As long as people don’t know the PROFIT nor the CAPITAL, the YIELD is in the air. Many of the officially presented yield figures are of no use. The same applies mutatis mutandis also to derivative key figures. Financial ratio analysis often lacks evidence. Don’t believe any net profit figure, demand the proof! The Profit Formula® deserves to be introduced not only in all schools but also in companies, WORLD NEWS, a scientific breakthrough of the first order. Profit determination is a main subject in the field of business economics.
In addition to numerous ordinary improvements, 8 Scientific Perfections are fully explained in this book. Suitable for self-study, students, graduates, everybody, even professors can learn a lot from it and each manager will improve performance. Prior knowledge not required; it starts with exact money calculus, and ends with the measurement of period profit, exactly, quickly and easily.
Read everything noted down below and for a short introduction article: Basis for Better Business Administration and Management. Harsh criticism of out-of-date study books in Business Economics; covered in detail in this book. Among other, the following textbooks have been criticized (neither authors nor publishers have responded, and so my criticism remains intact):
– Bedrijfseconomische Analyses – Blommaert & Blommaert
– Basisboek Bedrijfseconomie – De Boer, Brouwers, Koetzier
– Management Accounting – Bulte, Dijksma, Van der Wal
– Kosten en kosten, Calculatieve bestuurlijke informatie – Van Halem, Van der Pol
– Bedrijfseconomie – Tijhaar
- NPV (Net Present Value) and IRR (Internal Rate of Return)
Discussion about which is better, NPV or IRR, wrongly seen as two different investment selection methods. This is irrelevant, because understanding the behavior of the underlying polynomial y = f (x), that is fundamentally necessary, and leads simultaneously to both outcomes, NPV and IRR. The discussion still continues.
Between economists who show that they do not understand what the NPV function is. Notification is made of a problem with the handling of IRR ….. due to the rather unrealistic reinvestment assumption. It is assumed that “cash flows can be reinvested at the IRR (Herst, Poirters and Spekreijse, TBA, 1998, p. 76).” An assumption that does not make sense. The NPV function says nothing about ‘scale size’. On the basis of NPV / IRR there is not always a final judgment. Do NOT do it, i.e. declare a project UN-acceptable, that is possible with NPV / IRR. But to prioritize two or more acceptable projects is usually not possible with NPV / IRR. More about this in Appendix 10.2 ‘The ‘Go/No Go’ Decision Regarding Strategic Investments’ from the book The Profit Formula® ISBN 9781086333992.
Some writers (among others Tijhaar and Blommaert & Blommaert) see (or saw in the meantime?) this as a disadvantage or a drawback of the IRR method. With artificial assumptions that are then made, as with IRR, the assumption “that the net proceeds that are released in the interim can be reinvested at the IRR rate (Blommaert & Blommaert, 1997, p. 228).” The IRR method nor the project is further liable for what happens or does not happen with cash flows that have returned from the project.
Van Halem and Van der Pol even speak of “a weakness of the method (Van Halem and Van der Pol, 1989, page 234).” These authors then report a corrected rate of return and mention even more so-called weaknesses of the IRR method. Nevertheless, in many textbooks this controversial premise is made. The IRR cannot do much more, but to blame IRR for that is strange. The NPV formula (from this formula directly follows the IRR) does not really change by this. It was, is and remains y = f(x), a polynomial, no more and no less! Except in some simple situations, none of the so-called investment selection methods can definitively select. Remember, after an investment it does not stop, it actually starts.
The concept of ‘scale size’ is important not only at the beginning but throughout the duration of investment projects. However, that is separate from the aforementioned function; this function says nothing about that! Know what that function can and cannot do. The NPV / IRR method also does not take into account any necessary backlog depreciation; the investment is only settled on the basis of the historical cost price. The method can select in the negative sense but usually not positive.
The separate consideration of only investments is hardly worthwhile, because it forms part of the trinity:
INVESTMENT, DEPRECIATION and PROFIT MEASUREMENT
- Criticism about all depreciation methods in the literature
They are not flexible;
Extra exercises are sometimes required (f.i. backlog depreciation);
The way of financing is often not taken into account.
The rigid depreciation methods in the literature do not follow the actual values; they only present artificial figures. They are unreliable, because they are not only determined by the chosen method, but they depend on a supposed life cycle for each method.
- ‘Ideal complex’ is not ideal
‘Ideal complex’ is for each complex of resources where the age structure is such that the number of working-units put out of service each year is exactly the same as the annually purchased number of new working-units.
Only at 100 % equity no backlog depreciations; that can be called ideal, but unfortunately it hardly ever applies. In any other financial structure, the depreciations have to be determined exactly, taking into account that particular financial structure.
