Accounting 101

Published 9:20 am Saturday, August 24, 2013

Like many people, I first learned some basic business and accounting principles, such as how to calculate profit, from basic entrepreneurial ventures as a child. For example, I recall trying to make a few quick bucks one summer by running a lemonade stand. I took the $10 I had in my piggy bank at the time and used it to purchase some Country Time, a few lemons and some Dixie Cups. I set up a card table at the end of the driveway, mixed a few pitchers of lemonade and waited. By the end of the day, I had sold $20 worth of lemonade.

Twenty bucks wasn’t bad for a day’s work back then, and I was proud to let everyone within earshot know about my newfound business prowess. But I was quickly disappointed to learn that my take for the day was not $20, but $10. When initially calculating my profit, I counted the revenue I had generated that day as pure profit, not realizing I need to subtract the money I spent buying the supplies required to produce my lemonade.

Several years later, I enrolled in college and chose to pursue a business degree in accounting. One of the many things I learned was that, had I been keeping proper books to track my earlier business venture, I would have recorded the cost of lemonade mix, the lemons and the cups as the cost of goods sold. There are several different ways to calculate the cost of goods sold, but regardless of whether you use the first-in-first-out method (FIFO) or average cost or any other method recognized under generally accepted accounting principles (GAAP), the bottom line is that you must account for the cost of all goods sold in calculating your profit margin, not just the ones you choose to include in order to produce the results you want.

On Aug. 9, The Tidewater News published a column titled “High utility bills are a problem,” which was authored by Thomas H. Councill Jr. In the column, Mr. Councill attempted to make a case against the City of Franklin by stating that the reason he believed electric bills in Franklin are too high (a claim that has yet to be substantiated) was because the city’s profit margin on its electric utility was an astounding 88 percent in the fiscal year, which ended on June 30. Aside from the fact that he submitted the column prior to the availability of preliminary year-end numbers, and the fact that he used a hodgepodge of numbers, which makes it difficult to ascertain the source of his information (he used budgeted revenue for FY 2012-2013 instead of actual revenue, among other things), he omitted one fairly significant figure from his calculations: the cost to the city of purchasing electricity from Dominion Power, which was then resold to customers of Franklin Power and Light.

To be honest, I’m not sure at this point who made the calculation Mr. Councill submitted to the newspaper. They are supposedly the same numbers that were presented by Linwood Johnson, spokesman for the group Concerned Citizens Against High Utility Bills, at the June 10 public hearing on the proposed 2013-2014 city budget. But whoever prepared them did not know what they were talking about or were intentionally trying to mislead the citizens of Franklin. Whichever the case may be, it was the height of irresponsibility on behalf of both Mr. Councill and Mr. Johnson to accuse city leaders of misleading the community when they aren’t even close to having their own facts straight.

Given the fact that so much misinformation has been put into the public domain on this issue, let’s examine the facts, based on data recently released by the city.

In 2012-2013, the electric fund saw total revenue of $13,986,979, including the sale of electricity to customers and a fuel charge adjustment based on an increase charged to the city by Dominion Power. Total operating expenditures were $11,850,171, which includes the $8,986,143 in energy purchased for resale and $1,453,923 in the fuel charge adjustment charged to the city, along with $1,410,105 in other expenses. This leaves net operating income for the year of $2,136,171. Because the electric fund is considered an enterprise fund controlled by a government entity, it is not commonly referred to as a profit margin. But for purposes of drawing a comparison to the numbers put forth by Mr. Johnson and Mr. Councill, that operating income represents a margin of 15.28 percent on total revenue. That’s a far cry from the 88 percent they claim.

Another major point of contention for those bashing the city’s electric utility is the annual transfer made from the electric fund to the general fund. This transfer is a budget item that is pre-determined by city council and is utilized to offset other general operating expenses incurred by the city. This year, the transfer made was in the amount of $1,409,891. There are two important facts regarding this transfer that cannot be ignored. First, without the transfer, the city would have to increase real estate taxes to cover the ensuing shortfall in revenue or decrease city services. And second, even with the transfer of funds, the rates charged by the City of Franklin for electricity are very competitive with what Dominion Power would charge if Franklin Power and Light were dissolved. To take it even a step further, if one were to consider the transfer from the electric fund to the general fund as a dividend paid to the city for the risk of owning and running a utility company, this year’s transfer to the general fund was 10.08 percent on operating revenue. If one owned a share of Dominion Power on June 20 of this year, when the stock was valued at $55 and the most recent dividend on that stock was paid, the $.56 per share distributed was only one percent of the stock price, which makes the Franklin transfer look fairly attractive. Regardless, the margin on operating revenue after the transfer, whether it is treated as an expense or not, is 4.84 percent, roughly 83 percent below the numbers put forth by Mr. Johnson and Mr. Councill.

The City of Franklin faces any number of challenges today. But the lessons I learned running a lemonade stand 30 years ago, which were then confirmed for me as an accounting student in college, Franklin’s public utility enterprise isn’t one of them. And while some may want to manipulate the numbers to lead us to believe there is a problem, here are some numbers that indicate exactly what some of our real problems are: the students in Franklin’s city schools performed below the state average in 31 of the 33 SOL tests given this past school year, and according to the Virginia State Police’s 2012 crime report, of all the independent cities in the commonwealth, Franklin is one of only four with a crime rate as high as 11,000 incidents per 100,000 residents. If we’re going to spend a lot of time and energy dealing with numbers that make people upset, perhaps it’s time for some community spokespeople to quit stirring up a fictitious debate over energy costs and focus on a couple of issues that will truly have an impact on the future of this community.

TONY CLARK is the associate publisher of The Tidewater News. He can be reached at