More Like a Business

The entrepreneur-builder EB in my April 2 post manages construction of a house and sells it in 8 weeks. I now suppose he borrows more money – $70,000 rather than $30,000 -- so he can pay each worker when his work is complete, and this will cost EB another $1,000 of interest.  I also make it more realistic by supposing he repeats the process. He starts a new project every 4th week, each with the same weekly cash flows.  In only the 5th week his cash flows will start a 4-week repeating cycle. 

The cash flow for one project is obscured in EB’s combined weekly results. Still, a pattern is there and EB nets a profit of $23,000 each 4-week period after the initial 4 weeks.   This agrees with intuition since one house is finished every 4th week after the initial 4 weeks.  A skeptical reader can check my numbers fairly easily in a spreadsheet. 

Looking at the combined results and ignoring their root, one might be fooled into believing that EB exploits the workers. He nets $23,000 each 4-week period like clockwork, apparently without difficulties. Also, his banker collects $2,000 of interest every 4th week starting the 8th week.

Now suppose EB decides to save part of that $23,000 netted every 4 weeks, say, $10,000. After 32 (= 8 + 6 x 4) weeks EB has saved $70,000, so he no longer needs to borrow from the bank. He can commence making $25,000 each 4-week period, not having to pay $2,000 of interest. He becomes self-financing.

This is a rather complicated story but still simpler than real life. Regardless, it essentially describes how many successful businesses operate.  The business uses its own retained earnings to finance growth and future operations.  

Let’s now assume EB can’t work the entire year due to weather, and he wants a little vacation. Suppose he can manage building 10 houses per year rather than 13.  10 x $25,000 = $250,000, which sounds like a nice income. But hold on. With 2 projects going at once – he is done with the 1st when he starts his 3rd – and probably some advance and afterwards work for others, he could probably use an office manager.  That person could order supplies, help schedule workers, pay expenses, handle sales transactions, do bookkeeping, and so forth. Deduct $40,000.

There is also the taxman, who wants about $55,000 for income taxes, Social Security and Medicare. I can imagine Obama saying to EB, “You didn’t build that!”