Then there is nothing what is obvious. Almost always with a so-called ideal complex the depreciations (all value differences) have to be calculated precisely.
- Economic Life Cycle Determined SUC is currently set too low
The economic life cycle can be determined via ‘trial and error’, assuming that only the costs are decisive. This means that sales proceeds are not dependent on production on this machine. Indeed via ‘trial and error’ and certainly not by way of the various formulae that are to be found in many textbooks, for instance ‘Management Accounting’ (Bulte/Dijksma/Van der Wal).
The theory, at least the abridged model of Terborgh, is “nogal zwak i.e. fairly weak (Bulte/Dijksma/Van der Wal, 1995, p. 510)”, whereas they present a numerical example (Example 19.5 on mentioned page 510) exclusive of correct depreciation and interest costs. They talk about a net profit in each of the years and the outcome is a useful life of 4 years. But at 4 years a cost price of $ 23.31 applies. And with the maximum lifespan of 6 years, the cost price is still $ 21.57. Note, however, higher than the given selling price of $ 17.50. There must be a mistake here. And if the depreciation as well as the interest costs are not calculated correctly, something good can never come out.
According to Bulte/Dijksma/Van der Wal, the object of the CWW-method is: “maximaliseren van het verschil tussen enerzijds het investeringsbedrag en anderzijds de som van de contante waarden van de verschillen tussen de verkoopopbrengsten (-ontvangsten) en de complementaire kosten (uitgaven), vermeerderd met de contante waarde van de relevante restwaarde i.e. maximizing the difference between on the one hand the amount of the investment and on the other the net present value of the differences between sales (revenues) and complementary costs (expenses), augmented by the present value of the relevant residual value (Bulte/Dijksma/Van der Wal, 1995, p. 501).” Bulte/Dijksma/Van der Wal calculate CWW i.e. the present value of the profit in case of 1, 2, 3, 4 respectively 5 years. CWW will be higher in proportion if and when one produces during more years, quite logically, as long as selling price surmounts unit cost (positive profit margin). Then extra profit exists in case of one year more; its present value is certainly an addition, here all 5 years long, which Bulte/Dijksma/ Van der Wal indeed do.
“Conclusion: the economic life cycle here is 5 years if calculated by the CWW-method (and this is a different outcome then the one that is induced by the MGK-method) (Bulte/Dijksma/Van der Wal, 1995, p. 504).”
Bulte/Dijksma/Van der Wal are comparing apples to oranges. They compare two investments having UNEQUAL life cycles directly. In case the selling prices are yes indeed relevant, then the CWW-method – as described by Bulte/Dijksma/Van der Wal – is unfit for use beyond any doubt. The CWW-method is a farce. The authors Van Halem and Van der Pol also uncritically present the CWW-method and wrongly discuss minimum average costs (MGK-method) when looking for the above-mentioned minimum costs per unit product, see Van Halem and Van der Pol, 1989, p. 132 et seq. MGK, i.e. an average, is certainly not a correct calculation of the interest costs.
Standard prices of the working-units of tangible fixed assets are, amongst other quantities, required input data in order to establish minimum product prices. However, this important data is not calculated exactly – if calculated in conformity with outdated textbooks in use worldwide – it is consistently too low.
The calculation of the economic life cycle to date must be followed by the NEW algorithm presented in this book by Jan Jacobs.
Here the content of the book is given:
The old algorithm seemed to be quite right at first. Nothing to do with tax at all was the idea, because costs and revenues are equal to each other, there is no profit. Not thinking through! The old textbooks Business Economics are not correct in many more places, and this is crucial. There is a lot of discussion about profit tax in the economic literature, in situations in which this tax is manifest from the outset. Here the profit tax was out of order, which initially seemed to be right. Yet it is absolutely wrong. As is immediately apparent from the audit calculation, NPV of the cash flows at s (sales price) identical to SUC (Standard Unit Cost).
The NPV then turns out to be NEGATIVE!
Anyone who works with impure cost prices (from unproven figures setups) has so-called made visible what in fact are invisible profit margins; whoever does that, is pulling wool over our eyes. Even a refined allocation via so-called cost drivers does not prove anything at all. Only proven causal relationships do count. Do not allocate indirect costs afterwards but ‘commitment’ in advance with exactly what costs to make; chapter 13 of Business Economics VI Groundbreaking.
- Divergent AC and DC calculations
Literature as well as practice are swarming with disputes between advocates and opponents of AC and DC. Divergent ‘solutions’ are given even in the case of a classic example. Simple sums end up in different results, AC profit versus DC profit. It looks like magic. As if there would be haggling with the concept of profit. All kinds of deviations between on the one hand the budgets and on the other the realised AC and DC results. In connection with AC also aspects of budgeting (budgets are just a tool) the subject matter is budgetary control, i.e. the search for variances, first and foremost controllable variances.
