silly question on profits made by business

[pdnewbie]

What do businesses do with profits? What does your company do with profits? I'm just asking because I've never run a business and don't know what goes on. I'm also asking because I've a suggestion on how profits and losses should be accounted for in businesses. An alternative business model. Here it is.

Companies should be aiming for efficient and effective transformation of capital to output. To me, that means breaking even every time. Not creating or destroying wealth, just using inputs and transforming them into outputs according to demand.

I guess this could be achieved by better budgeting. Set up funds to address all conceivable effects that the business could be having on its environment. Better reporting on how companies use their profits. Being more ethical on how they use their profits. Build a best practices approach when formulating a business case for each budget. Profits and losses are distributed evenly across all stakeholders.

Look, forgive me if this is already done in industry, because I don't really know. I just thought I'd share it in case it isn't. There are probably flaws in my argument and I'm more than happy if you want to pick at them. Read on for my aside.

Aside: There should be a medium (say, internet) that names and shames unethical organisations, and governments, who exploit, or neglect:

* natural environment
* human welfare

- physical (e.g., starvation in third world countries)
- mental (e.g., media organisations keeping populations in the dark about current political and social issues)
- social (e.g., organisations who produce products that encourage destructive escapism)
- spiritual (e.g., organisations who encourage immoral behaviour)

It should be hierarchical, a bit like Google Maps, where you can zoom in to geographical regions and see the companies that exploit.

But then it raises another concern: how do you unravel the illegal organisations that are even more responsible for exploitation?

[Dani]

Who defines what is immoral? or explotation?

A company that breaks even is a dead company, especially as soon as it has it's first problem and has 0 money to save it.

That's why most people are so scared of losing their jobs, their life is a 0 profit business, so they can't survive even a couple of months without their job income.

Company profits (after tax) generally go to three places,
1. The owners/shareholders of the company
2. Get reinvested into the company, or are used to expand research, development, aquire other companies
3. Just saved in case of a rainy day.

Failure to do any of these would be the end of a company. If the owners didn't get paid, no one would start a company ever. You have to risk a lot, and put in a lot of effort to start a company, so people should be rewarded for it.

What you are suggesting is very close to socialism or communism.

[Brutha]

Look, forgive me if this is already done in industry, because I don't really know. I just thought I'd share it in case it isn't. There are probably flaws in my argument and I'm more than happy if you want to pick at them.

You didn't make an argument, to make an argument you have to understand what you are talking about.

Companies should be aiming for efficient and effective transformation of capital to output.

Yes, a company trys to produce at much money (output) as possible with its capital (input).

To me, that means breaking even every time. Not creating or destroying wealth,

How is breaking even more effective than making profits? Making profits (whether they are in money or in other areas) is by definition more effective than making no profits.

Aside: There should be a medium (say, internet) that names and shames unethical organisations, and governments, who exploit, or neglect:

Why don't you make that website yourself? We live in a time where you can do something like this.

[pdnewbie]

Thanks for your comments. Brutha, you're right it's not an argument, it's just an opinion. Bad choice of words on my part.

As for making zero profits, I'm not sure I understand what the problem is. I'm talking zero profits after all expenses have been paid. I'm not just talking about factoring in the budgets of each department. I'm also talking about factoring in the company's commitment to shareholders, to community organisations, and to other third parties, and even an 'emergency fund contribution' (call it what you will), into the selling price of the goods/services.

What I'm saying is changing the definition of what profit means. Consider insurance against insolvency (in the form of a reserve fund) as an asset in the balance sheet (in total) and an expense in the p&l statement (for each year). Consider payment of dividends to shareholders as an expense. This means to me that profit is then spillover, or a deviation to targets, rather than something to maximise.

I acknowledge that in times of growth, there will be some profits going the business's way. You'll need them to keep up with demand. There will also be times of decay, and in those times there will be some losses going your way. I agree that a cash buffer should exist within the company at all times to weather the hard times. Again, it can be factored into the selling price of the goods/services produced. The premium will depend on the volatility of the business, I imagine.

But I feel that the goal should be break even. Not continnual growth, but stability. Not money making, but offering goods/services according to what's best for society. For example, not soft drinks and fast food, but healthy food.

If a business wants to stay afloat during periods of low demand, but keep its principles, it can innovate, and it can consolidate.

If a business cannot run under the conditions I am prescribing, I am suggesting that it is not being 100% socially responsible for its actions. It's less than perfect.

[ahimel]

Originally Posted by pdnewbie

As for making zero profits, I'm not sure I understand what the problem is. I'm talking zero profits after all expenses have been paid. I'm not just talking about factoring in the budgets of each department. I'm also talking about factoring in the company's commitment to shareholders, to community organisations, and to other third parties, and even an 'emergency fund contribution' (call it what you will), into the selling price of the goods/services.

I think there's a difference of terminology here. Usually "profit" is defined as the money left over after you've paid for the necessary expenses (rent, cost of goods sold, etc.) If you don't have any of that, you're going to be screwed the first time the rent increases.

