Common Sense by Joel Greenblatt

Author:Joel Greenblatt
Language: eng
Format: epub
Tags: BUS011000, Business & Economics/Business Writing, BUS019000, Business & Economics/Decision-Making & Problem Solving
Publisher: Columbia University Press
Published: 2020-08-09T00:00:00+00:00

Where did this King guy come from anyway?

Chapter 3

Technology, Globalization, and Disruption

When There’s No Time for Education…

I admit it. I spent four years in college as an accounting major. Not only does that sound boring, I still don’t know what I did for four years. Revenues minus expenses equals net income. Assets minus liabilities equals net worth. That’s probably 80 percent of it—takes less than two minutes with time for a doughnut.

Maybe I chose accounting because, growing up, my father would walk around the house sharing his pithy Brooklyn-born street wisdom. Stuff like, “Figures don’t lie, but liars can figure” and “Take two and hit to right” (though still not sure how not swinging at the first two pitches and then hitting to right field was supposed to help with my homework). But maybe it was because in seventh grade, I spotted Darrell Huff’s How to Lie with Statistics in the school library (good shot the librarian was also from Brooklyn), a copy of which I still keep on my desk. Whatever it was, I learned early that it was probably a good idea to figure out how numbers work (especially since 54.36 percent of statistics are just made up).

As it turns out, in the accounting world, one of the places the numbers get (slightly) more interesting is when people spend money on things that last a long time. Say you decide to buy a large machine for your business, and it costs a million dollars. You figure the machine should last about ten years. It doesn’t seem fair to charge the whole million dollars to this year’s expenses. You’re planning on using the machine over the next ten years and you’ll still have plenty of life left in the machine after the first year is over. So, what accountants often do is spread that million-dollar one-time expense equally over the ten years that the machine will be used. That way, each of the ten years you plan to use the machine will only get charged $100,000 in expenses. That annual $100,000 charge is called depreciation and it’s the way accountants try to match the cost of using the machine for one year with the amount of sales (or revenues) the business generates each year.

Recently, though, accounting has gotten even more exciting (if that’s possible). The world of annual or monthly subscription services has made figuring things out a little more complicated. Let’s say a maker of computer software sells software that helps businesses keep track of their inventory. You run a small business and want to purchase the software. But instead of selling you the software, the software manufacturer charges you $1,000 per year to use it. The manufacturer figures that the average customer will last about 8 years. Why? Because once you choose a software system to store all of your inventory information, it’s probably expensive for you to switch to another software provider and retrain all of your employees to use the new system.

So, here’s the exciting part.

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