There is an easy to learn formula. Just one formula. For both AC and DC. And for everything that one can think off around breakeven analysis and iso profit lines.
Many textbooks present a variety of DC and AC calculations. For DC and AC, one simple calculation scheme is sufficient, a single formula and then easy to make illustrative drawings.
- Budgeting and Budgetary Control
Regarding Budgetary Control, a so-called Dutch method is used here and there in the literature against what is called the American method. However, just one method is good: the right method. There is no room for other adjectives. It is not an art to make a correct total count. This can usually be done in various ways. But that is by no means a correct analysis
EXAMPLE 1 from ‘Bedrijfseconomie’ (Tijhaar) 10th edition.
EXAMPLE 2 from ‘Basisboek Bedrijfseconomie’
(De Boer, Brouwers, Koetzier) 3rd edition.
The analysis given by De Boer, Brouwers, Koetzier in their book is not correct. After this criticism, in the next edition of the book by De Boer, Brouwers, Koetzier, this whole example was omitted and replaced by an entirely different, very simple example. In terms of content, neither authors nor the publisher have responded, and so my criticism remains straight. In the meantime, it has turned out that exactly the same error (the mixing of efficiency variances and capacity usage variances regarding machine hours) with all the consequences is made by Blommaert & Blommaert in their book Bedrijfseconomische Analyses.
Mapping out all the pluses and minuses precisely, that’s what it’s all about. Incorrect, incomplete analysis leads to mismanagement.
Even according to the authors, “a fully-fledged book at the doctoral level for management accounting (Bulte, Dijksma, Van der Wal, 1995, Preface),” Budgetary Control unfit products variances in particular are treated too fragmentary.
These and other examples are fully elaborated in the new study book. No Greek word has been used, and although factual formulas have indeed been used, everything is automatically drawn up along the lines of logic so that everyone can also understand the analysis made. There is no need for difference analysis rather just common sense. Remember, every analysis must be clear and transparent.
Losses on fixed costs are thrown into one heap by Tijhaar; he reports a total capacity usage loss of $ 3,980 (Tijhaar, 1993, p. 143). To be specified in $ 3,140 external cause and $ 840 internal cause, namely extra unfit products in Dept. I. Indeed a negative unfit products variance (this is the cause, the consequences are multiple as will become apparent).
According to Tijhaar, any more than normal rejected product means a loss of “eenmaal de standaardkostprijs, aangenomen dat het afgekeurde product verder volledig waardeloos is i.e. once the standard cost price, assuming that the rejected product is completely worthless (Tijhaar, 1993, p. 146).” But every unit extra unfit product, I sign on, cannot be sold. And that means loss of profit margin in addition to the loss of standard costs during this period. In the opposite case: in the event of less unfit products than normal, the extra products will simply be sold. Tijhaar is then also making an extra profit. That is correct and no more than logical, but conversely Tijhaar makes a completely different and wrong calculation. That is not consistent; contrary to logic!
The analysis that Tijhaar as well as many other writers give in their textbooks is not good, because it is not complete and therefore it entails the danger that wrong policy decisions will be taken. What we find in many textbooks and in all kinds of curricula is completely unnecessary ballast. Definitions and formulas in all sorts of variants in many textbooks, they are confusing and not enlightening.
- Statement of Source and Use of Funds
A disguising SSUF overview does not make much sense in practice. There is also little to do with the short SSUF overviews mentioned in the theory, which per definition only describe a part of the whole. That is why they cannot give a good insight a priori. However, even the long SSUF overviews, as they are called in the literature, do not give the complete story. Meant is ‘long’, so it is called (often also other names, and abbreviations are used). The only real SSUF shows everything. In detail. Every cent, in and out. Easy to set up, not by starting from the bottom line – but from the top of the profit and loss account.
Not the profit plus the depreciations, with which so many theory books start, because then a lot disappears outside the field of view. Add the invoiced turnover (top of the profit and loss account) to what the debtors (see previous balance sheet) were. Suppose that no debtor has paid even one cent, the debtors must now be the total sum. However, the debtors are (see current balance sheet) what they are. Subtract that from the sum and the difference is the payments apparently received on the part of the debtors; if necessary, debits can still be settled on non-paying debtors. Idem, all those other items. Look what it was. Suppose there is not a penny moving. What should it be now? And it is? Ergo, the actual cash flow must be the difference, apart from complications.
