by Rosemary Redfern

Created on: March 04, 2009

Common sense says that if a business is to survive it has to control it's costs. It's also a basic business rule. As Mr. Micawber said, in David Copperfield by Charles Dickens, with an income of twenty shillings, nineteen shillings and sixpence expenditure, happiness, twenty shillings and sixpence expenditure, misery.

The current financial muddle has been caused by the financial world losing sight of where their income comes from. For example, there is a row in England at the moment about a boss of the Royal Bank of Scotland who has been given a retirement package of sixteen million pounds. This is at a time when the government has had to make available two hundred million pounds plus to keep the bank afloat. Bank customers have for years been complaining about the charges banks make for their services. Another basic of business is give customers what they want and they will pay for it. The complaints suggest customers have not been getting what they need or want.

Many people are under the impression that banks hold their money for them until they need it. This is inaccurate. Once you have turned over your money to the bank they own it and do what they will with it. Hence they can afford to gamble with it.

Capitalism itself is not a bad concept. We all want the best available for our income and the best income we can manage. We want to own our own home, have it nicely furnished, be able to buy good clothes, go on holiday and eat out. That is normal and not wrong. This is why individuals start businesses. The problem is the way the financial world is administered.

The capitalist world will always push for growth. What happens is, salaries rise because of demands to cover rising expenses, therefore the cost of living rises because people have more money and will pay more for what they want. Their perceived needs increase and the price of houses rises in a continuous spiral. This gives a perception of greater individual wealth.

This is not actually growth. It's just the amount of money everything costs is greater than it was.

The second strand to this problem is the current idea of spending your way out of debt and borrowing for everything. If an individual owes more than they can pay back, they are deemed to be bankrupt. If a large corporation owes more than they can pay back, they get the government to bail them out. Somewhere in this is a moral. It's something to do with the scale of the borrowing. Try for a thousand and you are laughed at. Try for twenty million and it's Yes sir, when would you like it?'

Businesses often need to borrow to finance expansion, provide jobs and develop their products. What has to be considered is how this money is to be repaid because there is usually a time lag between launching a product and making it a success. The bosses who take these calculated risks usually manage to get good deals on their personal finances. The Royal Bank of Scotland had a boss who developed Direct line insurance. It was an huge success and he made a lot of money because he was rewarded in line with his success. It's like film stars who take a lower salary but have royalties on their films. A good film pays them well.

CEO's need to be paid in accordance with their performance. In other words, in line with the amount the business is making and can afford. It's elementary.

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