Kees Pater doubled the size of the Dutch cookie factory he bought in 2004. But a not-so-sweet management lesson really changed things.

Pater's opaque and top-down management approach was stressing everyone out, including himself. His angst finally landed him in rehab for four weeks.

In the Middle East, chocolate chip cookies are eaten with a knife and fork and topped with chocolate sauce.

During his time off he worried that, without him there to lead the troops, the cookie business would crumble. But to his surprise, no such thing happened.

People came to work. Product shipped. Revenue was generated. Tick tick tick for an entire month. All without any input from him.

So Kees Pater made a radical decision: he turned his company's org-chart upside-down. The frontline staff would make all the important decisions and he would be a support and resource person.

The first step was teaching business acumen to every baker and mechanic, making clear every cost involved in baking a box of cookies. Everyone learned how to read the company's financial statements and how they themselves impact profitability. 

Today, those team members are all happier, healthier and wealthier. And Pater has unwittingly become an advocate of a wonderful movement known as Open Book Management.

Peter

Cookie cutters were created in the 1700s by early American tinsmiths.

General Electric, the venerable icon of American business, is having a rough time at the moment. Their share price is down an awful 35% in the year to date. 

The markets aren’t happy, and one of the reasons why is that GE is touting no less than four different "relevant profit figures."

GE was founded by Thomas Edison, JP Morgan and Anthony Joseph Drexel

Instead of offering a single "bottom line" for investors to ponder, in recent years GE has been presenting this bewildering array of profit perspectives:

• Industrial operating earnings
• Industrial operating earnings + verticals
• GAAP Income from continuing operations
• GAAP net income

Call the first three "made up totals," if you will. 

There's nothing intrinsically wrong with adapting measures to gauge performance. Many companies trumpet one profit report called EBITDA, which is the bottom line with interest, tax and depreciation added back. But using four raises eyebrows.

According to a recent WSJ article, under its new leadership, GE is considering reverting to a “back-to-the-basics approach” with its financial reporting.

As many retailers know, shoppers who are given too many choices often decide not to buy. Perhaps that's one reason GE's stock is languishing.

Peter

As part of their downsizing, GE is offloading railroad locomotives but keeping jet engines

In last week's message, we described the six steps of The Value Cycle and explained how a firm sacrifices some of the value of its assets in order to generate profit.

But, is it possible for a company to continually sacrifice assets without generating profit and still remain a going concern, favored by the capital markets? Apparently so.

Groupon has never turned a net profit despite $15 billion in sales since 2012

Below is a list of firms which have generated little to no profit over the course of many years, and yet remain in operation:

1. Groupon
2. Tesla
3. Uber
4. Spotify
5. SnapChat
6. Twitter
7. Yelp

While that is an abbreviated list, the question remains: How can a supposedly for-profit enterprise, consistently make losses and still stay in business?

Maybe it all boils down to the question of “How long is the long run?”  

Logic tells us that you can’t keep sacrificing value forever. The investor must believe that there is value creation over some horizon. 

Peter

Twitter has never turned a net profit despite $7 billion in sales since 2012

The reason we teach accounting is to help people understand business. 

When you understand the elements of accounting, the essence of business becomes clear. It’s much more than cash in, cash out.

We convey that essence in a diagram called The Value Cycle. 

This is how business works: 

1. The business raises funds from its shareholders
2. It leverages those funds with debt
3. With those funds it acquires assets for revenue generation
4. It then sacrifices some of that asset value, in order to...
5. Generate value
6. The net value generated or consumed is attributed to shareholders as profit or loss.  

The Balance Sheet and the Income Statement tell us the story of this cycle, and are expressed in the accounting language.

Peter

In his new biography of Leonardo da Vinci, Walter Isaacson mentions a note among the great artist's papers: "Learn multiplication using the root method from Maestro Luca". 

da Vinci was referring to Maesto Luca Pacioli. And while Leonardo himself marked an epoch in art history with his Mona Lisa and Vitruvian Man, Pacioli did the same for economic history.  

Marcus Vitruvius Pollio was a 1st Century Roman architect whose discussion of perfect proportion in architecture and the human body inspired da Vinci's Vitruvian Man.

This is because da Vinci's friend Luca Bartolomeo de Pacioli wrote the work that started the spread of modern accounting. 

And while today we take accounting for granted, the modern economy couldn't exist without it. It's understandable then that the BBC lists accounting as one of the 50 Things That Made The Modern Economy.   

Like the Internet, accounting was the enabling technology of its day. It lead to multi-national corporations and sent sailing ships to the far reaches of all hemispheres.  

For better or for worse, accounting has played a large part in changing our world forever. 

Peter