Financial Strategy: Why Do They Require People to Buy the Mark VIII E-Meter for Cash?

Summary: The recent revelation that you have to buy your new Mark VIII e-meter for cash instead of using money deposited with the cult on account has led some to speculate that the cult’s finances are in precarious shape.  Though that is certainly possible, I think it’s impossible to tell from this one data point alone. However, this development suggests that Miscavige is managing the business of Scientology to achieve only one goal, a financial metric that is utterly useless in the real world, but one that allows him to feel like less of a failure when he looks at the numbers than other numbers in the cult.

We also look at what moves Miscavige might make next to continue to grow the business using his management criteria.

The Detail That Sparked the Question

Over at WhyWeProtest, a new thread wonders whether the cult finances are struggling in light of the new requirement that people buy the new Mark VIII e-meter with new cash, rather than using money “on account” that they have paid in advance for courses not yet taken.  Recall that Mike Rinder’s blog yesterday featured a detailed post about how the cult has made this change in the rules.  In some cases, people have put significant amounts of money on deposit; one now ex-Scientologist highlighted in a Tampa Bay Times article had over $350,000 on account at one point.

Forbidding people from using their deposit money to buy e-meters certainly sounds like it could indicate that the cult is running out of cash.  That is indeed possible, but there are other explanations that could also account for this decision.  My inclination is to believe that they’re not in danger of running out of cash. It’s merely bad management.

What Real Executives Manage

There are dozens, if not hundreds of financial numbers that senior executives pay attention to when running a company, to help them keep tabs on how well their business is doing.  But it turns out that only a relatively small handful of these numbers are the key indicators that will move the stock price up or down significantly.   That’s true of the largest, most complicated companies in the world, like Exxon or General Electric.  Every industry is different.  Software companies focus on growth in sales as well as “operating margin” (defined below) while the oil industry could care less about sales figures, since sales includes the cost they pay for the oil they refine, and that fluctuates based on global economics.  If you ask the CEO of Exxon what his sales were, he will give you a blank look; I’ve actually seen it happen when a rookie asked him that when he came to Global Capitalism HQ to review the business a few years back.

But one thing is common to all executives in a real business: the numbers they manage the business to deliver are ones that genuinely reflect how well the business is doing, and that give the earliest possible warning for how the business might be faltering.  They don’t ignore the hundreds of other numbers, but they only lose sleep over a handful of numbers.

Basics of Financial Management

Here are some of the key numbers that appear on financial statements in most businesses.  We’ll refer to most of these in the discussion of Miscavige’s management mind at work.

Sales Sales (a.k.a. revenue) is the money you take in from the product or service you offer. In the case of Scientology, this includes sales of courses, books, auditing services, cruises on the Freewinds, etc.  We also classify donations such as IAS and Ideal Orgs as “sales,” even though real accountants would describe them slightly differently.
Operating Expenses Operating expenses are those expenses you pay in the normal course of business to generate sales.  They would include rent on buildings, utilities, raw material costs, labor, advertising, paper clips, costs of the private jets for the executive team, costs of your IT operation, etc.
Operating Income Operating income is the money left over when you subtract out operating expenses from sales.
Operating Margin Operating margin is the percentage of sales represented by operating income.  Most manufacturing and service companies manage to sales growth plus keeping this number at or above the level that it was at in the same period last year.  It’s all about how efficient you are.
Extraordinary Items Extraordinary items include lawsuit settlements, gains or losses on selling off a division of the company, charges for failed products, etc.
Net Income Net income is what’s left of your operating income after extraordinary items and after taxes (though the cult doesn’t pay any taxes in the US).  At the end of the year, your cash goes up by approximately this amount.
Gross Cash There are two kinds of cash balances that a company holds.  Gross cash is simply the total amounts held in the various bank accounts of the corporation.
Net Cash Net cash is a subset of gross cash. It is what you can actually use to invest in growing the business.  To get from gross cash to net cash, you have to subtract out debt that you owe to the bank or to bondholders, since you’ll have to pay that off.  Importantly in the cult’s case, net cash also subtracts out the amount of money that customers have put on deposit in advance of using services for you.  In the case of Scientology, we believe this number is a significant portion of the reserves.  You can’t count this as net cash because customers could, in an ethically run business, show up and demand that money back, and it is particularly bad form to be unable to refund them on demand.

For a little clarity, here’s an example of how this might work in Scientology.

Let’s say that the cult begins the year with $1.000 billion in reserves.  Over the course of the year, sales from all operations are $200 million. and operating expenses are $140 million.  That means operating income is $60 million, and that means that the operating margin percentage is 30%.  That’s a pretty healthy number relative to a lot of industries, by the way.  The grocery business would kill to get 5% operating margins; 1% to 2% is more normal.

If the cult paid out $30 million in legal settlements that year, they’d have net income of $30 million, and at the end of the year, gross cash would go up by about $30 million, to $1.030 billion. Net cash would go up by the same amount, since the $30 million in profits is not encumbered by a need to be able to pay it back.

