Teh Chad

As my particular writing style is more founded in brevity, I decided to put both of these in one post.

The current ratio is a simplification of a business’s ability to take care of the liabilities that will come due in the near future.  Most companies see the term “current” as relating to the next year.  The current ratio is the amount of current liquid (again, in the next year) assets divided by the current liabilities.

The current ratio varies, of course, from company to company.  Today, April 28th 2010, here are a couple of companies and their current ratios from internet sources: IBM 1.4:1, Microsoft 2:1, Red Hat 1.8:1.  It appears, from this ratio alone, that these companies will not have too many problems paying their bills in the coming months.  A company with a current ratio of less than one, say 0.3:1, might consider raising some capital by doing things like selling some stock or maybe some of their longer-term assets.  They might also consider looking at options to get rid of some of their current liabilities.

The profit margin is something that most people understand and speak of frequently.  Calculating the profit margin is also relatively simple.  Profit is equal to net income divided by sales.  This is really a simple picture of how a company can keep costs down.

Everyone has heard the phrase “pass the buck.” This is where it comes from.

To articulate, marginal costs and profits relate to a change in how a business takes money in. If it incurrs a new cost or profit, it is called marginal. This is simply an extra or new profit or loss.

Passing the buck is passing it along to clients.

Think of each given business as a spaghetti strainer. It will catch things and let other things pass through. There are many examples, but I’ll go with a simple one: a wood shop.

A wood shop employoee, and usually the shop’s owner, works hard for the money. When they are rewarded with solid profits, they pay themselves. They are due a good wage for their good work.

Passing the buck typically applies to marginal costs. When a company has to pay a new fee, it is very often passed on to the customers. The forms of this marginal cost can take many different shapes.

Say the business must pay for a new insurance to cover accidents with some sort of furniture that is produced. This cuts the profit margin of the given piece of furniture. To attain the same profit on each piece, the price must be increased. The buck has just been passed.

This is how the rich don’t necessarily get richer, but the poor always end up getting poorer.

Interest is simply what money makes for its owner. Labor earns wages, property earns rent, and money earns interest.

When we think of interest, we often think of mortgages and the FED. Really, interest is everywhere money is. Money is an asset and assets work hard for their owners. Money works harder than any other asset I know of. Money is unrelenting in earning interest.

Do you have a credit card? Do you have a mortgage? Conversely, have you issued a loan? Have you bought ownership in a company?

Nearly everyone in the western world can say yes to the first two questions. Those same people are confused about what the second two questions entail.

They are different sides of the interest rates. Having a balance on a credit card means that you are paying for the privilege of carrying that piece of plastic around. That’s really it. You’re still spending your money, but on top of using your own money, you are incurring an expense for that convenience.

Mortgages are essentially the same. The principal is still the same money. But interest is earned by that principal. The interest is earned over a much larger time frame and it is normally a much larger cost relative to the principal.
This side of the interest keeps us paying. It takes money out of our pockets.

So I have another question for you: What side of interest are you on? Would you like to stay on the side of paying the interest or would you rather be the one that others pay you for those expensive conveniences?

Nobody who is wealthy under their own doing will tell you that it is easy. Lots of work and discipline is involved.

The second side of interest is much different. We start making things work for us. The loans we have to other people pay us. They put money in our pockets that is on top of the original principal. They give us money for those conveniences.

To answer my original question, we stay behind the interest rates because we are consumers and don’t mind paying for conveniences. These derivatives of simple savings accounts have associated costs. These costs have been downplayed to the point where we don’t pay attention anymore. I contend that we need to pay much more attention.

Not only have we become lazy, but we despise work. There’s a word that has been thrown around a lot recently, but I feel it is appropriate here: change. We need to change our focus. We need to work hard to understand costs and how finance works.

A couple of posts you might like:
> Good debt vs bad debt
> Debt explained