Stocks and flows

C Gopinath | Updated on May 10, 2020 Published on May 10, 2020

Which category does your business belong to?

The oil industry is in a crisis. The world’s sea lanes are said to be filling up with oil tankers. The problem seems to be that about 100 million barrels of oil are produced per day, while only about 70 million is consumed, creating a storage problem. With storage tanks getting filled up, oil producers have to pay people to take the oil off their hands, dropping the price of crude oil into the negative territory for brief periods. The wells are slowly shutting; re-opening them won’t be easy and will drag their companies down the financial hole.

Oil is a flow business. It needs to keep flowing. You cannot stock it for too long, for it then deteriorates. Hearing of nations maintaining strategic oil reserves, I am always reminded of my mechanic who would warn me against leaving my car sitting too long. “Cars need to move,” he would hint, for that would also mean more oil sales in his gas station. “If they sit for too long, you would have sediments at the bottom of the tank, which creates other problems”. I wonder how much of those strategic oil reserves are really usable. A smart manager would keep it flowing.

Brewers are also in a flow business (we will leave it at that and not talk of the reason why rest-rooms are critical in areas where beer is consumed). Millions of kegs of beer are sitting in breweries, restaurants and pubs going stale. They have shelf lives that range from 2-4 months, depending on the variety. Unlike farmers who can dump milk in their backyards, beer cannot be dumped unless its pH value is adjusted to reduce toxicity. Milk, also a flow business, can at least be converted to milk powder, becoming a stock which then behaves differently.

Banks and airlines are other flow businesses. The successful airlines are those who do not switch off their plane’s engines but keep them flying all the time! Banks keep money moving. When it gets stuck in non-performing assets, that’s the end of the bank.

Gold is stock, even if you turn it into jewellery and make it flow on the necklines of women. The wise ones, like central banks and corrupt government officials, leave it as biscuits in their vaults. The more you isolate and keep in vaults, the more people seem to want them, causing the price to flow!

It’s no stock

And now it is time to deal with what we have always called stock — shares that we own in publicly traded corporations. The reason they were called ‘joint stock’ companies is because traders of goods got together, contributed their stock (i.e., commodities to trade), put it all in a ship and sent it around to India, which the traders controlled through the East India Company.

But it is a mistake to think of stock in companies as ‘stock’, even though my financial advisor warns me against drastic decisions on my investments, whose value has plunged. “Leave it alone and it will bounce back,” he cheerfully advises. But he doesn’t understand my theory. The share certificates may be called stock, but that is misleading. There must be a flow underneath that stock, the flow of the business activities whose share it represents. The underlying characteristics, or the sub-stratum as philosophers would say, may reveal flow or stock behaviour.

So this column inaugurates a new way for you to think about our businesses. Is it a stock or a flow? The industries that fall in each category have very different characteristics. Studying them can help us deal with fluctuations in business and the ripple (no pun intended) it creates in the flow.

The writer is a professor at Suffolk University, Boston

Published on May 10, 2020

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