“You Pay Your Bills With Cash”


Book Review –“How the Mighty Fall” by James Collins

I read a book yesterday.

That might not sound like a very big accomplishment and to be honest it’s not.

I read a lot. My goal is to read about 25 pages a day. That works out to an average of one book every 10-14 days or so. I read just about everything I can get my hands on. They can be books about business, philosophy, history, theology, biographies or even the odd novel, the type of book isn’t really the point.

I read to learn. Part of my personal mission as a writer and teacher is to always be learning.

Yesterday I started a new book and was so captivated by it that I read the whole thing, just over 200 pages, in one sitting.

“How the Mighty Fall” by James Collins is a study in failure. It’s a study in how once great companies go from good to great to gone and how some companies can recognize the onset of decline and reverse the trend while others can’t or don’t do the work necessary to bailout and repair a sinking ship.

Collins became famous for his first book, “Good to Great” which is a study in how companies break through mere success to iconic greatness. His follow up book “Built to Last” studied how these great companies are then able to maintain their status over the long haul but within that second study Collins began to notice that some companies, even after a long time of sustained greatness would collapse into irrelevance or disappear completely, sometimes with alarming speed.

Collins claim, based on extensive research, is that there are five stages to decline.

  1. Hubris Born of Success
  2. Undisciplined Pursuit of More
  3. Denial of Risk and Peril
  4. Grasping for Salvation
  5. Capitulation to Irrelevance or Death

Companies can appear to be healthy industry leaders right up until they transition from Stage 3 to Stage 4 but in hind sight the writing is on the wall long beforehand as they arrogantly go about their business under the mistaken impression that they are and will remain invincible. In my work as a Financial Coach both to individuals and small business I see the same 5 stages over and over again. In my experience the tipping point comes in Stage 3, its’ how you avoid or manage risk that is the key to survival.

Towards the end of the book Collins tells the story of Professor Bill Lazier who teaches small business management at Stanford. He begins his course with a case study in failure and asks the class what the central issue was as the company collapsed. These are MBA students that are used to looking at macroeconomic forces and strategic planning so at first the answers he gets are a grand analysis of big schemes and outside forces.

“No! Think!” is Lazier’s response to these egg-head answers. Eventually a student will somewhat sheepishly venture what seems so simplistic that it couldn’t possibly by right this is an graduate class at one of the most prestigious universities in the world after all. They will say something like “they can’t make payroll next week, they are out of cash.”

At that point Lazier will jump up and write in huge capital letters two-feet high, CASH. “You pay your bills with cash! Never forget, you can be profitable on paper and bankrupt at the same time.”

Cash is king. Everyone knows that, especially when you are first starting out in life or business, but as we become more and more successful we can get drawn in to the North American lifestyle of buy now, pay later, so we forget that. When available cash is replaced by access to credit and the whole system get’s flipped on its head.

The key lesson I took from this book is the simple fact that we must pay our bills with cash.

We may be able to buy on credit, we may even be able to extend credit and pay off one card with a different one but all this is a fool’s errand! Eventually you will have to pay – in cash. Buy now pay later is always replaced with pay now or else.

To a large extent the North American way of life was built on what sociologists and historians have dubbed The Protestant Ethic. Max Webber literally wrote the book on it in 1904, “The Protestant Ethic and the Spirit of Capitalism” originally published in Germany in 1905, put words to a sentiment that had been growing in western democracies for over two centuries. Simply put the Protestant Ethic says that time is money and there is honor in any work that contributes to the common good.  In addition, wealth comes to those who diligently work at their given task and spend less than they make.

But another social-economist, Daniel Bell would later note in the 1970s that the Protestant Ethic was dead due mainly to the invention of credit. Bell published his seminal work on the demise of the Protestant Ethic and the rise of capitalism, “The Cultural Contradictions of Capitalism” in 1976 at time when interest rates and inflation were on the rise, and for the first time since the Second World War people were spending less and going deeper into debt.

The Protestant Ethic is undermined not by modernism but by capitalism itself. The greatest single engine in the destruction of the Protestant Ethic was the invention of the installment plan, or instant credit. – Daniel Bell, The Cultural Contradictions of Capitalism

Now, according to Bell you can achieve the trappings of wealth quickly without completing the work previously required to get there. And that contradicts the basics of capitalism and capital allocation. Buy now pay later is just horrible planning and fundamentally wrong both ethically and mathematically.

And so, we come full circle. As a Financial Coach I see it every day. The Protestant Ethic, if not completely dead as Bell would have it, is indeed on life-support, put there by continued access to easy credit. Paying in cash is viewed as a curiosity at most retail institutions and downright discouraged at others. (Ever try to book a hotel room, or buy a car with cash?) In recent years central banks have continually lowered interest rates in order to encourage people to borrow ever more money so that they continue to spend money and keep this giant wheel called the economy moving.

People who refuse to take part in debt fueled spending are dismissed as “old fashioned” and even looked upon by their peers as a bit delusional, to be pitied as folks who just don’t know how to enjoy life. I know, I’ve been on the receiving end of this kind of derision more than once.

But – At that end of the day, as Professor Lazier likes to so dramatically point out to his students – “You Pay Your Bills in Cash!” Staying on top of cash flow is the first, second and last thing every person interested in building wealth needs to get a handle on. Without it you become locked in a perpetual cycle of working for the things you’ve already consumed and continually mortgaging your future for the things you think you want now. You’re taking on more risk than you can handle and you’re teetering on the edge of Stage 4 decline. Once you start grasping at straws in order to stay afloat, the dominos start falling quickly and it’s a short trip to the bottom.

Contact us for more information on how we can help you return to the Protestant Ethic, work hard, save for the future, and get out of debt before you reach the tipping point to stage 4 decline and it’s too late do anything about it.

 

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s