It's Not Luck - Eliyahu M. Goldratt [40]
“Yes, I am,” I firmly say.
“And your company is doing less than a quarter of a million dollars net profit on sales of, let’s see . . . ” He looks at his notes, “of 91.6 million dollars? Not too good. What I’m trying to figure out now is how much profit you do on net assets.”
Mr. Snake-Oil smiles at me, “If you can put a dollar value on your people, I’m afraid that it will reduce your return on net assets. Shall we proceed to determine the realistic value of the company’s assets?”
I like it less and less.
Mr. Snake looks again at my card. “Mister Rogo, on your balance sheet the company equipment is reported at a value of 7.21 million dollars. What is the real value?”
“What do you mean?” I’m puzzled and irritated. “At UniCo, we don’t play games with our books.”
“I know.” He gives me another look at his teeth. “I’m sure that your books are kept according to all the accounting regulations. But that is exactly the reason for my question. On your books,” he patiently explains, “the equipment is recorded at its purchase value minus the depreciation since the time of purchase.”
“For the purpose of depreciation we are using a ten-year period,” I explain. “It’s written in one of the footnotes.”
“Footnote number twenty-one, to be exact.” He demonstrates that he knows my balance sheet better than me.
“But that is not the point.” He looks at Brandon and Jim for help, but they don’t say a word.
“Mister Rogo,” he tries again. “A machine that your company bought ten years ago now appears on your balance sheet as having zero value.”
“Of course, by now it is fully depreciated.”
“Yes, but it still might have value. When we come to sell it, we might get a nice price for it.”
Before I can comment, he continues. “On the other hand, a machine that you bought only a year ago, which therefore appears at almost its full purchase value, often can be sold for only a song. You see, the balance sheet doesn’t give me a clue to the realistic value of your equipment.”
“I don’t see the relevancy,” I say, “but hypothetically, if we put the machines alone on sale, we are not going to get much. Many of them are quite old and most are built according to our special needs. There are few manufacturers that can use our equipment.”
“So how much can we get?”
“I don’t know.” Under the pressure I add, “Less than 7.21 million dollars, that’s for sure.”
The cobra probably realizes that I don’t intend to give him a better answer, so when Brandon and Jim don’t show any sign that they are going to clarity it further, he scribbles something on his pad and moves to the next item.
“What should we estimate the value of the inventory to be?” he asks.
“Why don’t you use the book value?”
“Because, Mister Rogo, your books are handled according to the proper regulations.”
I bet yours aren’t, I think to myself. No, I don’t like this person one bit. Aloud, I say, “What’s bad about it?”
“Nothing, except for the fact that it gives useless information. You evaluate inventory according to what it costs you to have it. I’m interested in its value if you try to sell it. Do you agree that the two numbers are vastly different?”
“No, I don’t. At least not in our case.”
He throws a desperate look at Brandon and Jim.
“Why?” Brandon asks me.
“Because we have very little work-in-process,” I explain. “Most of our inventory is finished spare parts, whose selling price is minimum our cost, even if we sell at wholesale. The rest is common raw materials.”
Brandon looks at him.
“Makes sense,” he replies. “What about the land?”
I know what he means. Usually the number appearing on the books is some historic number that has nothing to do with the current value.
“No surprises here,” Brandon says. “The land was appraised when we purchased the company four years ago. Since then, real estate values in that region have stayed about the same.”
“I prefer to get an up-to-date appraisal.”
“Certainly,” Brandon agrees.
I don’t understand what is going on. This person is approaching it all wrong. The company is profitable, it is a going concern. Why do Trumann