Five Watchwords

October 2014

1. True enterprise is social

True enterprise occurs whenever someone uses his skills, talents and resources to serve or meet the needs of others. One needs, therefore, to be very clear, and careful when using the qualifier ‘social’, lest that means enterprises not so described are ‘unsocial’. In fact, unsocial ought to be the real qualifier, so that we focus on what makes a business or economic activity something other than a vehicle for serving other people’s need.

2. Third sector

The idea of a ‘third sector’ makes little sense unless used alongside ‘first sector’ and ‘second sector’, business and government, and, therefore, the particular analysis that gave rise to these uncertain terms. Secondly, the third sector is essentially the result of a specific taxation regime, whereby funds made ‘unsocially’ in the business world are transferred by taxation to charities and the like in order to finance the parts of the economy that the business sector does not reach, or reaches but then plunders or abuses. Better, surely, to invoice a company for the pollution it puts into a town’s river, than for the town to accept that cost, then recover it by taxing its citizens?

3. The taxation divide 

The taxation divide creates a mythical or unreal division. On the one side, companies are supposed to ‘make’ money, on the other side charities give it away. On the one side, this neatly excuses business people from giving thought to how they make money; on the other, it leads to and reinforces a culture of financial indifference, if not indiscipline. The real difference between the first and third sector is that the first sector makes profits for distribution to its shareholders (though only after they have taken care of the company’s investment, cash flow, and liquidity needs), whereas a charity makes profits on the basis that it will only use its profits to further its objects. From a pure accounting point of view, this is all nonsense since accounting is constant and common to all enterprise. What the taxation divide does is to allow the government to escape scrutiny, because it does not create value in its own right but redistributes the values created by entrepreneurs.

4. Confusion between debt and own capital

Many a ‘social enterprise’ funds its risk with debt, an immediate and absolute mismatch, in terms of type, term, expectation and effect on the entrepreneur. To be an entrepreneur is to take risk, not just to borrow money; and to cover that risk, not just to hope things work out. Awareness of risk and risk levels and, therefore, of the difference between debt and own capital (equity) needs to be there from concept to practice, and clear in the mind of the entrepreneurs especially, so that they do not take on board the wrong kind of capital, debt when they need own capital, own capital instead of debt. If entrepreneurs do not know this difference, it cannot be rectified from outside. No amount of regulation of balance sheets, neither at the macro nor at the micro level, can hop over the fact that entrepreneurs are the link between assets and liabilities and that much depends on whether they are awake. Risk arises from seeing something before anyone else does, having an idea before the world can see it in product or service form. This is the essence of being an entrepreneur; one is not just an agent of capital growth. Again, the fundamental problem is the absence of risk-appropriate capital, something that is often also true of the ordinary business world, at least in small ‘unprofessional’ businesses.

5. Cashflow, the entrepreneur and liquidity

The environment of a business, or an initiative, or an undertaking – call it what you will – is never static; it is also never definitive. It is a context or horizon of circumstances. Stand in that context or look at oneself from the horizon, and one will see that the circumstance to end all circumstances is the entrepreneur as such. Forget this for a moment, and that will be the moment the rogue wave hits. For this the only antidote, indeed, the only way to understand business, is that one’s balance sheet is the expression of one’s entrepreneurial ability and that one runs the world from here outwards. Above all by positive cash flow. Lose positive cash flow, and the world invades, bringing with it its own criteria – quite rightly so. 

Using humanity’s liquidity to finance one’s initiative is not a one-way street; it is a profound social contract. From ancient times down to today’s distinction between debt and equity, such things have been known and very carefully managed. One can buy a set of computerised accounts, but this does not give one the right or ability to use humanity’s liquidity. There is much else that has to be taken into account, but none of it is not already covered by a standard set of ‘pure’ accounts – that it so say, accounts before they are distorted for net worth calculations or tax avoidance purposes (which are the main uses of accountancy today).

For a balance sheet to be the means for interfacing successfully with the rest of the world, entrepreneurs need to be financially literate. They may well use division of labour to have someone keep their books, but they should never become dependent on that person, or not know at a moment’s notice where they are in their journey across the economic ocean.

Bookkeepers and accountants can only supply or reflect back data; they cannot interpret that data, they do not know what it means. For they are not the one’s reflected in it or responding to it; they are not the one’s who will have the intuition or insight or hunch that trumps what life throws at one. They can only watch behind their shield of ‘information supplied by the client’.