Sometimes the absurdity of trying to do business and make money and then pay the appropriate taxes to the Feds and State just about knocks me over.
I’m currently doing the annual ritual of getting my taxes and financial statements in order. I am using a good accountant – conscientious and smart – and we are struggling to come up with documents that are consistent with accepted practices and have at least a distant relationship with “Truth, Justice, and the American Way,” as they used to say in Superman intros. After many many years of being involved in this process I am convinced it is almost impossible for my business to do this correctly – and probably yours, too. But I must, and I will, so my accountant and I will collaborate and come up with a plausible fiction that a banker can show to other baffled bankers and then lend money on with some confidence that it will be repaid with interest, on time.
I am a complete skeptic about accounting. On a huge scale, can anybody believe that companies like General Electric or Berkshire Hathaway can be understood by reading their annual report? If my small firm is opaque even to me, how can anybody grasp what is going on at a Citibank or BP? I certainly doubt the officers really have a clue what the numbers mean, except in a broad sense of momentum and liquidity.
I have come to the conclusion that “earnings per share” for a public firm are a fabrication concocted by financial analysts to confuse stockholders and make a bonus.
After years of dealing with accountants who are more concerned with their own bottom line than the accuracy of their clients’ books, I have concluded that there are just a few things that have real importance. The most important item is liquidity. How much cash do you have available to spend? How much do you really owe versus that cash amount or solid receivables?
Second, how big are your real margins? It is not so important to make a lot on each transaction if you have a lot of transactions like Amazon or Costco, but at the end of the month or quarter, did you make a real profit by generating fresh cash?
Overhead is important. But this is where the accountants get to have their fun and obfuscate reality. They can usually flummox the most astute layman by how they allocate expenses and indirect costs, like “depreciation,” or “freight” or even “inventory.” Can you imagine trying to put an appropriate number on the value of GE’s inventory? Impossible.
So at the end of every year, I sweat the “results” of my year and worry about government and lenders doubting my accounting fiction, which I think is better than most trashy fiction offered up to the clueless consumers of accounting fairy tales.
Question: Should rich people pay more?