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Dickeson--Don't Be Baffled by Accounting Metaphors

September 2000
Cash is a fact; profit is an accounting opinion. That short statement says it all. I picked it up recently in a magazine or newspaper. Somebody said it about the Internet dotcom companies and their IPOs. The stock offering brings in megabucks of venture capital. The companies don't make a profit, but who cares? Profit is an opinion of the bean counters. The stock market investors following the IPO bid the stock up higher and higher. But one day the cash runs out and the bubble bursts. Cash is a fact, not an opinion or forecast of future worth. Either you have cash to pay bills and make payrolls or you don't. If you don't…

There are 50,000 printing companies, and if the shops that report to the PIA ratio studies are typical, printers average 3 percent to 4 percent "profit" on sales. That's dreadful, we moan. We ought to be ashamed, we say. But wait a minute. If our shop were a dotcom, we'd be in fat city with 4 percent on sales. If we were reporting 10 percent on sales, but it was all tied up in inventories and receivables and we couldn't make payroll, we'd be in hot slop. Now if we were a grocery supermarket, 2 percent profit on sales might look just dandy—if that 2 percent were cash in a money market account. Look at the "ecology"—the total environment—of profit or residual value.

What the dotcoms have done recently is signal a reality check. Profit is an accounting "opinion." It's based on a whole fabric of critical assumptions, many of which are charming archeological artifacts. Here are a few:

  • Inflation is zero over time: buildings and equipment purchased with the dollars of an earlier day still have the same depreciable value today;

  • Land does not change in value over time;

  • Leases negotiated in past dollars and at some historic interest factor are equivalent today and tomorrow;

  • A "going concern" cannot be assigned value; and

  • Inventories are valued at the lower of cost (regardless of inflation) or market.

And so on. Accounting, and its handmaiden profitability, are metaphors, a form of virtual reality. No one, including investors and the IRS, believes accounting profits or book values except when it's expedient, convenient or self-serving to do so. In computing a price-earnings ratio to value a business, what, for example, are "trailing earnings" compared with "profitability?" What does that "EBITDA" gibberish mean when looking at price earnings multiples? It means stripping away some of the opinion assumptions of "profit."

But, at the same instant, the dotcoms confront us with the harsh reality of cash flow. Maybe profit is an illusory opinion, but cash (or equivalent liquid assets) is a fact. A printer may comfortably survive with a 3 percent profit illusion on sales, but neither dotcom nor printing company can comfortably survive without liquidity—cash. The stock market investors' wishful projection of the current worth of future profits or earnings is, once again, simply an investor's opinion, another metaphor derived from virtual reality. So now we have both accounting and market investors' opinions of value.

Where does that leave us with our job cost estimates as a basis for establishing a price for a print job? Are "cost estimates" also metaphors of virtual reality? Of course they are. A cost estimate based on "production standards" of time and materials are estimates of what an accountant's opinion of profit might be if all cost assumptions came true—which never happens. Now we have three views of virtual reality.

Even currency itself has certain transitory value. Ask the currency speculators making a living on arbitrage between currencies. Look at the daily value listing of yens, euros, pounds, bats or pesos. And a 1990 dollar had a lot more value in purchase power than a dollar today.

Peter Drucker asserts the three things that must be managed are liquidity, productivity and being in business tomorrow. Note the absence of "profit" in his list of management imperatives. What we are really saying is that current liquidity, in whatever form, is more nearly an ascertainable fact than a ledger accountant's or cost accountant's or investor's opinion of profit or earnings.

And we even hold reservations about the value of cash as a liquidity measure. All we have are opinions expressed as metaphors that mustn't be regarded as dogma. Each opinion has some usefulness. Each has known weaknesses. But, for goodness sake, watch the cash drawer first, foremost and always.

When setting a price for a commercial print job, take a quick look at the estimate values if you wish. Wet your finger and hold it up to find the direction of the breeze. Then answer these questions: What perceived value does the customer have for the job? How quickly will the invoice be paid? What are the competitive constraints?

In making the price decision, liquidity (speed of payment) takes precedence over any metaphor of profitability. I'm not advocating disregard of job contribution or earnings or "profitability." Just recognize the frailty of underlying assumptions and resist being dogmatic about those opinions.

Metaphors are short-cuts for thinking and wisdom. You may say your neighbor is a bear or that particular press model is a dog, but neither is fact. It's just shorthand to call up a list of characteristics. The estimator may say that a prospective job should yield a 24 percent contribution on value-added, but that isn't a fact; it's metaphorical. But if the controller says that account pays in 90 days, take that as fact!

—Roger V. Dickeson

About the Author
Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached by e-mail at, by fax (520) 903-2295, or on the Web at


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