I don’t care as much about political ideology as I care about the financial health of our businesses, our local governments, and our federal government.

Every rational person will agree that taxes are a necessary evil.  We need them to keep our governments working.

But it’s wrong when taxes hurt an industry or a region because they tax businesses or individuals in an unfair or egregious manner.  Not only is it wrong, but it hurts the industry (which hurts consumers and employees) and it hurts the economics of the region impacted.

The words fair and unfair are loaded with the meaning that politicians try to assign them.  Again, I’m not speaking to political ideology, but to basic fiscal principles that make taxes either work or not work in the long-run.

I think that it’s possible to make tax policies that are neutral to households, promote commerce and trade, and yet still provide for the common welfare.

There are a lot of examples, so while it may seem that I’m picking on Tennesee, I’m not.  I just heard about this story yesterday and it makes a good, focused example of a bad tax.

Why the Hotel Tax on Free Breakfasts is Bad

Every state is looking for ways to plug its budget gaps.  The State of Tennessee is making a move that will require hotels to collect and remit sales tax on the free breakfasts they serve guests each morning.  The officials sponsoring the bill estimate new revenue of about $1 million to $2 million per year.

This is a bad tax for three reasons:

1. Consumers ultimately pay for the tax.  I laughed out loud when I read this line in the article: “State officials stress that the businesses would be taxed and not the hungry patrons.”  Every business has to cover its costs, including the property, sales, and income taxes that it pays.  It recovers those costs by charging a price, and when the costs go up, generally the prices go up.  It’s a falsehood that the hotels will pay the taxes.  Consumers will always pay the taxes in the long-run.
2. This tax consists of double-taxation, which violates the basic principles of a good tax (if such a thing exists).  Each hotel employs someone who buys breakfast food for guests a few times a week.  When that apple, bagel, loaf of bread, or bag of cereal is purchased, the hotel already pays sales tax to the supplier.  Tennessee is now asking the hotels to collect sales tax a second time on the same food.
3. Should this bill pass it will hurt small business.  (Is that worse than hurting big business?) Most hotels are operated by franchisees who license the hotel chain’s identity from the corporate office.  These aren’t big national chains that will pay the taxes.  They are small business owners all over the state of Tennessee.  Assume a given hotel decides to not raise its prices to cover the additional tax bill.  That is less cash flow the hotel owner will have to give an employee a raise, or hire a new employee, or hire a contractor to make repairs.

The state’s hospitality industry is fighting the tax.  They should.  It’s a bad policy and a bad precedent.

And, unfortunately, it’s just one example of a bigger trend on both the national and local levels of governments pursuing more revenue without considering the long-term consequences of their actions.

[Disclosure: No affiliate links | Image credit: AnnaleeBlysse on flikr.com]

I noticed this article today in my weekly newsletter from CFO Magazine and saw three great examples of companies working to improve their cash flow with some impressive results:

1. A company switched industries to speed up cash flow:  Brush Engineered Metals is in the process of moving its core business from mining of industrial metals, with its nine-month cash flow cycle to more advanced materials for high tech applications with a 10-day cash flow cycle.  A nine-month cash flow cycle ties up cash in many forms – mining equipment, leased land, and inventories in the forms of raw ore, processed ore, and finished shipments.  This move to a new industry segment helped drive a 375% improvement in cash flow efficiency!
2. A company added a business line to improve its margins:  Eaton Corporation added sophisticated engine parts production to its existing low-tech auto parts supplier business.  The company’s chief financial officer gives the reason: “… the margins are higher and that translates into more cash.”
3. The same company boosted efficiency out of its existing supply chain:  Eaton also scrutinized its existing inventory and the inventory of its acquisitions to find additional cash flow improvement opportunities.  Supply chain improvements contributed half of Eaton’s $1.6 billion operating cash flow last year.

These are strategies that any company can implement.  However, as the CFO of Brush Engineered Metals says: “These improvements are ‘anything but accidental… It’s something we actually sought to achieve, and expect of ourselves.’”

Companies large and small continue to struggle with cash flow and credit markets remain very tight, especially for small business.  Finding ways to boost internal cash flow is critical.

These three specific strategies have longer cycle times to realize the results, but the upside is that the resulting boost to cash is fairly permanent.

Other cash flow management options, paying vendors more slowly for example, can be executed quickly.  However, at some point many vendors will push back and the cash flow boost may not become a permanent correction.

What’s your experience with managing your company’s cash flow?

[Disclosure: No affiliate links | Image credit: eyesplash Mikul on flikr.com]