If, in the same year that net income contributed $30 million to gross cash, the cult also regged people to put $50 million on deposit for courses in advance of taking them, then gross cash would go up by $30 million + $50 million, to $1.080 billion.  But net cash wouldn’t go up at all because you have to be ready to pay your customers back if they change their mind and want their deposits back.

The One Number I Think David Miscavige Manages

I think David Miscavige manages exactly one number as he reviews the cult’s finances:  gross cash.

I think he does this for two emotional reasons:

  • Mainly, I think he does this because he desperately wants to be able to overlook the negative indicators he’s seeing, such as declining revenue and increased amounts of money paid in legal settlements.  Declining sales over multiple years is a disaster in almost any company, and increasing extraordinary expenses are also problematic because they cost you profits but don’t help you make more money later.  So I think he focuses on the one number that’s least likely to deteriorate, no matter how bad the rest of the numbers in the company might be.
  • I also think that gross cash makes most intuitive sense to a very unsophisticated manager.  When you ask a kid how much money is in his piggy bank, he’ll almost invariably give the gross cash figure, and he’ll forget about the money he owes people because feels better to have as much cash as possible.

I have had the feeling for a few months that this is the number that Miscavige cares most about. This scenario, focusing only on gross cash, explains why he seems to be so un-troubled by the lack of “fresh meat” walking in the door, which would contribute some revenue today, but lots more revenue over time as the cult empties the finances of each new member on the Bridge to Total Bankruptcy.

It’s uniquely tough for the cult to cut operating expenses and boost operating margin, since they have little control over costs like utilities and telephone.  It’s uniquely hard for them to increase profits (and thence cash) by cutting costs since their labor costs are already extremely low, due to the Sea Org slave labor wages.  Most service companies spend from 30% to 50% of sales on salaries, which makes that a juicy target for cost-cutting measures.  But since the $50 per week Sea Org earn in a good week is about 1/10 of the salary of a minimum wage worker in other businesses, the cult won’t be able to manage labor costs to preserve operating margin.

And especially these days, managing to net income is difficult.  Net income is hurt by slowing sales, growing expenses and by extraordinary items.  Those three variables can be very tough to control, especially when the cult seems to be paying out far more in legal settlements the last couple years than in the past.  Operating income is easier to manage than net income, since it doesn’t include extraordinary items, but both of these numbers are hard to manage in the best of time in the most straightforward of companies.

Here’s the magic trick: if you can take in deposits then gross cash can go up even if net income is negative. For example, if the cult does $200 million in sales, $30 million in operating profit, and pays out $30 million in legal settlements, then net income was $0. But if you also add in $40 million in deposits greater than revenue, gross cash goes up by $40 million which looks pretty good. You could almost feel like you were doing something right. The only problem is that while deposits make gross cash go up, net cash would go up by $0, which doesn’t look good.

So now you can see why gross cash is a much more likely number for Miscavige to manage.  By extracting deposits from your customer base, you can make gross cash look good even if the rest of the business is turning to shit.

That, in turn, explains why he fights so viciously to not only avoid giving refunds, but to avoid giving back money on deposit. If he were managing revenue, he’d hate to give refunds because that takes revenue down. But if he’s managing gross cash, that is why he fights so viciously about money on deposit.

What Might They Do Next to Protect Gross Cash?

One commenter suggested that the cult might arbitrarily convert deposits to IAS donations.  I’m not sure that’s too likely.  Here are the scenarios I come up with:

  • First, I think that the lawyers will smell blood in the water if the Garcia’s are successful in getting the cult-specified arbitration system (which apparently has never actually existed) to be tossed out of court.  I strongly suspect that Ted Babbitt is using the Garcias as an initial case before filing tons of suits on fraud related to Super Power.  But I also suspect he and several others are waiting to file a mammoth class action suit to get refund of money on deposit, particularly for ex cult members.  I have talked to a couple of ex’s who would not sue individually but who would happily join a class action suit to recover money.  And due to the precise nature of the documentation, I think recovery for the ex’s would be fairly high, a lot higher than the pennies on the dollar typical of traditional class action suits. Look for the cult to continue to fight the Garcia case tooth and nail.
  • Second, I doubt that they will convert deposits to IAS donations without something that looks like permission from the deposit holders.  The word “conversion” in accounting circles is somewhat dirty — it basically means that you took something and pretended it belonged to you in the first place.  I think the cult’s primary mechanism to hang on to deposits is just to make the refund process as difficult as possible.  I think a suit over conversion, even if there were terms permitting it in the deposit agreement, would easily win.
  • Third, I think they’ll continue to focus over time on IAS donations, rather than taking deposits.  This is a trend already well under way, as evidenced by all those flyers that invite you to donate and move up a status level, but I think it will likely accelerate, even if they can’t really convert deposits directly to donations.  They may try to put status levels “on sale,” promising you 150% credit towards your next Patronius Gluteus Maximus trophy for every dollar you convert from deposits to IAS donations, but I suspect people will blow if they are being regged at par (i.e., one for one exchange of deposit dollars for IAS donation dollars).

Author: John P.
