Bail Outs

It seems that everyone is catching a fever on these bailouts. As, I recall the US government came up with a stimulus package to shore up American companies, mostly banks. The reason was to make credit easily available, so that companies could have access to financing and, therefore, produce.

You see, if government injects money into an economy, production goes up and jobs are created. The increase in employment tends to lead to an increase in aggregate demand, which in turn leads to further increases in production, consumption and more jobs. As more and more people are employed, there is more money available to households, which can, potentially, be used for more consumption. This is called the multiplier effect; and it gets repeated over and over. In the US, there are signs that it is beginning to work.

I am yet to be educated on whether we had a credit crunch here in Botswana. I know a lot of our financial institutions are multinational, and their parent companies would have been afffected. But, seriously, have our local banks stopped lending? The fact is that most of our locally produced goods e.g. beef, garmets, diamonds, copper, nickel are consummed outside. Would our government's bail out encourage consumption of our products in the US, Europe etc. Note that most of these countries do not accept government subdidised imports. The problem is that as economic conditions deteriorated in the West, families began to save and became more concerned with value for money. The market, therefore, shrunk. So, at this juncture its hard to keep supplyng the same quantities at the same price. Cut down on costs. Cutting down on costs, doesn't mean you should retrench. Labour costs are mostly direct, except for senior management(which represent overheads). If you cut down on production employees, then you forfeit the opportunity to earn revenue.

So, what is the solution. No currency devaluation; rather companies should look at target costing. It's mostly about studying the market, and determining what share of that market you want to capture given the market price or the price you are comfortable with. Determine your desired profit margin, and lo you have the target cost. Invest in reengineering your processes to get the target cost of production if it differs, significantly, from the actual cost.

I have noted that in most occassions, companies in Botswana invest a lot in Financial Accounting; but not much in Cost Accounting or Management Accounting.