What were those crazy banks doing with all those homes and condos they financed? Mark to market accounting! We’re starting into financial accounting this week, which I worried would be a boring slog of debits, credits, owners’ equity and cash flow. But instead it’s been a fabulous lesson in how all those crazy business types of the last few years helped send our economy into a tailspin.
This week we learned about mark to market accounting, which works like this: You buy a blender for $100. The market value of said blender promptly shoots up to $1,000. You put down on your books that you have a blender worth $1,000 instead of $100. Now you look about $900 richer – as long as the market price stays at $1,000 or more. Now replace “blender” with “home mortgage” and imagine what happens when the market price falls to $1. Sound familiar?
What did those crazy WorldCom guys do that brought down their company? Booking expenses as assets! Another score for accounting this week. While learning about journal transactions and what to book where, we uncovered why WorldCom went bust. It’s because they capitalized their purchases rather than expensing them. Say what?
It worked like this: WorldCom bought a blender for $50. Now, $50 is not a lot of money at WorldCom which regularly dealt in billions of dollars. So normally that would mean they would just expense the blender, which is like when you spend money out of your checking account. You mark it down as money out the door. Gone. Poof!
But instead WorldCom credited that $50 blender as an asset. It made it look like that $50 blender was a real asset to the company (like a huge piece of factory equipment or a car) that it was going to slowly take off the books over time as it aged. That made WorldCom’s books look really, really good even though they were spending lots and lots of money. If it had just been the occasional $50 blender, everything might have been fine. But WorldCom racked up $3.8 BILLION in expenses-turned-assets. Oops.
Vanilla Ice holds the secret to having difficult conversations at work. I can’t take credit for this awesome insight. MBACookie is the brilliant brain that somehow connected having difficult, painful conversations at work with the cheesiest of the cheesy white rappers. In our class about leading people, we had a 12-page technical note written by Harvard professors that offered up some tips on how to have these really hard talks with people – but MBACookie found a way to sum it up in one Vanilla Ice lyric: “Stop, collaborate and listen.” Maybe they should play “Ice Ice Baby” at corporate leadership retreats.
Shopping at Costco will make you fat. In Marketing class this week we discovered why I can never, ever find a small, single-person’s sized bottle of ketchup at the grocery store any more. The Heinz people learned through painstaking research that if we buy more food, we consume more food (and, you guessed it, return to buy more food more frequently). And it turns out the phenomena doesn’t just hold true for ketchup. Laundry detergent, toilet paper, potato chips, ice cream. So you might want to think twice before picking up the 150 oz. bag of pork rinds at Costco.
You can have a great product, great margins and still get screwed! Another homerun for Marketing class this week. We learned that despite having an awesome product, a great marketing plan and a devoted customer following, StainMaster carpet still got screwed. By who? The retailers who sold it. The problem? Lots and lots of carpet stores had StainMaster and there wasn’t much that set those individual carpet stores apart. Think about it – do you have a carpet store of choice? Probably not. So the only way a carpet store could compete with other carpet stores was to cut its price on StainMaster. And once one carpet store cuts its price, it’s not long until the others follow.
And when retailers cut prices, the commissions get smaller for sales people. And if the commissions get smaller, the sales people are going to push other stain-resistant carpet (with higher commissions!) instead of StainMaster. And suddenly, the demand for StainMaster? Poof! Gone! Screwed by the distribution channel.
Softball is lots o’ fun. Even if you lose. Our section actually came in third in the MBA-land softball tourney, but with all the orange (our section color) and the cheering (very loud!) coming from our dugout, you’d think we were winning the softball World Series. It wouldn’t have been nearly as fun if we’d been obsessed with winning. I heart my section.