Apples, Oranges and Failing Bars

In 2016 America, we readily admit to watching an odd assortment of television shows.  I confess to being high up on the list of having the "most eclectic mix of things DVRed each week."  No problem there.  We will keep that in mind for this week's concluding piece.

In my high school, which admittedly was a really behind-the-curve place (there were no AP classes, and I ended up one of the few freshmen at MIT who had not had calculus in high school -- because it wasn't offered), there was one class that had the word "economics" in it.  That would be "Home Economics", which was far less about economics and far more about how to learn the kitchen skills needed to be a housewife.  Those with a Y chromosome were not welcomed, if you get my drift.

We were not taught in that school (nor, likely, most others in the late 1960s) how to balance a checkbook, nor did we learn basic bookkeeping skills.  While there were a lot of other things we didn't learn there either, I think the basic economics stuff was right up there with the most missed later in life.

Had we all learned basic money skills back then, I would like to think that we would have a great deal better preparation for life.  Moreover, we would immediately react when we heard words like "revenue" and "profit" bandied about as if they were interchangeable.  And, Lord knows, that happens all the time.

I heard some protestor in the street yelping the other day on TV about how bad, bad Exxon (actually ExxonMobil, but why split hairs) had "made $230-something billion dollars" last year, and they were doing all kinds of bad things, and polluting the air and causing global warming and all that.  What got me, though, was the "made $230 billion last year" line.

So I looked it up.

ExxonMobil actually made, as in "netted after all product costs, salaries, expenses and corporate taxes", about $16 billion in its most recent fiscal year.  Now, $16 billion is a nice amount to end the year with in your bank account, at least before you distribute some of it as dividends to shareholders.  It is a nice amount, until you realize that there are well over four billion shares of ExxonMobil stock, first, and then that the $16 billion net was on sales of -- you guessed it -- $237 billion.

In other words, our street protestor not only had no idea of the difference between "sales" and "profit", but she was completely incapable of recognizing that a $16 billion profit is only a high or low figure when compared to the sales that generated it.  If you sell $100 billion and earn $16 billion, that's a 16% net profit and really good.  If you sell $500 billion and earn only $16 billion, that's about a 3% net profit on sales, and you can do a lot better with your investment dollars than to invest in that company.

Basic economics would have taught the protestor that there actually is a way that companies are actually people, in that they are public companies owned by shareholders, which are generally pension funds and mutual funds held by broad swaths of the population.  In the fact that big holders of those are union pension funds, corporations are unions, too.  And "widows and orphans."

Those funds can put their money anywhere, from cash to foreign currencies to individual stocks, government bonds and other funds.  They choose to put their money where it will return the most for the people like retirees and recipients of those union pension funds, who actually invest.  So they have a legal, fiduciary duty to find the best return at a given level of risk.  At the same time, companies like ExxonMobil have a legal, fiduciary duty to return the highest amount to their investors.  And if that is, say, 2%, even if that 2% equates to $16 billion, the investors are going somewhere else.

But you know all that.

What this has to do with DVRed TV shows is that I am a regular watcher of the "reality" show called Bar Rescue, where a fellow named Jon Taffer, an expert in bar management, goes around to failing bars and tries to save them.  It is an entertaining show, in that the bars tend to be a bit seamy, the owners and staff often drink on the job, and you get the impression that, despite his overhauling of the bar, the owners aren't going to change and it's going back in the tank in six months.

The thing is, in the initial voice-over and introduction section, they are forever saying that "when the current owner first took over, they were doing well" (e.g., in last week's rescue, they were "doing $75,000 a month").  Then, a moment later, they paint the current situation, which is invariably that the bar is "losing $6,500 a month" or some similar figure.

Now, I don't expect that we should rely on "Bar Rescue" to teach us economics or bookkeeping.  But I do think that, at the very least, we viewers should be able to figure out how much worse the bar had done since the owners took over.  Why?  Because by giving us numbers at all, they are trying to portray it.

See what I'm getting at?  You can't tell what "losing $6,500 a month" means, unless you know how much the bar was making beforehand.  And "$75,000 revenue" and "$6,500 loss" are apples and oranges.  Were they making, say, $5,000 on that $75,000 a month in sales?  Are they losing that $6,500 on, say, $20,000 a month in sales?  Mr. Voice-over doesn't tell us that.  And unless he does, we don't know if the problem is inadequate revenue, or poor management of good revenue.

This shouldn't bother me.  And it doesn't, that much.  But even if we shouldn't rely on a reality TV show for our understanding of Business 101, I do want to point out that by mixing up revenue and profit as they do, the show undermines our understanding of the plot.

Of course this is completely unimportant, in the grand scheme of things.  But if you wonder how that idiot protesting ExxonMobil didn't have the basic knowledge to figure out that the company had only earned about 5% on its sales, I suppose that perhaps she watched too many episodes of "Bar Rescue."

Or went to my high school.

Copyright 2016 by Robert Sutton
Like what you read here?  There's a new post from Bob at www.uberthoughtsUSA.com at 10am Eastern time, every weekday, giving new meaning to "prolific essayist."  Sponsorship and interview inquiries cheerfully welcomed at bsutton@alum.mit.edu or on Twitter at @rmosutton.