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July 31, 2005

More Economic Illiteracy.

Looks like Liz Day doesn’t actually know what a millionaire is.

A range of clothing emblazoned with slogans promoting virginity until marriage is set to make its founder a millionaire.
....
The clothing is so popular that Wait Wear's founder and director, Yvette Thomas, expects turnover of more than £1 million this year - 250 times up on 2004.

Now it may be true that this rather amusing line of clothes will make the owner a millionaire. It could even be true that a company with a million in turnover will be worth a million, thus making the owner a millionaire. But that certainly isn’t necessarily the case. I mean I own a business that turns over a million a year, it has done for a decade. But I’m most certainly not a millionaire.

What matters is the profit made on that turnover, something very different. Ms. Day has got confused between a turnover of one million, income of one million and asset value of one million.

Tsk, tsk.

July 31, 2005 in Economic Idiot Award | Permalink

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Comments

Back in my days as a finance director of a London ad agency I once gave a little talk to the staff to try and get them to understand the importance of cash flow. I started by asking this question: “Of every hundred pounds we charge to our clients how much is left for the shareholders after paying all costs?”

The highest figure was around £80. Our MBA managing director was closer but embarrassingly way too high. The best guess was from our cockney-barrow-boy style media buyer. He suggested £1. At home that night my non-accountant wife said it would be about 50P. She’d probably heard me moaning about this too many times. The correct answer was 33P. It’s probably less nowadays.

Posted by: David Farrer | Jul 31, 2005 10:10:52 AM

Looks like you're forgetting value of capital ownership, IPO or private selling of the capital of an healthy company in a hot sector could bring an amount the same rough magnitude as your turnover, it varies between economic sectors of course and I assume it's low in the clothing business, but still not zero as your analysis seems to imply.

Laurent

Tim adds: So I say " It could even be true that a company with a million in turnover will be worth a million, thus making the owner a millionaire." and this shows that I have forgotten the value of capital ownership?

Posted by: guerby | Jul 31, 2005 11:23:48 AM

Even I, extremely incompetent in economics, have noticed that these two are confused all too often.

Posted by: Antti | Jul 31, 2005 12:03:54 PM

My wife and I just went on a trip to the state we used to live. She was surprised to find that one of our favorite eating spots had closed.

She said "But they were always so crowded. How could they go out of business?"

Same idea - revenues aren't profits, and profits aren't cash flows.

Posted by: The Unknown Professor | Jul 31, 2005 5:30:41 PM

Tim: ooops, sorry about that, I indeed completely skipped this sentence in my reading!

Red Faced Laurent

Posted by: guerby | Jul 31, 2005 8:32:29 PM

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