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January 11, 2010

How to Bankrupt a Business Without Really Trying

Over the weekend Chavez announced a devaluation of the so called "Strong" bolivar. I guess it wasn't all that strong after all. When our Buffoon-in-Chief removed three zeros from our bolivar he renamed it "Bolivar Fuerte," Strong Bolivar. As with everything else he has done in his life, it was a failure. The socialist mismanagement forced the government to devalue once again.

I'm sad to say I went through the cycle of inflation, devaluation and price controls in 1984 and I want to explain how it bankrupted my business.

I had an Apple store in Caracas. We were selling Apple IIs back then. The list price was Bs. 10,000.00. The dealer gave us a 30% discount so our cost of merchandise was Bs. 7,000.00. In turn, we gave customers a 15% discount.
Revenue:              Bs. 8,500.00
Cost of goods sold:       7,000.00
Gross profit:             1,500.00
The bolivar was devalued from Bs.4.50 per dollar to Bs.14.00 per dollar. But we were not allowed to raise prices on equipment we had bought at the old price, the most we could charge was the full old list price, Bs.10,000.
Revenue:              Bs.10,000.00
Cost of goods sold:       7,000.00
Gross profit:             3,000.00
The importer was allowed to sell his new equipment based on his new cost. Assuming half his cost was local and half import price, our new cost for Apple II computers came to Bs. 15,000.00, twice as much as before. This also means that if before I could afford to have eight Apple IIs in stock, now I would have to do with four or put up extra cash.

For all practical purposes the devaluation stole half my working capital. This is how socialism, populism and devaluation bankrupted my business in Caracas back in 1984.

Denny Schlesinger

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Last updated March 8, 2009.