Show of business Big profits that arent aren't really raptly there By fly Arch Booth president of or orthe the Chamber of or Commerce of or orthe the United States Slates Many industries have been racking up strong profits gains recently a a situation tion that tha t looks good to the stockholders and bad to the crowd But the stockholders actually have little reason to rejoice Experts are concluding that many of the so- so called so-called profits arent aren't what they appear to be Flows How's that again LETS LET'S SAY that tha t you are a manufacturer of widgets Because of inflation the cost of making a widget increases from 1 per widget to per widget Since you had been selling them for a piece you must increase the selling price to reflect the new cost So you raise the selling price to At the moment you raised your selling price you had widgets in the warehouse virtually all of them made at the older per 1 widget cost But now they are worth in the marketplace rather than That is they are worth 10 cents a piece more TilE THE WINDFALL By the stroke of a pen your inventory has increased in value some 10 cents x widgets This is your inventory profit Sounds like a great way to tomake tomake tomake make money doesn't it But wait a minute Has your company really become moo m moX profitable Can you expect to tomake tomake tomake make such a profit next year No Its It's a shot one-shot deal STILL ITS IT'S better to have the money than not to have it But can you treat it as you would real profit Can you use it to expand your business Can you distribute it to the stockholders Again the answer to both these questions is no unless you plan to go out of business That windfall you seem to ha have ve earned is in fact already committed You must keep restocking your inventory as it is used up And you know that new additions to that inventory are going to cost you more So if you want to stay in business the is going tobe to tobe tobe be put back into Inventory What's left of oC it anyway because under some circumstances cir dr its it's still profit to the IRS and subject to the 48 percent corporate income tax ALBATROSS IN DISGUISE Such is the proc process ess by w which a paper profit turns from an apparent asset into an actual liability By the time IRS gets through a business may discover that it has paid out for taxes what really amounts to essential working capital And if the managers arent aren't sharp enough to recognize the difference difference difference dif dif- dif dif- ference between real profit and inventory profit profit profit-if if they try to use the paper profits the same way they would use real profit then then the business will be even more strapped for cash perhaps seriously so WHAT'S REAL profit Real profit is the return on investment derived from thereal the thereal thereal real value created by the manufacturing or service process not the increase that results from inflation tion The subject is enormously complicated in actual practice Differing accounting methods can change the way inventory profits are valued and the nature of the business itself will determine whether the paper profits have a big or a relatively small impact BUT nUT HOWEVER they're measured these phantom profits are there creating a false impression in the minds of managers and the public alike Its It's one more illustration of the fact that inflation is taking its toll of business as well as the consumer Its It's one more illustration of the need to elect an inflation proof Congress next fall |