Period Profit, 3 Basic Questions

According to at least some people, the objective of a capitalist business is taken to be the maximisation of the wealth of its owners, of course within legal, ethical, political and maybe more boundaries. The wealth of its owners can be measured in terms of the period profits i.e. the maximum dividends paid and/or shareholder value i.e. the market value of the company's shares. Both items, profit and shareholder value, are discussed in Period Profit and Shareholder Value. It follows, all decisions made by managers should be those which ultimately lead to the maximisation of profit and/or shareholder value. The owners of a business provide necessary capital and in doing so accept a certain amount of risk. In return, they benefit from the profits earned by their business.

How high is the period profit? A basic question. Other questions: what is the specification? Which part of the profit is operating profit, what are the so-called 'holding gains' and what is the result out of speculation? Gearing profits? Trading profits? The answers to these questions will be a trade-off between utility and costs to prepare. What information is needed? For different purposes, such as taxation, it may be necessary to prepare an entirely different set of accounts. After measuring, it becomes a matter of judging the measuring result i.e. the size of the profit. First one needs to know that size, expressed in a fixed unit.

Basic question 1: How high (or how low) is the period profit?

'How high should the profit be compared to how high it actually is?' is the vexed question of the delivered performance. Other people who are more interested in wages and/or prices may re-phrase this question to what the profit might be.

Basic question 2: How high should the profit be in a certain period?

In times of booming business, there are of course high expectations. Even bad management is capable of getting into the act, but do they perform as well as they should? And there are many more questions and problems such as the appropriation problem i.e. which pay-out ratio?

Basic question 3: What to do with the period profit?

Maybe the profit cannot be distributed completely or one does not like to do so.

Without the answer to the first basic question, no one will get to the very heart of the answers to the sequence of questions. No performance review is beyond dispute as long as it holds 'profit is an opinion'. The first basic question 1 needs a proven answer. What is the all-in period profit? Proven. Not a single number can be taken seriously without proof. General management of course is responsible for everything, but it starts (and it ends) again and again with the first basic question.