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Crouser Report OnLine May 1, 1996
Trasmitted from Sioux City, Iowa
We ll be headed to DETROIT on May 11th where we will be spending Saturday
morning chatting with you about printing and prices. Coming up: ATLANTA, May
18th; CHICAGO, June 1st; MIAMI, June 15th (note change from the 22nd); and
COLORADO SPRINGS, August 24th. Fax (304) 342-5187 or call (304) 342-5100 if
you want to attend any of the sessions. The session is FREE, but you must
Dear Friends. . .
I guess this is as good of time as any to comment about depreciation.
Depreciation gets a very bad name, especially from folks who somehow
misconstrue the concept as getting away with something, or in the United
States, as cheating the government out of tax revenue. So, let s try to set
the record straight. More importantly, the misinformation tends to keep some
printers from realizing how poorly they are really doing.
Depreciation, and its first cousin amortization, comes from the fact that
capital equipment has a positive impact on several years of your work and not
just one year. A piece of capital equipment, by the way, is equipment used to
produce goods and services. A machine to make automobiles or a printing press
or a manufacturing facility are capital goods, or in this case, capital
Depreciation, by the way, deals with a real asset such as equipment.
Amortization, on the other hand, deals with intangible items such as a
Franchise Fee. There is generally no other conceptual differences between
depreciation and amortization.
Example: Let us use a simple depreciation example. While this first example
does not take into consideration current with tax law, it does supply you
with a basis to understand the concepts of depreciation. We will consider
We buy a press for $20,000. A basic accounting principle is to match income
and expenses. The press is an expense, but is it an expense for the year
inwhich it is bought? Yes, but its useful life extends over a number of
years. For simplicity, let s say we know the press will last exactly five
years and we purchase it on the first day of year one.
Further, let us estimate that the $20,000 press will have a salvage value at
the end of 5 years of $5,000. Therefore, we would use up $15,000 worth of
value over a period of five years. Taking it one step further, $15,000
divided by five years would yield an estimated depreciation expense of $3,000
The way your accountant will technically handle this transaction is that they
would first debit an Equipment account for $20,000 and credit (deduct)
$20,000 from the Cash account if you were paying cash. In order to keep
ourselves focused on what happens to the depreciation, we will assume you pay
cash for the equipment although that is rarely done.
Every month your income would be charged with part of the depreciation. For
instance, a debit to Depreciation Expense for 1/12th of $3,000 or $250 would
occur and a credit to Accumulated Depreciation for the same $250. This
Accumulated Depreciation account is a contra account to the equipment asset
This allows the accountant to keep the amount of the original equipment
while still account for the estimated usage of the equipment
(depreciation). At the end of year one, the Equipment account would show
$20,000 and would be offset by Accumulated Depreciation of $3,000 (12 months
x $250 per month). The net value of the equipment would be $17,000 or $20,000
- $3,000. This net value is called book value since that is the value placed
on this piece of equipment on your books.
At the end of year two, the Accumulated Depreciation would be $6,000 ($20,000
- (24 months x $250)) and the net book value would be $14,000. At the end of
year three, the net book value would be $11,000 ($20,000 - (36 months x
$250)). Same thing at the end of year four. The net book value at the end of
year four would be $8,000 ($20,000 - (48 months x $250)). And, at the end of
year five, the net book value would be $5,000 ($20,000 - (60 months x $250)).
Now, assuming you do not change the basic assumptions that the equipment will
be worth $5,000 at the end of the useful life, no further depreciation would
occur until you sold the equipment.
Paying For The Equipment: Most of us don t have $20,000 in cash to give to
the equipment vendor on day one. Instead, we finance with some sort of down
payment and a payment plan over a period of time. For example, assume we put
down $2,000 in cash and/or equipment and finance the balance for three years.
And, to keep it even simplier, let s disregard interest charges and just
stick to the $20,000, of which we have financed $18,000 over three years.
Let s say we get our local branch of the interstate bank to go along with the
loan of $18,000 which we will pay back in 36 equal installments of $500
(again disregarding interest).
