Two years ago, my personal budget planning tool entitled Nurturing the Nest Egg: A Business Approach to Personal Financial Planning was co-published by Pension Governance Inc. and the Connecticut Society of CPAs. It advised individuals to plan for their retirement as if they were developing a business plan, by establishing a formal written document with sections dedicated to: (1) personal mission and model, (2) volume, (3) costs, (4) revenue, and (5) ROI and value added.
One year later, my professional article entitled Sixty Questions to Address Before Expanding a Business Practice was published by the CPA Journal. It advised public accounting firms to plan each new service initiative by developing a stand-alone business plan for it, with sections dedicated to: (1) the business model, (2) volume, (3) costs, (4) revenues, and (5) investment value.
Do they look similar? That’s right; they use the same model! The jargon may vary slightly from situation to situation, but the concepts are universal in nature. In fact, any business venture — from a blue collar worker’s retirement strategy to a Fortune 500 company’s new global venture — can be planned with reference to these universal management concepts.
Well, if that is true, then we should be able to assess President Obama’s management of our economy using our five universal concepts. That might seem a bit ambitious for a single column, so we’ll take the liberty of dedicating two columns to this task, the first one below and the second one to be published a week from today.
America Inc: Our Business Model
In the first section of any strategic plan, we assess whether our business model can function at various levels of activity. The model must be understandable in simple terms that describe how: (a) human capital is … (b) provided with the tools that are needed to create items of value that … (c) customers will seek to purchase, thereby … (d) providing the resources that finance future growth. At its heart, any model contains these four essential components.
Let’s try to conceptualize the pre-crash American economy in these terms. Glancing back at our growth model, is it any surprise that our economy crashed? We underinvested in our human support systems of public education and health. We also underinvested in tools such as public transportation and energy. Our foreign trading partners demanded less of what we wished to sell, leading to mammoth imbalances of global trade. And our government fell deeply in debt, ensuring that future funds would be less available to invest in economic growth.
It may be unreasonable to have expected the Obama administration to have solved all of these problems within its first 100 days. A fairer test, for report card grading purposes, may be to assess whether they have announced reasonable plans to address these issues.
So … have they?
They have indeed issued concrete proposals to improve our human capital and the tools that we require to produce items of value; furthermore, some of these proposals are already being implemented through the federal government’s stimulus legislation. Specifically, investments have been authorized to upgrade our schools, our health care technologies, our railroads, and our clean energy infrastructure. That is all good news.
The bad news, though, is that their plans about creating global green energy industries and halving government budget deficits have not yet been supported by any concrete plans to eliminate our global trade or government budget deficits. Until initiatives such as carbon cap and trade taxation systems and entitlement program reductions are implemented, it is difficult to assess whether America’s new business model will actually succeed in the global economic market.
Grade: B minus. A good start, but needs a lot more work.
Gross Domestic Product: Our Business Volume
The second section of any business plan assesses whether our entity can maintain production activity levels that meet the demands of customers without burning out in the process. An individual, for instance, may analyze whether he needs to work significant overtime hours to earn his target compensation, and whether he is physically capable of going without sleep to produce more earnings if necessary. And in prosperous times, a firm may consider whether it can ramp up production to meet surges in customer orders while avoiding equipment breakdowns.
The American economy has a simple statistic that summarizes our overall production level: the Gross Domestic Product. Although GDP bottomed out at negative 6.3% in the fourth quarter of 2008, it improved to negative 6.1% in the first quarter of 2009 and is expected by Federal Reserve Chair Ben Bernanke to end its decline later this year.
Although some business leaders are worried that this improvement merely represents a temporary bounce, most believe that our economy has turned a corner. Thus, although life is still exceedingly difficult for many Americans, our negative growth trend certainly seems to be improving.
Grade: B plus. Still not positive, but moving in the right direction.
Next week … Part 2 of our report card!