Thursday, July 12, 2007

DZMM and Pseudo-knowledge

DZMM has a lot of it. Pseudo-knowledge I mean. I keep hearing Angelo Palmones hitting DOF Secretary Gary Teves for the advance tax payments made by large corporations. I seem to recall the statement made by Teves that the advance payments represent only 1% of the BIR's total tax collection last year. Given that, why is Mr. Palmones so fixated on that? Hmmm...

If my understanding of finance is correct, being an Financial Management major myself, then I'm sure that advance tax payments shouldn't really distort collections, especially at such a minuscule scale.

Two financial concepts are at work here: Cash flow and Time-Value of Money. I won't go into the details of those two but they can easily be summarized by the axiom "your money today is worth more than your money tomorrow".

In the setting of a private business enterprise, it's akin to reducing the credit/collection period from a client. In publishing, this could be likened to asking readers to get for a 1-year subscription for a magazine/periodical rather than having them buy it from the news stands. So timing is really irrelevant in this issue.

The whole budget deficit issue could be explained in a manner familiar with most Filipinos: the telecoms business. Smart or Globe has two types of subscribers: those who use prepaid cards and those who subscribe to a post-paid plan. Taken from the perspective of the telecoms company, those who buy prepaid cards actually advance money to them. In fact, I'm sure that they earn more from their prepaid cards than from postpaid subscribers because they collect in advance. They can use the funds they received "early" or in advance to finance more revenue-generating activities. So, if everything goes smoothly, advance payments allow for the exponential growth of a business.

Postpaid subscribers, however, represent a very stable source of income for the telecom company. Stable in the sense that they can be forecasted easily. Collecting them is another issue. So if you apply this imagery to the budget deficit, the real problem lies in the failure to collect from the postpaid subscribers.

Mr. Palmones should consult someone who understands the concept of cash flow management before exhibiting his ignorance and embarrassing himself in public. I certainly won't consult him for any business decisions.

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