Above Water

  

A boat. That's how to think of this one. If the water level is a "fair accounting" assessment of the book value of your company, then if you are above water, you are the boat. That is, something happened at your corp digs. Maybe you found oil under the drone-testing acreage you own, and all of a sudden, the asset you have valued at a hundred grand is now worth millions. Your asset is now above water from an accounting perspective, and you have to re-evaluate the values at which you are holding "property, plant and equipment," or whatever you call that line.

Above Water also means that you're doin' just fine, i.e. think about the angry substitute teacher yelling at the class "I've had it up to here!" and she makes the hand sign above her head like she's drowning in bad behavior. Yeah, you know who we're talkin' about. She's below water in her tolerance...and financially, the analog is a company drowning in expenses which are much higher than revenues...and the end of the world is likely not far off if fast adjustments aren't taken.

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Finance: How Do Some Accountants "Cook t...103 Views

00:00

Finance allah shmoop we'll have new Some accountants cook the

00:05

books Ah those hollywood accountants You know they just make

00:10

up numbers to mess with poor naive innocent little actors

00:14

and actresses Brad pitiful is making a movie about an

00:18

alien who comes to earth and gets elected president brad

00:22

gets fifteen percent of the movie's profits as compensation Well

00:25

the flick is a block but a a monster hit

00:29

doing two hundred million box the box office another one

00:31

hundred million in licensing revenues from netflix the network's youtube

00:35

and like well brad has his eye on a shiny

00:38

new g six jet and has all said to buy

00:41

one when the studio says sorry no profits Well how

00:45

can this be He wonders the studio accountant lucky jim

00:49

here does the math Well the two hundred million dollars

00:52

was just box office sales and the theaters keep half

00:55

the money So that's one hundred million bucks to us

00:58

Same deal with the aftermarket hundred million So only fifty

01:02

million came to us Brad says don't i get fifteen

01:04

million of that new small thing called production costs while

01:09

we needed toe actually make and then market your movie

01:12

Well the movie cost eighty million dollars a shoot And

01:14

then we spent thirty million dollars to market it Well

01:17

brad sighs thinking about a much smaller plane and says

01:20

well then okay that's one hundred fifty million to you

01:23

and one hundred ten million in expenses So we made

01:27

forty million dollars and i get six million write Well

01:31

here comes the book cooking paradigm that eighty million dollars

01:34

wasn't spent the day before the movie rolled out into

01:37

theaters It was spent years beforehand and renting money costs

01:43

money so the studio had to use its credit I

01:46

even rent money from banks and partners to fund the

01:49

movie's production Well the studio borrowed eighty million bucks for

01:52

five years in fact and then another thirty million for

01:55

two years The market it now this is extremely risky

01:59

capital And if this movie had bombed then the banks

02:02

might have lost everything So if you were the bank

02:05

would you charge just three percent for that extremely risky

02:09

capital You have no way So the studio could have

02:12

rightly told the producer tio go fund himself you know

02:15

to fund the movie elsewhere and get whatever interest rate

02:18

on the money he could find and the studio would

02:21

match it And surprise surprise Other than in somalia there

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were no takers Not a single lender was willing to

02:27

take on such enormous risk even at a twenty percent

02:30

interest rate So the studio generously loans the production money

02:34

at fifteen percent interest and here's the math fifteen percent

02:38

on eighty million dollars for five years That's twelve million

02:41

of interest per year for five years or so sixty

02:44

million dollars in total And that fifteen percent interest rate

02:47

was a gift The real market price was more like

02:50

twenty percent Well then fifteen percent on the thirty million

02:53

for two years to market it Yeah at another nine

02:56

million dollars of interest costs So what happened here Well

02:59

the interest charges ate up all the profits Yes the

03:03

film had operating profit ignoring interest costs over forty million

03:06

dollars But it had to rent the money to go

03:08

make the film the rental cost or the interest costs

03:12

of the money with sixty million dollars for the production

03:14

and nine million for the marketing Oh and there's this

03:16

other little thing called a distribution fee that studios taken

03:20

Return for pushing the film into the difficult to deal

03:24

with theater owners and usually that's thirty percent off the

03:27

top but those are details So were the books cooked

03:29

here No not at all If making movies was such

03:32

an easy profitable business well there would be legions of

03:35

venture capitalists throwing money at the business the way there

03:38

are in silicon valley with computer software engineers Unfortunately hollywood's

03:43

heyday was a half century ago and economically hollywood is

03:47

dying The studio and the banks behind it have to

03:50

charge a very high interest rate to accommodate for the

03:53

sad fact that most movies don't make back the money

03:57

invested in them Most movies lose money so the one

04:00

in ten movies that actually make money have to be

04:03

Hey for all the rest of the studio only charged

04:06

three percent interest for years I work out great for

04:09

brad pitiful in his profit sharing story In a world

04:12

where the movie made forty million dollars in revenue and

04:14

had only ten million in interest costs With then thirty

04:17

million of you know pretax profit well then brad would

04:21

have gotten fifteen percent of thirty million or four point

04:24

Five million in bonus dough But that's not the way

04:26

things work The books aren't being cooked here People They're

04:29

just being zapped by interest costs It's almost enough to 00:04:33.104 --> [endTime] make you lose your

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