"Don't Count Your Chickens..."

1.  Income – Outgo = Cash flow

2.  Revenue – Expenses = Profit

3.  Future Customer Revenue – Current Expenses (Mark-to-Market) = Destruction

“Mark-to-Market” is an unfamiliar term to the general public, but in laymen terms and in the business world, it basically equates to the accounting method Enron used to deceive its investors by reporting future revenue values of a customer against current expenses.

Wikipedia states “For one contract, in July 2000, Enron and Blockbuster Video signed a 20-year agreement to introduce on-demand entertainment to various U.S. cities by year-end. After several pilot projects, Enron recognized estimated profits of more than $110 million from the deal, even though analysts questioned the technical viability and market demand of the service. When the network failed to work, Blockbuster pulled out of the contract. Enron continued to recognize future profits, even though the deal resulted in a loss. (USA Today)” 

Even though ‘Mark-to-Market’ can be a questionable accounting practice by publicly traded companies if used in the wrong context I have seen many small and medium sized businesses deceive themselves with these same accounting practices. This accounting principal may not be on paper but it gives the business owner a false sense of their companies real value based on future revenues that may or may not come.

The way this deception works is a dentist, office supply company or pest control company (or whomever) wrongly anticipates the increasing value of a current customer one to two to five years from now.

These wrong customer values are derived from two sources:

First, the assumption their good or service will have a higher market price in the future (and therefore generate more revenue) than the present.

Secondly, the assumption that a customer at present will still be a customer in the future.

These assumptions have devastating effects when a business owner makes purchasing decisions (current expenses) on this supposed future customer revenue.

The Parable - don’t count your chickens before they hatch. Don’t spend money you don’t have.

Image credit: ToonPool.com

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