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Saturday, August 8, 2020

CEO Insider

The Old Way of Calculating Profit, Inefficient and Illogical

The Profit Formula® is a new and far better way. Depreciation and amortisation, interest costs and tax burden are exogenous variables within the old formula – these cost items happen to be outcomes of separate calculations with several arbitrary choices – whereas they all are endogenous variables within the new formula, ipso facto separate calculations are not needed anymore.

An asset is a name with a value on a line of the balance sheet. The existing profit calculation systems make an arithmetical difference between, for instance, non-monetary fixed assets and other assets, which is in flat contradiction with a logical approach. By doing so, profit calculation has been made intricate, and it thereby costs a lot of time, effort and money and what is found in the end doesn’t justify this. With The Profit Formula® counting and calculating are reduced to an absolute minimum via a direct way to the outcome. A tremendous amount of money can be saved with regard to administration and fringe costs, also in case of pure nominalism (f.i. measuring fiscal profit). It is easy to verify, both totals (amounts of stock as well as liquidities, trade debtors and trade creditors) and each transaction in detail. It all ends up in CASH and up to here they all are HC-values. In order to check day-to-day operations, it is all there. The benefits of HC-accounting are preserved by The Profit Formula®. CASH is the first term in The Profit Formula®.

The well-known profit formula in use runs as follows:

Profit = Total Sales -/- Total Costs

Seemingly simple but highly treacherous. It involves a lot of work. Re free downloadable, The Old Way of Calculating Profit is Inefficient and Illogical.

Total trading profit is the addition sum of the first up to and including the last transaction. The determination of the ‘cost of sale’ for each and every sale is not a sinecure at all. For quite soon people in practice have to deal with thousands, if not tens of thousands transactions and numerous price changes in between. One has to go through all those transactions doing many counts and calculations. Then apparently it does not matter which one of all the existing profit calculation systems to use, but it should. What a lot of work! How inefficient! Total trading profit minus all the other costs such as for instance normal depreciation, maybe extra depreciation, interest costs and tax costs, at last emerges into a net “profit”, not to be proved.

For Total Costs (TC) it holds:

TC = C labor + C material + C x + C y + … + C tangible assets

C labor = C labor a + C labor b + C labor c + …

The same applies for all the other Cs and in the case of tangible assets the cost is called depreciation. Depreciation is often the outcome of artificial calculations with several arbitrary choices, such as which depreciation method and which life cycle to use. Moreover, there are questions without a clear answer, such as yes or no extra depreciation and if the answer is ‘yes’ then how much would the depreciation be in the case of a price rise? Opinions, just opinions and an awful lot of work. There is no proof, which profit figure is to be believed? It is happening just the other way round, on the one hand, one simply cannot ignore the distinctions between assets neither with respect to ‘valuation’ nor with respect to ‘capital maintenance’ because various assets are indeed different and have divergent functions, while on the other it is possible to write down a unit monetary asset, a unit stock and also a working-unit of a material fixed asset as respectively unit A, unit B and unit C. Each and every asset has a name and a value(-interval) at any moment the balance sheet is drawn up. This is by no means just a little error; it is contradictory to logic. It is rather strange that unit A mathematically is being treated different from unit B, while the difference to one another is just the name, the line on the balance sheet. Whereas there is every reason to emphasize ‘different standards for different assets’, paraphrasing an old saying amongst economists.

It lasted till around 1840 before the German doctor Julius Robert Mayer and the British brewer James Prescott Joule came to the formulation of what today is acknowledged as the law of conservation of energy.

Ground, buildings, inventory, stock, liquidities, etcetera, are different shapes of value. Each unit monetary asset, stock and also a working-unit of a tangible fixed asset has a value(-interval) at each and every moment the balance sheet is drawn up. Again and again the issue at stake is a certain amount of units multiplied by the price per unit. Monetary assets are in fact also a quantity, an amount of markers at a certain price each.

Analogous to the law of conservation of energy in physics, the law of preservation of value holds true in economics. No value can appear nor disappear just like that. PRESERVATION OF VALUE, ISBN 9798637745296, available at Amazon.

Here the content of the book is given:

 

On p. 56 it is said: “The law of preservation of value does not apply just at the end but also at the very beginning and at any moment in between. It is a natural law.” Laws of nature hold true independent of time and place.


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Jan Jacobs

Jan Jacobs

Independent Researcher Business Economics
Jan Jacobs, Independent Researcher Business Economics and author of The Profit Formula®: The Way to Easy Profit Measurement. I have more than 20 years of experience as a lecturer in Business Economics in higher day education and also in evening education for adults at SWOT (Stichting Wetenschappelijke Opleidingen Twente). As a subject teacher, I have always been critical of what was in many Business Economics textbooks. I am the author of The Profit Formula®: The Way to Easy Profit Measurement. Jan Jacobs is an opinion columnist for the CEOWORLD magazine. Follow him on Amazon.