Someone was telling me about his business, saying his profit was as good as earned the moment the contract was signed. I wasn’t polite: money that can’t be collected isn’t money. I’m certain of this one, and life proves it everywhere you look. What people say isn’t necessarily true; signed-for money is money the customer has merely agreed to let you imagine for a while.
How Far an Income Statement Can Stretch
Run the most ordinary kind of deal. You take an 800,000-yuan job, sign, invoice — the income statement books 800,000 in revenue. The client actually pays 500,000; the other 300,000 sits in receivables. Deduct costs and the statement shows a profit of 728,000 — of which 300,000 in receivables never arrived, and 120,000 is unrealized paper gains. In other words, 420,000 of that 728,000 exists only on paper. What actually landed: 308,000. The statement says he earned 728,000; the passbook says 308,000. That doubled gap is the distance between what was said and what was actually had.
“Accounts receivable” is an elegant name for something simple: the client keeps a pen in your income statement. Buffett said the same thing at his 1998 Florida talk — if profit is stacked up from receivables that never get collected, the company is working for its customers. Luckin, the tutoring companies, the construction firms: the blowup scripts are identical. IOUs puff up the profit while the cash quietly walks away.
The Bank’s Profit Runs Backwards
The income statement’s bookkeeping can bend even the most respectable industry. If a bank’s statements confuse you, that’s not your failure. Banks face a timed financial crisis. A crisis hits in batches — everyone fails to repay at once — and all the money earned in past years gets wiped out in one stroke. In good years, a bank books an extra provision and its profit goes down. So a bank’s profit is precisely the kind that appears when the money on its books is gone. Tencent runs the other way: its profit is genuinely money sitting on its books right now. The way I see it, Tencent is the money-printing machine — it’s just that everyone always said the bank was. A bank prints with other people’s money; Tencent collects first and serves later. The two machines share a name, not a boiler.
Defining Risk
Now the word risk deserves re-weighing. People told me deposits are safe and dividends are dangerous. Don’t tell me bank deposits are low-risk — for me, money that hasn’t landed in my hand is the real risk. A deposit yielding one-point-something percent — whether it outruns inflation is a promise the bank never signed. Cash has risks too; inflation is its IOU.
But that’s only half right, and it needs my own correction: a dividend’s arrival isn’t a contract either. The payout is one year’s profit decision, not a charter clause — profits slide, and that picture of 5% every year, forever, gets repainted. So landed isn’t the finish line; it’s the only bookkeeping that counts — and it gets re-audited every year.
Three Ledgers
I’ve since compressed my bookkeeping into an ordering of three ledgers: the income statement is an essay, free cash flow is a diary, and landed cash is a passbook. The essay can be beautiful; the diary rarely lies; the passbook never does. When the three disagree, trust the last one.
You’re looking at the share price; I’m looking at the dividend. I intend to break even through dividends — I don’t have time to waste on companies with fat profits that never pay a cent. Which number does break-even use? Only the landed one. Until the client pays, that receivable automatically zeroes out in my head. And the next time someone tells you how much they earned this year, ask one question first: has it landed?