Assume then that we make 12 payments of $500 or a total of $6,000 in year
one. What shows up on our income statement as an expense? The payments of
$6,000. No. What shows up is our year one depreciation expense of $3,000.
Hey. We pay out $6,000 of cash and get to deduct only $3,000! Yes, and this
is why we have to be so careful in our equipment purchases. However, the
$6,000 payout stops at the end of year three and the depreciation expense
goes on for two more years at a rate of $3,000 per year, eventually catching
How does it catch up? You pay $2,000 up front and $6,000 per year for three
years for a total of $20,000. Your depreciation is $3,000 per year for five
years, for a total of $15,000 and you have a piece of equipment worth $5,000
or also a total of $20,000.
Tax Law: I have been describing what is known as straight line depreciation
with salvage value. In the United States, this is not now used for our
businesses. That s because there was other types of depreciation which
attempted to estimate (some say estimate better) the
of the value
of the equipment.
Double Declining Balance placed more depreciation in the front years and less
depreciation in the later years and was attractive for it more closely
resembled the lot of most of us who had to borrow money to buy equipment. Sum
of The Years Digits was another method like Double Declining, which attempted
to do a similar feat of front end loading depreciation. And there were more.
However, that s not really important now, for the US Internal Revenue Service
I ve got to say I did feel a little sorry for the IRS in trying to keep up
with the many different methods. I say that for it was hard for me to keep up
with various clients on various methods. Anyway, I guess that was the reason
they modified the tax code to developed the Accelerated Cost Recovery system.
After a few years, that was modified and since has become something we all
know and love as the Modified Accelerated Cost Recovery System.
This system places all equipment purchases, for instance, into a standardized
time recovery of costs, or depreciation, can occur. It also allows some front
end loading of depreciation while requiring the folks who bought a press and
said it would be completely used up in two years to be more realistic in
their estimates. In addition, it allows a certain amount of equipment
purchases to be deducted and expensed in the year of purchase. Your
accountant can explain the details as I am sure they may even change by the
time you read this. However, the bottom line is, there is, more or less, a
fixed chart of depreciation you can take for capital expenditures such as
The practical effect of this change, in my observation, has been for the
printer to be able to have MORE depreciation than PAYMENTS in many cases.
Bottom Line: However, the bottom line is that the Modified Accelerated Cost
Recovery System (MACRS) is also an estimate. You may choose to use some other
form of depreciation for your internal books, but must report using MACRS.
Net effect is folks don t go through the added hassle and expenditures of
doing it. So, we are stuck with it and we all use it on our federal income
The Point: My point is that regardless of using MACRS and regardless of your
depreciation expense being more than your payments, the net effect is the
same. Depreciation is a real cost of using up the value of a capital asset
over more than one year. Go buy a car. Drive it around the block and try to
sell it back to the dealer. You will get less than what you paid. That s a
real cost and it happens with cars as well as printing presses and computer
So, to the many printers who tell me,
I made money, but of course it didn t
show because of depreciation.
I say, hog wash. Where many feel they are
making money is when the equipment is sold. Let s go back to the basic
Selling The Equipment: When we actually sold or traded in the piece of
equipment at the end of year five, we may or may not get $5,000 for it. We
may only get $2,000. In that case, we would recognize a Loss on the Sale of
Equipment in the amount of $3,000 which would, in essence, be similar to
taking an additional depreciation of $3,000 at the end.
Others will get $8,000 for the equipment. Well, that also is just an
estimating variance and we would take a $3,000 gain at the sale which would
have the effect of recapturing the over depreciation of the press.
Summary: I have seen printers with 20% plus in net owner s compensation but
who have poor earnings. Why? Their operating income (Revenue minus Operating
Costs of Direct Materials, Wages And Overhead) was 2%, but their
Extraordinary Income was 20% based on the Gain on Sale of Equipment leaving
them with 22% Net Owner s Compensation. I also hear printers very frequently
refer to Depreciation as not being a real expense. It is. Regardless of
whether you win or lose at buying and selling equipment, depreciation is a
real expense. Believe it and don t lull yourself with a fantasy.
