Macroscope | Low interest rates are simply papering over the cracks
Firms that can’t make enough to pay their staff, cover their expenses, and add a bit of profit for a rainy day, shouldn’t be in business.
It is entirely appropriate, even though now the Olympics have finished, to talk about hurdles. As one not entirely of lofty stature, I always found it faintly ridiculous to have to jump over a hurdle when I could easily run around it.
It may be a hindrance to running but in business, hurdles are important. It is a good lesson for business that the Olympic team that performed well above expectations was Great Britain (and Northern Ireland, also Jersey, Guernsey, Isle of Man and other British Dependent Territories, for short).
This happened because they are brutal in their funding of sports. It is entirely performance driven – if you are unlikely to get a medal, you don’t get funded, even if you are a former winner. There is no room for sentiment in sporting success. Being good is not good enough, you have to succeed.
In business, too, no one is there to give you a break, for every company must scale hurdles to be profitable. If you can’t make enough money to pay your staff, your expenses, not forgetting yourself, and add a bit of profit for a rainy day, you shouldn’t be in business.
The rate of return for a successful business will differ between sectors but let us say it is around 10-15 per cent. If you don’t make that you should lock the doors.
A typical rule of thumb is that your return must exceed your cost of capital – so if you put capital into the business, you need to make more than this figure.