By Tootie Smith
$2 billion sales tax proposed by the Super Majority of elected democrats on business will raise prices to consumers as it fails to consider profitability and cash flow.
Nike founder, Phil Knight, in his book Shoe Dog, tells of a situation in mid-1970’s where he almost went bankrupt even though the company had gross sales of $40 million. Although that seems like a lot of money to most of us, his cash flow was nil.
Profitability alluded him as the high cost manufacturing and retailing swallowed much of his end of the month cash. One day he found himself unable to pay a monthly payment to his Asian shoe supplier, a key asset for Nike. At the same time, he realized he didn’t have quite enough money to make American payroll.
He decided to go ahead and write the payroll checks knowing a large deposit was coming through within hours or days. Knight relied on what was called the “float.” By the time the payroll checks were cashed, deposits should be received. However, the deposit was late. Seems his timing was a bit off.
The “float” was used by many businesses knowing that other money would be forthcoming. Everybody did it. Later he found out, the company that sent the deposit was also relying on the “float.” Suddenly, one afternoon, he started getting phone calls from his employees and managers that their checks had bounced. Knight panicked. He went to his local Portland banker at the time with his company accountant and pleaded for mercy.
For years this banker had warned Knight of his low “equity position” despite continued escalating growth over the past 15 years. Unmoved, the banker froze Knights accounts and refused to continue the banking relationship.
Desperate and embarrassed, Knight knew he was finished and took the only action available to him at the time. He walked across the street to the Bank of Tokyo, where earlier he developed a relationship because his shoe supplier from Asia was also a customer.
You see he owed them money too and sheepishly confessed to them he could not pay. The Tokyo bankers were speechless. They had regarded Knight and Nike as the golden boy of athletic shoes. Knight asked them for a loan.
For three days the bankers poured over Nike’s books and concluded that his sustained growth and market share made Nike a good investment, even though they acknowledged his cash flow was weak. They gambled that Nike would be a good bet based on the last decades of continued sustained growth and loaned him the money. Knight paid his creditors and his employees were happy with their paychecks.
Today we know Nike as one of Oregon’s most beloved and profitable companies, born from a local son.
Point is, if gross sales tax had been around in mid-1970’s, there would be no Nike, because they probably would have been forced into bankruptcy because the company had no cash to pay the tax. With a sales tax, the government gets paid first regardless of ability to pay or profitability.
Think about Oregon’s other successful businesses like Columbia Sportswear, Intel, Portland General Electric, Precision Cast Part, Reser’s Fine Foods, and oh yes health care darling – OHSU. They all suffered growing pains in the beginning just like Nike.
How may startups exist today who find themselves in the same situation as Nike did all those years ago?
Knight, now retired ten years from the company he birthed, manages Nike Foundation and gives away….gives away… $100 million a YEAR to charity.
Knight’s generosity in giving would not have been possible if Nike went bankrupt, as surely as some companies in Oregon will do today if this gross sales tax is passed.