills to effectively perform their economic role in this society. They need to be prepared psychologically to have a “positive consumption ethic.” or “An honest day’s consumption for an honest day’s allowance.”
How do you determine on a personal level what an honest day’s consumption is? What an honest day’s allowance is?
An honest day’s allowance can be determined by dividing your monthly average expenses divided by 720. The average monthly expense is the total of all your basic expenses (food, shelter, transportation, utilities, etc.). 720 is the total number of hours in a 30 day month (24hr X 30days). This tells you what your rate of consumption should be on average. Example: Expenses = $1500 / 720 = $2.0833/hr
Next, an honest day’s consumption is calculated by totaling your average expenses and dividing it by number of compensated hours worked during the month. This tells you how much this tells you how much you have to earn per compensated hour to cover both compensated and uncompensated hours. Example: Expenses = $1,500 / 160 hours (40 hr/wk x 4 weeks) = $9.375/hr
This means that in order to consume fairly and honestly you must net $9.375/hr. If she consumes more than this then she must take form her savings or borrow from the future. If he consumes less than this he is building up savings.
As a consumer, this is his/her value to the economy.
An educational system that focuses on preparing students to balance their roles as both consumer and producer will, I contend, produce a more equitable distribute of wealth for the society as a whole and a better quality of life for the individual.