I greatly enjoyed the debate on a BBC Radio programme “Across the Red Line”, where Lionel Barber, Former Editor of the Financial Times, and Blue Labour Founder Lord Glasman debated “Does Profit Corrupt?”
Fascinating topic, but framed by the fact it was recorded in September 2019, when the world was quite different. And the financial world had different views about profit.
In 2020 the view about profit has become amazingly simple: it is irrelevant.
We have seen plenty of news reports of businesses making losses, and worse than that falling into Chapter 11, Administration or disappearing altogether. If we go back further in time, we can find examples of massive losses – AOL/Time Warner’s $140billion in 2002 will take some beating.
Some people ask how a business can lose such an amount of money. The answer is simple: it is not real money. What they lost was the reduction in value of assets. Time Warner’s bank account was not $140 billion lighter.
Which shows the number 1 financial topic of 2020 – cash flow. Have you got enough in the bank to see you through the next month, 3 months, 6 months? If not, what can you do to get the money in the bank for when you need it? This is about all the finance function has to concern themselves with this year. Mere accounting for profit comes some way down the list in 2020.
It will not always be like this: we have lived through periods of history when profit seemed like THE most important thing. Remember the film Wall Street, or the concept of shareholder value, or the time before the financial crisis? Those times seem like history right now.
One day, 2020 will be history too.
https://www.bbc.co.uk/programmes/m00081v0
*BTW – that radio programme: its not just about profit. Its about the way we discuss it. Fascinating on more than one level.
https://www.lovemoney.com/gallerylist/85626/the-biggest-company-losses-of-all-time
Buzzword of the Week – Contribution
Definition – Contribution (also called contribution margin) is the selling price per unit, minus the variable cost per unit. This indicates how a particular product contributes to the overall profit of the company. It provides one way to show the profit potential of a particular product and shows the portion of sales that helps to cover the company’s fixed costs. Any remaining revenue left after covering fixed costs is the profit generated.
Alternate View – Financially, this is a useful concept. But it can go wider than just selling price less variable cost. Where you can calculate the fixed costs for a specific department or part of an organisation, these can also be deducted from the sale price, then showing what contribution the department makes to other fixed costs of the business (the rent for the rest rooms maybe?) and the overall profit. It is a nice word too – good to know you are contributing on multiple levels, including financially
Online Learning – my first online programme – How to Read Financial Statements – is now available. This is a series of 7 online lessons:
1. How finance fits with Strategy
2. The Language of finance
3. Owning & Owing – using the Balance Sheet
4. Measuring & Managing Profit
5. Measuring & Managing Liquidity
6. Budgets, what, why & how
7. The most important part of all
Each lasts between 20 & 40 minutes and includes the slides and videos to help you understand what good looks like in financial terms. The introductory price is $195 and is available now at https://app.mastermind.com/masterminds/8443