What (I think) you're talking about is what to do with that profit. And it's definitely true that you have to find some use for it. You can't just ignore it on the balance sheet, pretending it doesn't exist. You have to put it somewhere.

As Dani says, future growth, rainy-day savings, or shareholders are the most common places to put it.

And that absolutely must balance. Otherwise your balance sheet is off and the IRS will come after you.

What I'm saying is changing the definition of what profit means. Consider insurance against insolvency (in the form of a reserve fund) as an asset in the balance sheet (in total) and an expense in the p&l statement (for each year). Consider payment of dividends to shareholders as an expense. This means to me that profit is then spillover, or a deviation to targets, rather than something to maximise.

And what you're saying is perfectly valid. But several hundred years' of accounting discussion does not define dividends to shareholders to be an expense, and thus does not define profit as a deviation from target. You'd be better off to define new terms and use those, because otherwise you'll get into this semantics argument every time, and no one will ever actually discuss your theory.

It also seems to me that you have 3 separate things going on here:

1) A question on what to do with profits, which Dani has answered.
2) A statement/theory/argument that businesses should be socially responsible with regards to the products they're selling, the technologies they're using, their effect on the environment, and the wages and working environment of their employees.
3) A statement/theory/argument that part of social responsibility is to not gouge customers for the sole purpose of increasing profits and expanding business. Businesses should have "target" profit level that takes into account the cost of goods sold and other expenses, the desired rainy-day cushion and distribution to shareholders, and not aim for more than that.

Does that bear any relation to what you're trying to say?

[Dani]

Originally Posted by pdnewbie

As for making zero profits, I'm not sure I understand what the problem is. I'm talking zero profits after all expenses have been paid. I'm not just talking about factoring in the budgets of each department. I'm also talking about factoring in the company's commitment to shareholders, to community organisations, and to other third parties, and even an 'emergency fund contribution' (call it what you will), into the selling price of the goods/services.

If that is what you mean, then all companies currently break even by your stand point. Companies don't have money floating around in the ether. All of it goes somewhere and gets used.

Originally Posted by pdnewbie

What I'm saying is changing the definition of what profit means. Consider insurance against insolvency (in the form of a reserve fund) as an asset in the balance sheet (in total) and an expense in the p&l statement (for each year). Consider payment of dividends to shareholders as an expense. This means to me that profit is then spillover, or a deviation to targets, rather than something to maximise.

As Ahimel said, it would better to define a new term than redefine an old one. No one will ever be able to understand you because they already know what profit means.

You are basically starting a new language by redefining the meaning of words.

Originally Posted by pdnewbie

I acknowledge that in times of growth, there will be some profits going the business's way. You'll need them to keep up with demand. There will also be times of decay, and in those times there will be some losses going your way. I agree that a cash buffer should exist within the company at all times to weather the hard times. Again, it can be factored into the selling price of the goods/services produced. The premium will depend on the volatility of the business, I imagine.

But I feel that the goal should be break even. Not continnual growth, but stability. Not money making, but offering goods/services according to what's best for society. For example, not soft drinks and fast food, but healthy food.

Back to communist / socialist thinking. I had the same thoughts myself a while ago, but it is something that would be impossible to enforce without being a dictatorship.

Conversely it is something that would happen naturally if we lived in a truly enlightened society.

This sort of paradigm shift would require all of society to become altruistic people. Possible, but not likely.

Same flaw as socialism/communism, it requires an enlightened populace to actually work. Because greed, and fear will always disrupt it.

Originally Posted by pdnewbie

If a business wants to stay afloat during periods of low demand, but keep its principles, it can innovate, and it can consolidate.

If a business cannot run under the conditions I am prescribing, I am suggesting that it is not being 100% socially responsible for its actions. It's less than perfect.

Companies not %100 socially responsible Impossible!

I think you will find that only something like 1% of companies or less are actually truly socially responsible.

What you are also suggesting, though not directly, is that a company does not fight for for it's survival, but instead operates purely in the 'best interests' of the community. Which may mean it shuts it's doors if it is no linger in the public interest to stay open.

Who defines what is the best interests? Should Ford/GM/Toyota fire all their employees and shut down their companies devastating millions of lives, because cars could be considered socially irresponsible?

You are asking companies to commit suicide if they no longer meet the needs of society. As that is the only way for them to remain socially responsible. To dissolve when no longer needed.

That is a -tough- request. Almost as tough as asking someone to die because they can no longer contribute to society.

Technically, it makes perfect sense logistically but its a rough deal for those involved.

[Brutha]

Lets take the Pavlina LCC as an example.
Steves write a lot of quality post that bring him new readers. Those readers click on ads that are the income of the Pavlina LCC.
After your definition that wouldn't be profit, but lets consider the added income as profit for a second.
What should Steve do to get rid of those profit producing new readers?
Write a lesser number of posts?
Write lower quality posts?
That would both accomplish your goal of reducing the profit.

