RABCPA PC Blog
The one question that is often asked of me is what makes a firm successful, why do some firms flourish, and others go out of business. Obviously, that is a very difficult question to answer. There are many reasons why some firms fail, and some succeed, some has to do with luck, but many has to do with strategies and the abilities of the entrepreneur that runs the company. But I want to start off at a more basic question, before we delve into why some firms survive and others don’t, that is why firms exist in the first place. And to understand that we have to go back to Adam Smith and his book The Wealth of Nations that was written in 1776. Most people don’t realize that Adam Smith was not only an economist but also a moral philosopher. In fact, one of his most famous books was The Theory of Moral Sentiments.
The Wealth of Nations created the field of economics and provided the four basic cornerstones.
They are:
The beneficial power of self-interest
The division of labor, or specialization
The importance of freedom
The ability of markets to self-organize, to have spontaneous order
To understand this just have to look at the manufacturing involved in making a pin, Adam Smith pointed out that in order to make a pin it takes 18 distinctive operations. One person who is not properly trained could make maybe 20 pins a day. But if the various operations were divided among 10 highly trained employees, they could make 4,800 per man. This is the power of self-interest, specialization, freedom and self-organizing markets.
That still does not answer the question of why there are firms. For example, in a market couldn’t each of the 10 men by their services. Why would you form a firm to employ all 10? This is something that was addressed by Coase in his 1934 article that appeared in the Economics Journal. Coase basically stated that firms exist because they can reduce cost. The firm’s created internal hierarchies that allows the firm to operate at lower cost than the market. For example, in the market you have to negotiate with each person separately. If they were employed by the same employer, the need for negotiation would be mitigated reducing time and money spent on contracts whether they were formal or informal contracts.
Adam Smith discussed and implied that markets have many similar traits as those in biological evolution. Nelson and Winters put forth the assertion that just like evolution selects those traits most appropriate to the environment, the market selects business traits that can thrive and grow. Companies that have appropriate competencies, learning ability and routines that are in line with current market conditions will produce excess profits. Companies that produce these profits will grow and thrive in those that do not, will end up in bankruptcy.
The big question is, what actually makes some company successful? Stephen Klepper an economist did an extensive study and published a paper in 2002 that addressed this issue. This study analyzed successful companies in the automobile, television and pharmaceutical industries. The conclusion shows that companies that entered the market early were able to grow rapidly. This growth produced excess cash flow and if it was reinvested into the company through R&D those companies survived. The research and development activities enabled the company to develop efficient methods and lower cost which made it better able to compete and drive rivals out of business. Some examples used were General Motors that was started in the 1930s yet still survives pharmaceutical companies like Pfizer and Bristol which of survive since the early 50s. It needs to be pointed out that R&D includes not only research and development in the traditional sense, but also methods that can be applied to a business-like Google. Research and development enable them to build better algorithms, understand their customers better and improve some products like U-Tube.
Alchian, another famous economist pointed out that imitation being a primary source of innovation, without the necessary money a time required by extensive R&D.
In conclusion companies that apply Adam Smith’s lessons and focus on their self-interest and specialize in high value core competencies will produce excess profits. Firms that are more efficient than the markets and have lower cost will be able to reinvest in research and development (use imitation when helpful) to improve their products and reduce cost. By having products that are needed and wanted by consumers and delivering them efficiently and at lower cost this will drive out and keep competition limited. The cycle will perpetuate itself and the company will grow until it exceeds a specific scale where the law of diminishing returns will stop its growth. Posted November 15, 2019 by Robert A Bonavito in Business Valuations
Case Information statement (CIS), New Jersey is an equitable division state
Sometimes when we’re working on a divorce engagement, we seem to forget that this is only one part of a complex divorce. Of course, the finances for child support, alimony, business valuations and investment are an extremely large and complex area of divorce. But there’s more important things that attorneys are dealing with. For example, child custody, physical abuse in the household, lots of psychological issues. A lot of times psychologist are brought in and/or job specialist to evaluate the partner’s employability and also their psychological issues. All this stuff is really emotionally draining and cause a lot of problems. And we are usually not involved in any of that aspect of the divorce.
The importance of the CIS statement cannot be overstated. Many times, when I’m in divorce engagements these documents are updated biweekly. This is the one of the things you really need to understand. Let’s go through a case information statement. Typically, attorney once a client comes in for consultation, they will be given a CIS statement and asked them to fill it out as best as possible.
Utilize quicken and quick books to compile information
We look at the CIS as financial stmt for the family, Balance sheet, Income Statement and Cashflow statement, they all need to balance
Posted November 7, 2019 by Robert A Bonavito in Matrimonial & Divorce
One of the things about dealing with matrimonial engagements is it’s important to understand the number of marriages, number divorce and number of divorce attorneys. If we look at the number of marriages based on the most recently available statistics, 48,000 marriages about half of those end up in divorce 23,000; but the number of attorneys is 41,000. So obviously there are plenty of attorneys to help with divorces. But the way it is calculated is its per 1000 people. Basically, for every thousand people in New Jersey about 4.8 get married in any given year and about 2.3 get divorced per thousand. And actually, the rate of divorce New Jersey’s lower than most other states and declining. But just remember sometimes the divorce engagement can last for one hour sometimes a divorce engagement can last for decades. It all depends on the complexity of the issues
Why are divorces declining in NJ?
Lowest marriage and divorce rate, horrendous cost of divorce, financially and emotionally
1/4 the size of Canada, bigger than half the countries in Europe,
NJ population is still growing close to 9 million
New Jersey Tax Guide on Divorce which is helpful because sometimes the laws change in New Jersey as far as how alimony, sale of house, responsibility for interest income and other investment income Name changes etc. is handled. New Jersey does not recognize innocent spouse or injured spouse relief
The Internal Revenue Publication 504, which is excellent, and you should take a look and understand that as far as the tax credits, this addresses same-sex marriage filing jointly and separately head of household’s requirements custodial parents’ noncustodial parents.
One thing that’s one thing that attorneys understand is how custodial parent works. By filling out this form it can allow one of the parties to qualify for the $2,000 tax credit per child. This form however does not need to head of household or earned income credit etc. But this could be very helpful to your attorney if this is filed properly.
Alimony requirements, you have to meet the requirements in order to be deductible for pre-2018 divorce agreements.
QDRO, qualified domestic relations order
you want to get a good understanding in the layman’s terms of how a divorce works the Legal Services Of New Jersey has an excellent guide, this guide takes you through every aspect of divorce the filing complaint, legal procedures, case management conference etc. financial aspects of the divorce etc. and also utilize New Jersey courts.gov website
overview of the divorce process
types of custody for children
written for the lay person
form 8332, Revocation of Release of claim custodial parent
Some rules
Non-custodial parent is not entitled to head of house, earned income credit, based on regs
if custodial parent violates the agreement noncustodial parent must go to the court for remedy not the IRS
$2,000 tax credit
Easily revoked
Posted October 25, 2019 by Robert A Bonavito in Matrimonial & Divorce
