The deficit in thinking caused by a deficit in cash

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Sports Illustrated had a story this week about track and field in the United States that caught my attention; actually it was a story about the absence, not the existence of track and field here.  The article was about IAAF World Championships, an Olympic level track and field event staged every four years in between the Olympics, and like the Olympics, it is as much a competition between the nations of the world as it is between individual athletes.  The championship begin in 1983 and has been held thirteen times; it was held nine times in Europe, four in Asia and once in Canada.   This last summer the IAAF World Championship was held in Daegu, South Korea; next time it will be held in Moscow and then in Beijing. The United States is the leader in medal count, but has never hosted the event.  Bob Hersh, a senior American track and field official, who is also a member of IAAF committee was interview on the subject recently; Hersh was asked when he thought the United States would host a championship and he said not any time soon.

“We just don’t have the wherewithal, starting with the fact that there is no stadium that exists that could accommodate it,” Bob Hersh said in an interview with The Associated Press. “It’s obviously something I would love to do and USA Track and field would love to do,” Hersh said. “The IAAF would love to have us host one. The operating costs of a world championships are huge. If you also have the huge capital costs of constructing a stadium that does not exist, or reconfiguring one, that’s a lot of money. There are discussions. It’s not something that’s buried and forgotten,” he said. “It’s an issue we’d very much like to address, but the challenges are so great. We can’t say we’ve got a plan or we’re going to do this or that in ‘X’ number of years.” Sports Illustrated, 10-4-11

Let me begin by saying that I know track and field are not important in the grand scale of things, nor is hosting an international sports championship any measure of anything significant in these time of really important issues that must be faced.   However, I do think this issue is important and yes even significant in terms of our current economy and the deadlock in Congress.  I think it is an example of what happens when you get too far in debt – not only  do you lack the economic resources to to make long term plans and investments, but you lack the emotional and intellectual resources to think clearly.
A few years ago I was involved in a business discussion about cash reserves and its impact on decision making.  The jest of the discussion was simple – without an adequate amount of capital in reserve management could not make good decisions.  In our discussions we choose some specific amounts of cash that could be used as guidelines for that particular business – a very small casino; $250,000, $500,000, $750,000 and a million dollars.  Each level we thought could be used to predict our abilities to make sound decisions based on the facts of the case and not on our anxiety over money. The lowest level, 250k was the bottom, with that amount of money, or less in cash reserves, management was incapable of judging any case on its merits.  At that level all decisions were founded in anxiety and not good long-term reasoning.  The cases could be divided into two categories: operational or tactical expenses and capital or strategic expenses.
The next level up, 500k was the point where management could begin to think in terms of the merits of the case and not be totally consumed with immediate cash-flow. It was a better cash position for certain, but still a relatively weak decision making position; the next two levels up improve the decision making dramatically, with 750k or more in reserve the manager could think clearly about the issue at hand.  For example, at the 250k level if one had a chance to invest $50,000 in a project, product or service (3 new slot machines for example) that would increase the monthly cash flow, but not for another 6 or 12 months – the investment would not be made; and 6 or 12 months later when it would have started to produce a return there would be no improvement in cash flow and no prospect of an increase.
Dumb? Of course, but that is the nature of the beast; the investments in the future that logic would indicate are essential to growth and improvement are simply not possible – not possible financially, but more significantly not possible emotionally.  Take the same case at the 750k level, the investment would be made, in fact the manager would probably looking for a way to make a larger investment and therefore receive a larger return.  And in 6 or 12 months, the manager would be using the increased cash flow to further invest.  This is simple a capital investment model, but a tactical or operation model could also be used – one that would involve hours of operation, employees scheduling or other service related issues.
Now back to the real world and 2011 –  the Congress of the United States is operating at below that 250k level – no one can think clearly about the issues – only about the debt.  They cannot think clearly about defense, infrastructure, social security, education, science or anything else – they are spending all of their time thinking about that 250k.  They will not make any investments in the future – and at a national level it sometimes takes decades to get a return on a investment, not the 6 months in my simple little model – at best they will cut expenses.  But in the process of cutting expenses and eliminating the unnecessary and undesirable programs and services, they will do what accountants do when they do not understand the business they are overseeing  – cut out things that produce more revenue than they cost, especially those which do not produce immediate returns on investment.
It is a vicious downward spiral and one that I have personally and painfully lived through.  I watched a former employer and client cut expenses until it was bankrupted; along the way, I watched them pass on any and every investment that would have saved them.  They were not stupid, it is just the nature of the beast.  A deficit in cash produces a deficit in thinking.  So those world championships of track and field will continue to be held some other place and we will continue to struggle with our debt.

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