05 Aug The Borrowing Paradox
Financiers, farmers, and business owners are all obsessed with numbers. How can they not when numbers drive our financial wellbeing and very existence? Numbers are therefore remarkably interesting to analyse. So, let us explore some basic interesting facts about numbers.
The number one is the first non-zero natural number. Two is the smallest prime number. Three is the first odd prime number. Four is the smallest composite number etc. When you finally come across a number that is not seemingly interesting, it is interesting by pure virtue that it is the first non-interesting number.
Taking it to another level, Nathaniel Johnston specialises in quantum computing and defined “interesting” as any number that appeared in the “Online Encyclopaedia of Integer Sequences” which constitutes thousands of interesting sequences like that of Pythagorean triples and Fibonacci. According to this set of rules, the first non-interesting number is 14,228.
We live in a world of Paradoxes. The Interesting Number Paradox denotes that every number is interesting applies to business in the true sense that all numbers are important, and they have their function to perform. Therefore, no number should be discounted in business in terms of its informative value towards business analytics and its predictive power.
In lieu of analysing numbers and drawn from our life long personal experience in business finance, we have created the Borrowing Money Paradox. This is the notion that borrowing money decreases business risk, not increasing it.
How could this be when all economic textbooks relate to leverage as a risk on a risk reward spectrum and leverage increases risk?
Imagine any business owner without debt. Decision making falls on no accountability other than their own whims and emotional bias (a statement potentially inflicted with bias for the sake of discussion). For most part, the decision-making process poses no bearing on what is best for the business and stakeholders as opposed to what is best for the owners. Two separate but conflicting forces when it comes to corporate governance in its purest form.
Bring debt into the equation, and now there is a non-biased third-party stakeholder whereby the business owner becomes truly accountable to all decision making. Compliance and governance now have a role to play. Perhaps debt is the imperative that drives action within a business to incrementally improve risk management practices, enhance financial reporting, review OH&S initiatives, create operational procedures and apply management succession etc. Such practises will create financial resilience. With all other aspects being remaining status quo, the behavioural responses to the business potentially endures positive modifications with the infusion of debt. How can it not when a mortgage sits between a business owner and their fiduciary duties?
On that note I will leave you with Adam Smith….
The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it*
*Smith, Adam (1776). “Book I, Chapter V Of the Real and Nominal Price of Commodities, or of their Price in Labour, and their Price in Money”. An Inquiry into the Nature and Causes of the Wealth of Nations.