Mini-Review: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and the Government Bailout Will Make Things Worse


Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E. Woods Jr.

My rating: 5 of 5 stars
Meltdown is a evidence-based, academically credible, and brutally honest analysis of the causes and effects of economic depression faced in the United States since the early 1900’s. Thomas Woods’ almost adversarial opinion of the Federal Reserve is approached via many different approaches and data sources, as is his affinity of Austrian business cycle theory. (As opposed to Keynesian economics primarily seen in the U.S.)

For those with interest in macroeconomic theory or the effects of government intervention on both business and individual finance, this is absolutely required reading. Those with politically libertarian leanings will also find many of the facts presented within outright shocking. I personally finished the electronic version of this book with over 10 pages of highlights, and plan to continue following Woods’ work.

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My FonWallet Story: Making It All Public

Update: April 26th, 2009. I’ve had a few brief conversations with Todd over telephone and IM, and have offered to cease pursuing both judgments and remove this post from this website provided a prompt, reasonable payment schedule for the personal judgement against Todd. He has committed to proposing me a payment settlement plan by the end of April, 2009. I am currently awaiting this documentation.

There are several areas of this post in which he has taken issue. Since many people have already read this post I am hesitant to silently change copy, so for readability purposes I have highlighted that original copy in bold, followed it with additional personal commentary in square brackets, and Todd’s verbatim remarks in curly braces.

Update: November 1st, 2010. I recently had a phone conversation with Todd, who stated a payment schedule should be possible in the near future. I’ve yet to receive any follow up of meaningful action.

Update: December 1st, 2010. Very minor typographical corrections.

—-

I’ve avoided writing on this for a year and a half now, but have been pushed to do so by several inquiring minds over the past year and a half not affiliated with the company. Some documentation on this can be found in public record, and some not. I will note the points on which I’m speculating. None of this information is covered by any NDA I am under.

The company under discussion is generally known as “FonWallet”, though the official legal entity has changed numerous times and is fairly tangled in the personal affairs of one of its owners, Todd Coulter. {Todd, April 16th, 2009: “This is totally false, inaccurate and easily proven”} [Preston: April 26th, 2009: When I first became involved in the project, most important assets at the time seemed to have direct ties to Todd, personally, rather than the company: such as bank accounts, server assets, and vendor accounts.  At the time, at least, there were a handful of different entities that all centered around Todd… A few I recall were FonWallet Payment Solutions, Inc., FonWallet Payment Solutions, Ltd., MBXIP, SipCellNet… possibly other I do not remember. I do NOT have detailed knowledge of the activities of those additional entities, nor do I make ANY claims as to how–if at all–they currently relate back to FonWallet. Also note that I still have the original stock certificate log books for FPS, Inc. and FPS, Ltd.] I have neither vindictive nor harmful wishes against anyone affiliated with the company: only to be compensated for my work.

I personally performed a significant amount of work for FonWallet, at the time known as FonWallet Payment Solutions, Inc. and now known as FonWallet Transactions, Inc., largely in the first half of 2007. It is a startup operated largely in Phoenix. {Todd, April 16th, 2009: “This is again totally false, inaccurate and easily proven”} [Preston: April 26th, 2009: I personally know more than a few people of current and former involvement with the project that are local to the Phoenix area. Whether or not Phoenix now represents a majority of the projects efforts, I do not know: simply that there is a significant amount of work being done in Phoenix. With regards to the entity primarily associated with the project, all current documentation I can find–including the FonWallet.com website itself–leads me to believe that “FonWallet Transactions” is now the preferred nomenclature. This could be wrong, but from the perspective of a reasonable outside observer, this definitely seems to be the case.]

Employees/Contractors of the company were initially paid as promised, however, dollars dried up around summer and most of the concurrent staff stopped received compensation. The only reason some of us stayed on as long as we did was due to a personal guarantee made by Todd Coulter to personally cover the staff debts if the company were not able. Soon thereafter I moved on. Others stayed. As far as I know, none of the compensation owed across that period has ever been paid, even though the company has been in operation under a new name. I am aware of at least 2 others people owned money by Todd Coulter, personally.

Mr. Coulter eventually became completely unresponsive to inquiries on the matter, which prompted me to file suit. (AFAIK I’m the only that did so.) Mr. Coulter did not respond to the suit. A motion for judgment was made on 12/12/2007, and ruled upon in my favor shortly thereafter.

Two suits were actually filed, with myself (Preston Lee) as the plaintiff for both. The first names FonWallet Payment Solutions, Inc. as the defendant with a ruling of $71,324.32. The second names Todd Russell Coulter personally as the defendant, with a ruling of $24,044.32. The sum total is $95,368.64. I suspect that the company name change was made, at least in part, to avoid having to pay these debts.  {Todd, April 16th, 2009: “This is totally false, inaccurate and easily proven”} [Preston: April 26th, 2009: This is purely speculation on my part, and to be honest, I hope is completely wrong. I do not have insight as to the specific reasons for the creation of a new entity (FT, Inc.), except for the knowledge that the old one (FPS, Inc.) was out of money, had a ruling against it for $71K., and the stock books were were in the possession of the guy (me) who filled suit. Again, I hope I’m wrong about this, but I haven’t been provided with any reasons to believe otherwise.] To the best of my knowledge, Mr. Coulter was properly served on both accounts but neither notified the other owners of the company nor made attempt to respond to the suit.

