Desperately seeking real profit

A responsible manager of an entire enterprise or a single profit-center has to know what the existing total value is and the added value, in other words the capital together with the profit. The yield i.e. profit divided by capital, must be reliably known within a known margin of accuracy, under specified conditions, to be able to give guidance.

If, when and as long as it holds 'profit is an opinion', one is forced to look at other (financial or not) 'leading indicators'; without setting aside the EFQM-model and the balanced scorecard, it holds that a user-friendly measuring instrument, pointing out the real profit, acts to satisfy (one may postulate) an unfulfilled desire. In the noble search for truth there is no reason not to tackle apparently impossible problems, if for science only. One needs, I refer to Keynes, new ideas. The debate on inflation accounting will not end without the solution.

Profit is not just the outcome but also the starting point of the process. Profit measurement and the calculation of yield and the comparison of 'return to capital' with the 'cost of capital' will always be a main focus for attention of many a manager in each and every organisation. No controller, nor investor, can disregard these figures.

The conclusion at the end of the 1970's, i.e. 'there is no solution', was already at that time de facto incorrect because the only proven thing at the most was and is that the followed road has a dead end. All existing profit calculation systems follow the same dead-end road i.e. period profit is total sales minus total costs. "Perhaps the search for an ideal accounting system should be likened to the search for the philosopher's stone or the elixir of life (Whittington, 1989, p. ix)."

Information about the game cannot step into the result. Nothing is able to replace the (real) profit and loss account, not even the most extensive balanced scorecard/performance-review nor value based management or whatever. A new accounting system is needed; the old one takes much effort and time, it costs a lot of money and even then what is found at the end?

Profit depends on a great many variables, but this does not mean that there is "a choice (Whittington, 1989, p. 15)" of several approaches to calculate profit. First, all these variables have to be available, just to input the data. Only then can the profit be measured with a certain amount of reliability, somewhere between a pessimistic lower limit and an optimistic upper limit, depending on the extent to which the input data were correct. Incidentally, these are the data for all exemplary problems in literature, and when such a sum is correctly compiled there cannot be any doubt about it. It is bad enough that the profit figure, the measuring result, depends on all kinds of data that are probably never correct anyway. It cannot be accepted beforehand that the measuring result would also depend on the measuring instrument. That outcome must not be more than slightly dependent on a haphazardly applied measuring instrument.

The idea that 'there is no solution' to the problem of profit measurement is just an idea. The followed way so far has a dead end. That indeed seems to be true. But it does not prove anything about other ways. The notion that no solution can even exist - for a down to earth money counting problem - has been rendered out of date by a brand new way, going straight to the solution. To measure profit is indeed really possible quite contrary to the existing general opinion. The problem of profit calculation has been solved by means of a new basic equation of profit measurement. Anybody can measure any reasonable period profit with The Profit Formula^®.

The profit for any given period is the increased value at the end of that period with regard to the initial value. To have and hold what one had as has been laid down in full freedom, and the surplus is profit. The profit is an 'after the fact' figure. When one is looking at an entire year one looks back at the annual profit figure with one's back to the future as it were, while the enterprise may well be heading straight for a disaster. Thus considered, profit figures are of little use. Profit, however, is not just the consolidated annual profit of a group, but it mainly consists of the detailed profits of one specific activity or company unit for short periods. Knowledge of these profits is essential to give guidance and to be able to adjust. In the end good management is about creating increased value, it is as simple as that. The total of the profit for a period is the sum of its parts. The profit on each product in that period is a part. Regarding the profit in addition to its composition - the profit contribution for each company unit, for each product (or group of products) and for each customer (or group of customers) - who would not want to be well informed on these matters?