[pdnewbie]

Originally Posted by ahimel

It also seems to me that you have 3 separate things going on here:

1) A question on what to do with profits, which Dani has answered.
2) A statement/theory/argument that businesses should be socially responsible with regards to the products they're selling, the technologies they're using, their effect on the environment, and the wages and working environment of their employees.
3) A statement/theory/argument that part of social responsibility is to not gouge customers for the sole purpose of increasing profits and expanding business. Businesses should have "target" profit level that takes into account the cost of goods sold and other expenses, the desired rainy-day cushion and distribution to shareholders, and not aim for more than that.

Does that bear any relation to what you're trying to say?

Yes it does. Thanks for the summary.

Originally Posted by Dani

If that is what you mean, then all companies currently break even by your stand point. Companies don't have money floating around in the ether. All of it goes somewhere and gets used.

Yes, but I feel that it's hard to find what they did with the profit. And I admit with this system it would be even harder. You would have to track all those other commitments to work out how much they made after covering the more traditional expenses.

What makes it hard right now involves the annual reports. The annual reports, I believe, are incredibly difficult to follow if you want to check for corporate social responsibility (CSR). Perhaps this problem could be resolved by reputable auditors who provide some sort of CSR audit, and they follow standards set by government. The government audits the auditors to keep them honest.

Originally Posted by Dani

As Ahimel said, it would better to define a new term than redefine an old one. No one will ever be able to understand you because they already know what profit means.

You are basically starting a new language by redefining the meaning of words.

I don't think I'm doing that. I just feel that society views these other things like payments to shareholders, commitments to community organisations, cash reserves, and other things, as a bonus. It doesn't have to be. If businesses are full-heartedly committed to helping these stakeholders, they should consider these things as costs to the business. A dedicated expense to the business's accounts.

Originally Posted by Dani

Back to communist / socialist thinking. I had the same thoughts myself a while ago, but it is something that would be impossible to enforce without being a dictatorship.

I don't think it is impossible to enforce without being a dictatorship. Guilt, naming and shaming, works well. If a company is not being honest, educate the public, and hope that people use their moral compass to boycott the company. Make ethical investing mandatory, so that as soon as a company behaves unethically, or is behaving unethically, its share price nosedives, or stays artificially low.

As for smaller businesses, you're right I can't see an easy way. Perhaps building a culture that detests disloyalty from business. That's not dictatorship, it's behaviour changing. It's indirect control, for the greater good.

Originally Posted by Dani

Companies not %100 socially responsible Impossible!

I think you will find that only something like 1% of companies or less are actually truly socially responsible.

You're right Dani, the business world is a long way off from behaving responsibly.

Originally Posted by Dani

What you are also suggesting, though not directly, is that a company does not fight for for it's survival, but instead operates purely in the 'best interests' of the community. Which may mean it shuts it's doors if it is no longer in the public interest to stay open.

You are asking companies to commit suicide if they no longer meet the needs of society. As that is the only way for them to remain socially responsible. To dissolve when no longer needed.

Companies don't have to commit suicide, they can change. Just like people have to change to stay employable. Perhaps they need a new purpose, or they need to be creative, or engage in strategic alliances, or merge with a like-minded company. There are many options. That's what companies do now anyway.

After all this discussion, I guess what I want to see in business is easier tracking of how companies spend their profits. If it's easy to track, then it is easier to pick up if they are being irresponsible, and our society can hold them accountable.

[Brutha]

It is not that difficult to get to know how a business spends his profits. Sure if you don't understand anything about finance you have a problem.
You can read up how much money goes to the shareholders etc.
I also wouldn't see Steve as irresponsible if he uses the money he makes with this site solly for his own well being.
He produces Value, get money and spends it. What's wrong?

[pdnewbie]

Brutha, I'm just writing on this forum because I felt it was a good place to discuss this topic. In fact this is the only online forum I participate in. I'm not suggesting that Steve is dishonest. I feel there is a general expectation in society to get rich from your business. Money and greed is a bigger motivator than a purpose. This is particularly so with sole proprietors and private companies with a few shareholders. If they want to, they can charge extra on their products so they can use their profits to pay for expensive things, and buy more investment properties. It's just wrong.

[Brutha]

I feel there is a general expectation in society to get rich from your business.

Discussing on the basis of your feelings isn't as good as discussing on the basis of facts.
How you feel is no real argument in a forum discussion.

Originally Posted by pdnewbie

Brutha, I'm just writing on this forum because I felt it was a good place to discuss this topic. In fact this is the only online forum I participate in. I'm not suggesting that Steve is dishonest. [...] Money and greed is a bigger motivator than a purpose. This is particularly so with sole proprietors and private companies with a few shareholders. If they want to, they can charge extra on their products so they can use their profits to pay for expensive things, and buy more investment properties. It's just wrong.

I just want to show that producing value is a better goal than trying to minimize profits.
If someone produces values and makes money their is nothing wrong.
If you produce something that isn't perceived as valuable you won't make any money.

That is the area where you can do something, persuade people that fast food has no value for them. If you succed they won't buy any fast food and companys who want to make money won't sell any fast food.
Same with enviromental issues.
When people perceive a product that is produced environemental friendly as more valuable, companys have an incentive to produce those products.