Period Profit and Shareholder ValueProfit is not so important according to some people, more important they say, is the creation of shareholder value. Both conceptions, 'profit' and 'shareholder value', are not conflicting views but are mostly in accordance with one another. Period profit is the realised surplus value; it is the extra that there is at the end of a period over and above that which was there at the beginning. Shareholder value, the worth of an enterprise, is at any moment the present value of all future proceeds minus loans and current liabilities; the worth of the shares, the possessions of the owners. To create more worth for the owners indeed is very important too, but it is something other than period profit. Shareholder value will be constant through time, in a stable situation naturally, when replacement will always take place of exactly those items that have been used up. Made profits - above a certain level - are not to be despised. Dull business, yes indeed. The cow is not growing but all the time giving a bucket full up with milk. The quote of an old banker: “good business is dull business.” Shareholder values are birds in the bush. Not in the hand yet. The principle of realisation, provided a correct interpretation, defines what profit is. Profit is like milk. There is milk after the milking. The milking-stool seems to have three legs: people, planet and profit. Before the milking there are expectations, promises, changing shareholder values, whatever, but no milk. Profit is an ex post entity. Ex ante, profit projections and forecasts can be given. The measurement of profit however can only be done ex post. Ex post, looking in retrospect, of course one can calculate a difference of two shareholder values at start and end of a period under consideration. An increase is often better than a decrease. What is the meaning of the difference in a specific situation? The company may become a minor one, still profitable. Shareholder value (economic value: what might happen, additional to the existing activities) as well as total balance (embedded value: what really is present) are snapshots i.e. parameters with a value at a point in time, while profit is a period parameter. Period profit and shareholder value are separate, but relate to each other. They inter-relate, strengthening or weakening and vice versa, but it is a loose relationship. One cannot take the place of another. Concerning the published period profit (financial accounting), the pay-out ratio is an obstacle in the search for a true answer and not knowing, neither the real period profit nor its parts, is the root of much more trouble. Not only must the pay-out ratio be kept pretty low but also profit is overstated. Profit indeed is an important thing but there are more important things. Managers seem to be in a perpetual panic to encounter a shortage of money sooner or later, true enough, as long as one does not know the one and only proven period profit. In the pay-out of many so-called profit figures is a great deal of truth. In fact a part of the retained official profit is not profit but SVD (Substantial Value Difference).[1] What an enterprise likes to publish or has to publish according to law, rules and regulations, is quite another story. Verified internal profit and yield-figures - information produced for management decisions within the firm - are the most important considerations for the management of a company. What does the top executive say in the published reports of the company, if he doesn’t fully understand what has happened himself? Internal profit and equity both relate to profit measurement by no other law or rule than pure science. A pay-out of less than 100 % of the proven real period profit can provide for a growth-scenario. Raising shareholder value can also be accomplished by better investing. Higher shareholder values and higher profits usually go together. A rise in shareholder value implies promises, expectations. To prove them, to fulfil them is another matter. Future profits will be the proof. The other way round, bad investments, lower shareholder values, and the future will look bleak. By measuring subsequent net period profits as accurately as possible after done investments, one can have the corporation at one's finger tips. Triggering the whole operation. At the least little indicator one can give appropriate guidance on the necessary adjustment required. By not knowing the real period profit, one loses control. Traditionally costs are deducted from turnover, and profit is that which remains. However, the costs are not always that clear for a certain period, particularly the depreciation and the interest costs, besides tax costs. Moreover, the traditional method is very time-consuming, since results of speculation and differences between real costs and standard costs have to be included in the calculations. From the rigid methods of depreciation in the handbooks one cannot conclude the costs of depreciation, nor the true values to be entered onto the balance sheet, but merely figures, which have been calculated in an artificial way. These are unreliable, for they are not just determined by the method, which was chosen, but for each method they depend on the life cycle about which it is often difficult to say something meaningful prior to the life cycle. And if new values change, one either does or does not have to determine backlog depreciation by separate calculations - a time-consuming exercise on which there is no consensus. For example there are problems such as: should replacement be compulsory or not, what should be the specific gearing ratio, and what are the normal numbers of working-units? Such matters are often not even acknowledged, let alone processed correctly. To put it crystal clear: the whole idea of depreciation, the discriminating mathematical treatment of various assets, is good for nothing. It is indeed totally wrong. All existing profit calculation systems make an arithmetical difference between for instance non-monetary fixed assets and other assets but this is illogical. Profit calculation therefore has been made a complicated matter. Counting and calculating is absolutely minimal and exceptionally simple via a direct way to the solution. Short and easy. A tremendous amount of money can be saved, including for cases of historical cost accounting (measuring fiscal profit). The budgets of many accounts departments can be cut drastically. The formula as stated below gives the result of the search for the solution to profit measurement. This by necessity is limited to that which can be solved, the gauging part of the problem cannot be solved, not by scientists anyway. Values and standards are mostly outside the realms of economics. They just have to be defined; these parameters happen to be given data. Measuring data. Signals. Measuring is signal gathering and compilation into the profit figure. The crucial question is the connection between all parameters, which is a money counting problem. That problem must be soluble. It is the inventor's starting point. Of course one can draft every desired balance sheet in order to please someone, the shareholders and the creditors in the typical case of a company. Maybe the real periodical account is prepared solely for the internal use of the managers of the firm, to help them to manage. Suppose in the latter case there were different possible accounts, it can be this, it could be that, that in itself would be misleading information. Good management is not imaginable, anytime, anywhere, with accounts one chooses. Something for everybody. Science is still the noble search for truth. In science there is no choice. No room to assume. There is no reason to adopt nor sustain, whatsoever, without proof. The Profit Formula® Profit = (CASH -/- NVD) * (1 -/- Quota) -/- SVD This basic equation of profit measurement includes each and every capital maintenance concept and does not exclude a single concept of value. Integration of nominalism (NVD) and substantialism (SVD), both general and specific, and with the exact calculation of the burden of taxation. This equation encompasses it all. According to all reasonable profit definitions anybody can measure profit over a randomly chosen period, of any length - quickly and easily. The Profit Formula® is exceptionally user-friendly. Working with this profit meter is straightforward and relatively simple. The Profit Formula® is value-free. It is a universal profit-meter, suitable for measuring real (scientifically correct) as opposed to artificial (defined at will) profit. For instance, inputting fiscal premises will lead to the fiscal profit figure. The one and only real profit can be found exclusively by inputting the real values and standards. It has been disclosed, that shareholder value cannot replace profit. Exactly the same applies to cash flows. Also cash flows are another thing. In The Profit Formula® the notion 'CASH' is used rather than 'cash flow' to make it quite clear what is being referred to. Value differences are at stake. All along the line. Positive and negative. Nominal and substantial. One cannot deny the laws of logic. Although being a social science, a key economical notion is 'money', a quantity that can be and must be counted and those counts have to fit, because no money unit can appear or disappear just like that. [1] Refer to The Profit Formula®
|
|
|
