Profit is an Opinion

"The secret of life is honesty and fair dealing.  If you can fake that, you've got it made."  Groucho Marx

Some say profit is an opinion.  They're right, and that's okay.

The other day in one of my seminars I asked the participants to describe the goal of business.  After some back and forth, I quoted Eli Goldratt, in "The Goal."  He said "The goal of any business is to make as much money as possible for as long as possible."  My students seem to agree.  What is the indicator of "making money?"  Profit.

Let's discuss profit for a second.  Yes, profits are what it's all about.  It's the bottom line.  It's money we made.  Let's make some money!

Well, not so fast.  What is profit?  Well, that depends on a lot of things, like GAAP rules, Statutory Accounting, IFRS, and so on.  It depends on managerial and non-GAAP measures.  It depends on tax law and your local jurisdictions.  Also, a company may take a "one-time charge" or include "other comprehensive income."   Finally, we may need to consider if we're looking at Gross Profit, Operating Profit, or Net Profit.

When we consider these things, a novice might say "Wait a minute, mister!  You're just cooking the books to get the numbers you like!"  

There are lots of examples of company fraud in financial reporting.  That's not what I'm describing here.  What I am saying is that there are lots of legal and legitimate ways to make the income statement look a lot better than it otherwise would.  When financial and executive leaders build financial statements, they're following a lot of rules. They also have a great deal of discretion, as long as they disclose how and why they're accounting for things the way they are.  

"Wait a minute, mister!  You mean to tell me that the black and white world of finance and accounting is not so black and white after all?"  

Well, yes.

There is a lot more art than science in our financial statements.  A lot more discretion by the CFO to express costs, revenues, gains, losses, assets, and liabilities in ways that make the company look the way the CFO wants the company to look.  But before we indict an entire profession, keep in mind that these leaders are working from limited data.  It's impossible to know exactly what everyone in the company is doing every day so they can allocate costs exactly where they belong.  Suffice to say that the financial statements reflect reality, but they are not reality.  A biased reflection nonetheless.

What's all this mean to us?  What are we to do?  Well, that's where our business acumen comes in.  You see, by learning the assumptions, biases, and rules for financial reporting, accounting, and decision making, we can better understand what that numbers mean and what we can do to improve them.  That is, improve them through business improvements -- meaningful, sustainable, and valuable business performance improvement.  That's the only way.  Learn how the numbers are derived and your ability to interpret them will improve.  

"Wait a minute, mister!  If profit is an opinion, I better ask more questions around the office!"

Yes.  Yes you should!

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