Regardless, the latter ruling still stands, and I have tried numerous times over the past several years to settle the matter and collect compensation for the months of work and expenses that I am personally owed. I wish all those affiliated with the company the best of luck, however, this matter is certainly not “closed”. There are some interesting and challenging concepts involved and I wish the staff the best of luck. I write this note as a friendly, public attempt to settle this matter once and for all.

Relevant public legal documents are available from Maricopa County, Arizona. If anyone–specifically Todd Coulter–would like to the discuss the issue with me directly, you can reach me direct via email or my cell.

10 Woes Of Small Business Ownership

  1. You work more than anyone else.
  2. You cannot take time off at leisure.
  3. You carry constant stress.
  4. You get paid less.
  5. You get paid last.
  6. You pay for other peoples taxes and benefits.
  7. You always deal with the “problem” cases, not the fun ones.
  8. You are asked for more-more-more, often by those who already have more than you.
  9. Your sacrifices will not be recognized, and rarely noticed.
  10. You will not be thanked for all of the above.

The Financial State of Arizona

moneyThe Arizona Joint Legistlative Budget Committee (JLBC) released two documents yesterday quantifying the effects of U.S. economic fear, uncertainty and doubt as it applies to Arizona’s 2009 budget, and proposals for 2010. The big question on U.S. minds is, “How will all this affect my business?” By most accounts the answer is not positive.

The JLBC’s February 12, 2009 budget update puts “January revenues 21.5%…below [fiscal year] 2008”, for a cumulative 2-year decline of 35.9%. “January results [are] significantly worse than expected”, says slide 4 of the report. These numbers directly translate to additional lump-sum budget cuts for state-funded programs, including the Arizona University System.

Layoffs in the private sector worsen the situation via a direct reduction in state sales and employment taxes. In a 2010 appropriations hearing presentation also released yesterday, the committee discussed specific cuts to a page-long list of Arizona institutions. A 2010 option for reducing the Arizona University System budget calls for a $160.6 million lump-sum reduction. “ABOR and university system received a combined $141.5 million lump sum reduction [in 2009].” Such changes would affect Arizona’s Arizona State University, University of Arizona and Northern Arizona University despite higher projected enrollment numbers and tuition increases across the board. Arizona State leads in projected enrollment increases at 4% in 2010, with 15% at the East campus. Arizona University System tuition prices have increase an average of 8.5% annually since 2004.

The effect? All employees and families of the state of Arizona are nervous to find out, as “[c]urrent forecasts can indicate the direction of the economy, not its precise landing point”, to quote the 2009 update report. The nightly news will likely continue to cover layoffs, salary cuts and sob stories for Arizona not-for-profits for the foreseeable future, and it seems unlikely that a “quick fix” will restore budgets to previous levels as existing layoffs and budget decisions cannot be quickly recovered.

Please tell me I’m wrong.

The Poorest Cities

I don’t fit in well with either of the major U.S. political parties. I certainly have opinions which favor one side or the other, but overall consider myself somewhat middle-leaning with a tendency towards libertarianism. I nevertheless found this editorial observation by Glenn Beck interesting on the top ten poorest American cities.

On a related note, I’m reminded of a former Soviet teacher I had in college who shared many thought provoking stories, including the observation, “In the Soviet Union we were all equal…ly poor.”

Financial Primer For Self-Funded Startups, Part 1

You’ve considered starting your own business–ExampleTech–and have pondered the initial investment, opportunity costs and personal risks. Here’s a brief financial primer on what you need to understand before taking the big leap, and key issues you’ll need to grok for after ExampleTech begins operations.

My big leap is OpenRain, for which I manage financial planning and performance amongst a bagillion other things, so I frequently receive questions on the financial aspects of forming and operating a company. This failure-based example assumes ExampleTech uses accrual accounting as opposed to cash-basis accounting.

Understanding Your Initial Investment 

When you start the company books, the first type of financial statement you’ll need to understand is the balance sheet. The balance sheet is a snapshot of the company’s finances at a particular moment in time, and aggregates all the company accounts into one single formula which always remains true..

Assets = Liabilities + Equity 

Once you invest in the company, that money becomes a company asset, and is no longer yours. You are only given claim to this money by an equivalent amount of equity. The company is a living, breathing entity, and is considered to a be a distinct taxable entity by the Internal Revenue Service (IRS) if you have formed an LLC (ExampleTech, LLC), S or C corporation (ExampleTech, Inc.). Even if you choose to do business as a sole proprietor (John Doe “doing business as” ExampleTech), which is not a distinct taxable entity, you should mentally consider your initial personal investment gone forever! Don’t event think about mixing personal accounts with business. ExampleTech accounts belong to ExampleTech and are maintained separately from your personal finances. Period.  It’s company money now, not yours, so get over it. You’ve invested $10K in ExampleTech to get it off the ground.

