What the Upkeep Costs
In the mid-nineties Cosa Nostra was going through hard times. After the murders of the judges Falcone and Borsellino, the state went after it in earnest, trials followed one after another, hundreds of men were inside. Many of the prisoners stopped getting their wages. What this looked like from the inside can be seen from the letters that the jailed boss of Palermo’s Brancaccio district wrote to one of his aides. John Dickie quotes extracts.
In substance, the boss wrote that twenty of their men had been ruined by the trials and had nothing to live on, so a way had to be found to give each of them three or four flats, to secure a decent future for them and their families. The boys inside, he complained, kept asking him why the monthly payments had been cut after his arrest. Two million a month barely covered anything; he had paid five million, and he strongly advised paying no less than he had. When he was at the helm, he reminded his aide, they had a fund of two hundred million for annual payments, and somewhere between a billion and a billion and a half went on extra payments. And those in the building trade, he insisted, ought to give the boys flats.
That is a bookkeeper’s letter, not a killer’s. A man sits in a cell and worries about overheads. And he is right to worry. Dickie writes that under Bernardo Provenzano, who took over the organisation at that time, the prisoners’ fund was restored, and every unit of Cosa Nostra paid into it. An influential Palermo prosecutor, Guido Lo Forte, explained why: between what the state offers prisoners and what the Mafia guarantees them, they choose the second. In other words, cut the payments to the men inside, and they start talking to the investigators. The most dangerous saving is the one that looks most sensible.
Fixed and Variable
Costs come in two kinds. Some you pay even if you’ve sold nothing: rent, wages for your permanent people, insurance, interest on a loan. Those are fixed costs. Others grow along with sales: the oil you bought in order to sell it, petrol for deliveries, the agent’s percentage. Those are variable.
The Neapolitan Camorra pays its fixed costs with remarkable punctuality. Saviano describes how a clan keeps paying wages to the families of men who have been arrested or killed. The money is delivered by people known as “ghosts”: pensioners, former shop accountants, old bookkeepers from small stores, for whom it’s something on top of the pension and a reason to get out of the house. On the twenty-eighth of every month they knock on the door, put their bags on the table, take an envelope with the camorrista’s name on it out of an inside pocket and hand it to the wife or the eldest son. Almost always they bring a little food along with the money: ham, fruit, spaghetti, eggs, bread. Saviano notes that from the number of bags a courier carries you can tell how many wives and widows of camorristi live on that street.
A worker’s arrest doesn’t cancel his wages. It only cancels his work. That is fixed costs in all their glory: they don’t ask whether you had a good month.
Why does this matter? Because the balance between the two kinds decides how your business gets through bad times. If almost everything you have is variable, in a bad month you sell less and spend less, and you come through calmly. If almost everything is fixed, in a bad month you sell less and spend the same, and the till empties very fast. But in a good month it’s the other way round: fixed costs don’t grow, and almost every extra dollar of takings is yours. So the question isn’t which is better, but how much risk you’re prepared to carry.
The Point Where Profit Starts
From this comes the most useful idea in bookkeeping: the break-even point. That’s the volume of sales at which takings cover all your costs, fixed and variable. Below that point you’re working at a loss. Above it, every sale brings profit.
Mike Dash gives a calculation that Morello and Lupo got carried away with at the start of the century. New York was taking in a million new immigrants every year, and they needed somewhere to live. A six-storey tenement cost around twenty-five thousand dollars. It held twenty-four small flats, each of which could be let for a hundred and thirty dollars a year. That meant the builder got his investment back in eight years and was left with the building on top.
The arithmetic is right: twenty-four times a hundred and thirty is three thousand one hundred and twenty dollars a year; twenty-five thousand divided by three thousand is eight years. But look at what isn’t in it. Repairs. Taxes. Months when a flat stands empty. Tenants who don’t pay. The rent collector. All of that shifts the break-even point, and eight years easily turn into twelve. Pretty calculations almost always count takings honestly and costs optimistically. You count it the other way round.
Everything Wears Out
A building that seemed eternal grows old. A press that was bought new needs repairs more often than it works ten years later. A lorry ages, and the mechanic’s bills grow with it. This is called creeping decay: everything you’ve built slowly falls apart, even if you do nothing. Especially if you do nothing.
Hence two rules. The first: build wear into your price. If a press is going to last ten years, every shirt you’ve ironed on it has to pay for a little piece of that press. The bookkeeper calls this depreciation: he divides the price of the press by its years of service and every year writes a piece of it into expenses. But he writes it in the book; he doesn’t put it in the drawer. The till gets no fuller for it, and a new press in ten years’ time won’t cost what the old one did. So the money for a replacement is put aside separately, and everyone whose business is going well forgets about it, until the press breaks down for good and demands money that isn’t in the till. Don Vincenzo kept a separate box in the till, and that is exactly what it was called: “new press”. The same sum went into it every week. When the old press died, the new one was bought the next day, and the laundry next door, whose press died the same year, closed for a month.
The second: don’t buy new when a good old one will do. Gambetta observes that for its main trade the Family needs almost no fixed capital: an office in the back room of a club, some means of surveillance, fashionable accessories such as dark glasses, and a few hiding places. Sometimes an armoured car is needed. Antonino Calderone, to save money, bought his second-hand, for three million lire, in 1977, from one of Italy’s biggest pasta makers. Even our armour came with miles on the clock—but from a good family, a pasta family. A man who could have bought a new car bought one that did the same job and kept the money for things that bring in an income.
What Money Costs
One last thing. Money wears out too. The letter from the Brancaccio boss names its sums in lire, and Dickie converts them for the English reader: two million lire a month is about six hundred pounds. Twenty years on, those six hundred pounds will buy less, and the lira doesn’t exist any more. Dash writes that in 1903 an ordinary family in New York could live on three hundred dollars a year. Today that money won’t keep you for a week.
This is called purchasing power. Money that sits idle buys a little less every year. So compare the figures of different years with that in mind, and don’t celebrate takings that grew by five per cent if prices around you grew by seven. You haven’t grown. You’ve got thinner, only slowly.