Written by Will Hawkins on 12 November 2009
What do banks do?
I get a few emails with humour coming around at work, which I am sure most of you do too. Most of them, I read and delete. I thought I would publish this one because, although it first came out in 1957, it seems entirely up to date.
Imagine a banker being interviewed about what banks do:
“Q: What are banks for?
A: To make money.
Q: For the customers?
A: For the banks.
Q: Why doesn’t bank advertising mention this?
A: It would not be in good taste. But it is mentioned by implication
In references to reserves of £249,000,000,000 or thereabouts. That is
The money they have made.
Q: Out of the customers?
A: I suppose so.
Q: They also mention Assets of £500,000,000,000 or thereabouts. Have
They made that too?
A: Not exactly. That is the money they use to make money.
Q: I see. And they keep it in a safe somewhere?
A: Not at all. They lend it to customers.
Q: Then they haven’t got it?
A: No.
Q: Then how is it Assets?
A: They maintain that it would be if they got it back.
Q: But they must have some money in a safe somewhere?
A: Yes, usually £500,000,000,000 or thereabouts. This is called
Liabilities.
Q: But if they’ve got it, how can they be liable for it?
A: Because it isn’t theirs..
Q: Then why do they have it?
A: It has been lent to them by customers.
Q: You mean customers lend banks money?
A: In effect. They put money into their accounts, so it is really lent
To the banks.
Q: And what do the banks do with it?
A: Lend it to other customers.
Q: But you said that money they lent to other people was Assets?
A: Yes.
Q: Then Assets and Liabilities must be the same thing?
A: You can’t really say that.
Q: But you’ve just said it! If I put £100 into my account the bank is
Liable to have to pay it back, so it’s Liabilities. But they go and
Lend it to someone else, and he is liable to have to pay it back, so
it’s Assets. It’s the same £100 isn’t it?
A: Yes, but…..
Q: Then it cancels out. It means, doesn’t it, that banks haven’t
Really any money at all?
A: Theoretically……
Q: Never mind theoretically! And if they haven’t any money, where do
They get their Reserves of £249,000,000,000 or thereabouts??
A: I told you. That is the money they have made.
Q: How?
A: Well, when they lend your £100 to someone they charge him interest..
Q: How much?
A: It depends on the Bank Rate. Say five and a-half percent. That’s
Their profit.
Q: Why isn’t it my profit? Isn’t it my money?
A: It’s the theory of banking practice that………
Q: When I lend them my £100 why don’t I charge them interest?
A: You do.
Q: You don’t say. How much?
A: It depends on the Bank Rate. Say a half percent.
Q: Greedy of me?
A: But that’s only if you’re not going to draw the money out again.
Q: But of course I’m going to draw the money out again! If I hadn’t
Wanted to draw it out again I could have buried it in the garden!
A: They wouldn’t like you to draw it out again.
Q: Why not? If I keep it there you say it’s a Liability. Wouldn’t they
Be glad if I reduced their Liabilities by removing it?
A: No – because if you remove it they can’t lend it to anyone else.
Q: But if I wanted to remove it they’d have to let me?
A: Certainly.
Q: But suppose they’ve already lent it to another customer?
A: Then they’ll let you have some other customer’s money.
Q: But suppose he wants his too….and they’ve already let me have it?
A: You’re being purposely obtuse.
Q: I think I’m being acute. What if everyone wanted their money all at
Once?
A: It’s the theory of banking practice that they never would.
Q: So what banks bank on is not having to meet their commitments?
A: YOU GOT IT!”
Tags: assets, banks, Finance, Five, liabilities, practice, reserves
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Written by Will Hawkins on 08 March 2009
Running your own business is a tough thing to do. Nevertheless, you can control most aspects of the business, although you may never seem to have enough time to do them thoroughly. You can control how much your product service or costs to make and market. You can control your cash-flow. You can control how much you pay yourself. But the credit crunch has highlighted aspects of a business which cannot be controlled.
Someone I know well runs a retail lighting business in London and has done so successfully for many years. His family business has a warehouse in the midlands of the UK from where they run their international and mail order business. They have franchises in some stores in the USA too. Business is going well.
He had been considering investing in more property in London for some months before the credit crunch but he could not find anything suitable so he put off the purchase and kept the cash liquid until he found something suitable. However, this January the business had a disastrous run of sales and he had to dip into the cash he would have used to buy the property to maintain their cash-flow. The business also had to let some staff go to make efficiencies.
Had the business not had this cash, he would have had to go to the bank to borrow the money in the form of an extended overdraft perhaps. Things as they are now mean that, in fact, the bank would not have lent them the money despite the fact that the business has a healthy track record and that the business has good order books into the future.
Therefore, the business could have folded within a month had he not had the cash reserves to carry them over into a healthy month of sales in February. That is how the credit crunch is affecting small businesses up and down the country and across much of the world.
No wonder the Government is trying everything it can to encourage the banks to lend money including plans such as owning them, providing guarantee schemes and using “quantitative easing” to get cash where it is needed. No wonder too that there is such a backlash against the rewards for failure which many bankers are receiving.
Good businesses are folding due to circumstances experienced by my friend and his business because they have one bad month. There are no bale-outs for them.
Tags: bankers, banks, books, business, cash-flow, credit crunch, reserves, retail, sales, small business
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Written by Will Hawkins on 02 March 2009
You have to admit, it’s an exciting time right now. When the numbers that the business reporters talk about that have been lost in our banks (and I mean our banks) have so many zeros on the end of them that you don’t know whether you are in Zimbabwe, in Sir Fred Goodwin’s pension committee, or AIG’s “How can we make this seem less than the world’s biggest ever corporate loss Committee“, then you know you are in trouble.
Funnily enough, I read an article yesterday saying that Warren Buffett’s Berkshire Hathaway fund had fallen by 9.6% in the last year. That does not seem too bad at all in these times!
But what it highlights is one thing which we all need all of them time when in sales and marketing, and that is information. I learnt from an early age in business that if you don’t ‘know your numbers‘ about your sales pipeline, your forecast, your actual sales, or the effectiveness of a marketing campaign, then you are not doing your job correctly.
With information comes insight. With insight comes the ability to make judgements and plans. Without information, you are guessing at best, and speculating at worst.
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Any digital marketer worth their salt will know about Google Analytics. It is a free tool which allows you to gather information about your who is using your web site, where they have come from and gone to after visiting your site.
With the increasing movement for creating desktop applications which connect with databases on the web, there comes new opportunities for understanding your customers and the effectiveness of your marketing. eBay Desktop and the BBC iPlayer are examples of these types of ‘Rich Internet Applications (RIA’s)’ which are making web based tools available on your desktop
Today, I saw that developers can now build these RIA’s and incorporate Google Analytics tracking code into them so that marketers can track not only what customers are doing on their web sites but also in their desktop applications. They build them using tools like Adobe AIR and Flex.
Marketers are able to be accountable for their campaigns to depths not possible five years ago. A marketer will be able to see what type of PC you are using, where you are using it, what you are reading, what interests and what encourages you to buy in detail from wherever you access their site.
You might think that you have stepped off the bus into ‘1984′ with this type of talk. Or you can think of this as a good thing because it will save you time in future because you will find what you are looking for more quickly.
Whatever your thoughts, if you are marketer, you can be more confident that you know exactly how well your products are faring in detail, unlike our investment bankers who seemed to have lost track of business basics in the last few years.
Tags: adobe, Adobe AIR, bankers, banks, BBC, business, content, developer, digital, Five, Flex, google, internet, iplayer, marketing, media, RIA's, sales, web sites
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