Profits Don’t Provide the Whole Picture

As one reads the newspapers (uncritically), one would assume that business is booming.  We have just read about the third quarter in a row of impressive earnings growth. Total corporate profits are on the order of $ 1.2 trillion, way higher than before our devastation.  First caveat- we are comparing these results to pretty anemic periods.  If you were running your company and had a 50% drop in profits for one year, the next year’s earnings growth of 100% would mean you were back to just where you were two years ago.

Second caveat- corporations have jettisoned scores (ok, 8 million) of employees.  And, they are not rehiring them (ok, 600,000 is not really re-hiring).   That means that profits are occurring by bleeding the future of the firm.  As their inventories deplete, things will not look as rosy.

Third caveat- companies are not investing in future growth.  While investment spending is up (compared to the anemic efforts of last year), the numbers are significantly below those prior to the Great Recession.  (Harley Davison and Pfizer are two exceptions.)

The same analysis may exist for your own company.  Just because your P&L looks rosy does not mean things are truly copacetic.  You need to look deeper- often.  You need to monitor cash flow, profit, year to year sales (by product, if such exists), among others.  You also need to examine off-balance sheet data- such as the age and condition of your equipment.

Part of our lassitude in analyzing our operations is because we know how our tax code works.  Instead of getting investment or using profits, we tend borrow money to expand our business.  Then, we deduct the interest we pay and depreciate our equipment.  And, when we are really clever, we can purchase a $ 1 million piece of equipment on a ten year payment plan; we then deduct the interest ($50,000 per annum) and depreciation ($ 100,000 per annum).  Lo and behold, this $150K matches our cash payments to the bank.  So, on paper it looks pretty good. Our cash flow matches our tax deductions.  However, we depreciate items because we are going to have to replace them- you don’t save that cash, you continue the cycle.  We need to build our companies for the future.

[The Congressional Budget Office recently did a study and determined that our tax code “rewards” corporations who borrow rather than invest- the effective tax rate is -6.4%; that means the government pays corporations to finance with debt.  It’s how the Great Recession came to be.]

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About RAAckerman@Cerebrations.biz

A polymath whose interests span chemical engineering, medicine, biotechnology, business, management, among other areas. Among my inventions/developments: dialyzer, dialysate, neurosurgical drill, respiratory inspirometer, colon electrolyte lavages, urinary catheters, cardiac catheters, water reuse systems, drinking water system, ammonia degrading microbes, toxic chemical reduction via microbes, onsite waste water treatment, electronic health care information systems, bookkeeping and accounting programs, among others.
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