In April, I wrote the following paragraph about analyzing income.
Best Strategy: Which strategy is best? Any combination which produces 20%+
owners compensation. Can you have too much of a good thing? Yes. One owner
asked me how to get more than his 35% owner s compensation. I suggested he
start shorting the customer. When they order 1,000, deliver 950. That should
eke out a percent or so more. In the meantime, he should spend more on sales
activities. . . .
My best reader of all things important, my Aunt Annette Massey, drew my
attention to this paragraph and suggested. . . naw, chastised me. . .for
inferring that a person should do something like short a customer. I guess my
tongue in cheek suggestion that someone short a customer was a lot much. I
did not mean that a person should short a customer. I meant that the only way
that person could get more compensation out of this business as a percentage
of sales would have to involve something like shorting a customer, but I in
no way endorse it. And, by the way, I have seen about 38% tops for a print
shop over a full year. Anyway, that s what I meant even if it didn t come out
Free Saturday Morning Seminars
By the time you read this, you may have missed our first overflowing FREE
seminar in San Francisco (April 27th), but hopefully you will be able to
spend some time on Saturday morning to visit with me about pricing and other
topics in the following cities: Detroit, May 11th; Atlanta, May 18th;
Chicago, June 1st; Miami, June 22nd; and Colorado Springs, August 24th.
Officially, it s the 1996 Power Pricing Seminar. Unofficially, it s a great
chance for us to meet and compare notes. Sessions will begin at 8:30 with
coffee at 8 am and end at noon.
Happy Trails, Tom Crouser
1996 Power Pricing Seminar Featuring Tom Crouser s Pricing Systems With
Special Comments On the 1996 NAQP Price Survey sponsored by Crouser &
Especially For Shops With Less Than 14 People Coming to:
Atlanta, May 18th
Chicago, June 1st
Detroit, May 11th
Miami, June 22nd
Colorado Springs, August 24th
Spend Saturday morning (8:30 -12 noon) with Tom Crouser and learn:
The 5 Strategies Of Printing Price Competition! These are the only ones
available to you! Learn what they are and begin using them to increase your
The Real Secret To Making Money In Print Shops- how to make lots of money
with either a high or low price.
How the Printing Price Calculation Keeps You Poor - Using production
standards for estimating, as most computer estimating programs do, keeps you from earning a
Calculating Your Costs the Easy Way - Learn two rules of thumb which allow
you to quickly estimate a cost rate for anything you do!
Why Pricing Is Screwed Up In Printing - Why the price paid depends more on
your negotiating skills than on your job cost. See how you do.
Cost, Pricing and Estimating - See how the differences in each may be
costing you lots of money.
Plus! How the Crouser Method gets better prices! Throughout the session,
Tom will use tools he has especially developed for the printing industry.
See the new Crouser s Quick Estimator in action!
Using Customer Service To Get A Higher Price - An example of non-price
competition you can hear.
Learn Where Printing Prices Come From - Tom relates a brief history of
pricing in the printing industry. You will find it fascinating.
Also Hear Tom s Own Analysis of the results of the 1996 NAQP Price Survey
sponsored by Crouser & Associates.
TO REGISTER: Email TomCrouser@aol.com with your name, address and telephone.
You will be contacted regarding the meeting site. Or fax your reservation
request to (304) 342-5187. Or call (304) 342-5100. The session is FREE but a
ONE WEEK ADVANCE registration is required. Act now.
BACK ISSUES May Be Found at the National Association of Quick Printer s
America On Line Site (keyword: NAQP, publications, Crouser Report) or on the
internet at the PrintUSA web site (http://printusa.com/articles/crouser.htm)
or on PrinterNet. Hey, do we get around or what?
Crouser & Associates - Helping Printers Prosper Since 1985
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Sunday, May 05, 1996 7:33:47 PM
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