$10K Assets (cash) = $0K Liabilities + $10K Equity (ownership)

Since, the company has purchased $6K of equipment using $1K in cash and $5K on a credit card with an $8K limit (this will be important later). The balance sheet now looks like this..

$15K Assets ($9K cash + $6K equipment) = $5K Liabilities (credit card) + $10K Equity (ownership)

Where did these numbers come from? We have $15K in assets because we started with $10K in raw cash, spent $1K of it and received $6K of equipment in return. The difference is on the credit card as a $5K liability. Some interesting observations…

  • You (John Doe) still have $10K of ownership equity even though the company only has $9K of cash in the bank. It would not be possible to cash out 100% of your initial investment without liquidating (converting to cash, a.k.a. selling) the equipment.
  • If you bought the equipment out of warrantee and it breaks on day 1, ExampleTech will be down the $6K in equipment assets but would still need to pay off the $5K credit card liabiltity. The loss would come out of cash and leave the balance sheet looking like this: $4K Assets (cash) = $0K Liabilites + $4K Equity (ownership). Oops. On the plus side, you would realize what the term “equity-funded venture” means.
  • All book equity is held directly by you, the owner. This is a tremendous advantage over private equity venture capital (VC)-based start-ups, because you are the only person who cares about the eventual return on equity (ROE) investment. By using short-term debt instead of long-term equity, your creditors couldn’t care less about ROE as long as you’re making payments on time, so ExampleTech’s decisions remain yours to make.

ExampleTech is now ready to operate, and opens its doors with a slick new job for ClientComm.

Understanding Cash Flow & Income

After 1 month of operation, ExampleTech has performed and delivered $8K of services to ClientComm. Only $3K in credit card expenditures was need to complete the job. ClientComm has been invoiced and “the check is in the mail”, which should arrive and clear within 2 weeks. ExampleTech is now moving on to a much bigger project for MegaComm. Here’s your current balance sheet..

$23K Assets ($6K equipment + $9K cash + $8K accounts receivable)
=
$8K Liabilities (credit card: $5K initial equipment + $3K ClientComm job)
+
$15K Equity (ownership)

Note that you’ve increase your equity 50%, which is now $15K up from the $10K you started with. Woohoo! Here’s the ExampleTech income statement for the previous month..

Income
ClientComm: $8K

Expenses
Office equipment: $5K
ClientComm production expenses: $3K

Net income for period (last month): $8K (income) – $8K (expenses) = $0K

So in your first month you not only purchased reusable office equipment, but broke even! (That’s pretty awesome, go grab a beer!) Armed with $23K in assets and a renewed sense of self-confidence, you’ve signed MegaComm to a new deal worth $40K which will only cost $10K to deliver. You immediately start MegaComm production by writing a check for the $10K in materials and production costs.

..And you’re about to realize how you just screwed up.

To your surprise, you receive a call several days later that your check has bounced due to “insufficient funds”. What you forgot to consider is perhaps the most important aspect of financial management for the start-up phase of a self-funded new business: cash flow. Your cash flow statement for last month defines the raw dollars going in and out of ExampleTech during the given period, and looks something like this..

Cash at period start: $10K
Equipment investment: $1K
Net cash flow: -$1K
Cash at period end: $9K

Remember the $6K of equipment you purchased before you opened your doors? It’s only represented as $1K on the cash flow statement because $5K was put on credit, and creditors have not required ExtremeTech to pay out. The $3K shelled out for ClientComm production isn’t represented here at all because you chose to finance the entire amount with credit.
Thus, your bank only has $9K of raw cash even though your balance sheet showed you at $23K of assets, which also includes accounts receivable: money that has been counted as income on your income statement but has not yet been collected. Accounts receivable did not contribute to your cash flow statement since no money actually exchanged hands during the period, even though the job is completed! The cash flow statement will not reflect the ClientComm job until you..
  1. Cash the ClientComm check (which you really need), or
  2. Pay the credit card bill.
ExampleTech was cash flow negative last month despite having positive income, a non-intuitive but not infrequent business occurrence. Being cash flow negative isn’t in-and-of-itself a problem, but puts you in a short-term pickle because you don’t physically have enough cash for the materials, and your credit is already maxed out at $8K. You’re looking your next big client square in the face but don’t yet have the assets to pull it off, and you’ll be scrambling for the extra working capital to push forward rather than getting actual work done.

In Summary

Self-funding your company comes with the perks of directional freedom, less time pressure and fewer legal complications at the cost of pressure to stay cash flow positive from day 1. The self-funded company cannot grow–let alone survive–without an early, consistent trend of positive cash flow as we’ve just demonstrated. ExampleTech won’t have much wiggle room for strategic ventures and operational improvements until these numbers provide an ample financial buffer.

Next

We’ve glossed over quite a few important details such as taxes, loans, interest, accounts payable and, of course, paying yourself. So if you’ve found this information helpful and would like to see more content on the practical financial aspects of start-ups, let me know you’d like a Part 2 and the specific topics you’d like to know about!