It is about clearly showing the flows of money. Money flows are all too often NOT clearly shown. Sometimes it seems as if one wants to hide the money flows from view. The direct method provides a summary of the cash and giro book: the real money flows. The indirect method is mainly limited to changes in balance sheet items. It is not about these mutations but about their causes! The indirect method puts itself out of the game and does absolutely nothing. So it cannot hurt.
No wonder that almost all companies use this indirect method in their published financial statements. This sometimes has to be done according to the applicable reporting rules! However, there is nothing to prevent the company from using the direct method in the explanatory notes as extra, if one really wants to show the cash flows. Do not let yourself be swindled. Every penny must come from somewhere and must also stay somewhere. There are IN money flows and there are OUT money flows. They all have to be clearly displayed, under appropriate ‘titles’. With regard to ICF and FCF, there is often no dispute; but with regard to OCF there happens to be a lot of difference of opinion. While OCF follows from an exact calculation, according to ICF and FCF.
- Period Profit Measurement, exactly, quickly and easily
Profit determination is one of the main subjects in the field of business economics. The problem of determining the period profit of a company is regarded as such truly comprehensive, it is deemed insoluble. A solution would not exist. “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, 1983, p. ix).”
A lot of writing, and a lot of talking; finally, Tweedie / Whittington concluded: ‘they (economists / accountants) are unable or unwilling to deal with the problem of inflation accounting’. After which the problem was trivialized in the search for other (financial) leading indicators or just elevated above proportion as a search for the philosopher’s stone. The expression ‘different concepts of profit for different purposes’ has since given ten economists an alibi to give ten different answers to the same question and that they always think to be right.
“Suppose, profit is not correct (if it is not precisely CORRECT then it is WRONG) then, given a certain cash flow, depreciation is WRONG too. Consequently the valuation of the assets will also be WRONG, so total balance is WRONG. And share capital after subtracting Total Debt will be WRONG too. So all derived ratios are WRONG. Also quantities like the value based on the yield are WRONG. And then a lot more is WRONG (Jacobs, 1993, p. 10).”
Profit determination, is that possible? Yes! Indeed in this book the solution is given. WORLD NEWS! The adage ‘profit is an opinion’ is no longer true.
The determination of the result, profit or loss, over each period for each business unit, should not be a subjective matter, as it is then not possible to know whether such a result is ‘enough’ or ‘not enough’, without knowing this cannot be judged meaningfully about the policy to be pursued as well as the policy pursued so far. By others (sure, that too), but primarily by yourself about yourself. We must constantly be accountable as much as possible about what we have done, why and with what demonstrable result. In case of incorrect, unproven figures, there is a risk of intervention at the wrong times. The management tool is crooked, which must be recognized. Objectivity must be tested from the outset. Whoever you’d like to cheat on, not yourself, of course.
Everybody can measure period profit. Just see how complicated the elaborations are through the old ways, and how wonderfully simple with the help of The Profit Formula®. Basic formula of the profit determination. Without amendments, ifs or buts, and elementary. All profit calculation systems known so far generate a lot of work. If one uses The Profit Formula® regarding all values and standards one can quickly and easily calculate any profit. Simplicity is indeed often the hallmark of truth. Using this method measuring profit is ‘a piece of cake’.
Read article: Period Profit Measurement – NEW Formula.
Inform everyone, pass this info to the highest persons in rank of your institution, they are yes indeed in need of it to keep them out of shame.
As long as The Profit Formula® is not recognized, the business economics literature and all colleges and universities are on blame. The scientific substantiation of The Profit Formula® is explained in the book titled The Profit Formula® and subtitle The Way to Easy Profit Measurement ISBN 9781086333992 available at Amazon. Scientific evidence as well as practical application.
Profit determination is a main subject in the field of business economics, so everyone can immediately see that an institute does NOT provide good education without The Profit Formula® one of aforementioned 8 Scientific Perfections described in Business Economics VI Groundbreaking. This book goes beyond the borders of set science, and rewrites/improves large tracts of business economics as it is currently badly taught worldwide. It is for both beginners and professionals. Prior knowledge is not required. It is suitable for students and graduates in financial management (Economics, Accountancy and Business Administration), for financial and general managers, for entrepreneurs and for investors. Indeed for everyone who has to deal with money. The central theme in Business Economics is MONEY and money can and must be counted. In this piece of science, the most plausible statements are likely to fail when the counts are not correct. Existing textbooks are seemingly correct – with regard to the text – but presented calculations are mostly not to-the-point. In a company, normally a lot of money is involved; generally this money is the possession of other people, and one must handle things carefully i.e. a good manager is also a good steward and naturally takes care of literally everything.
Business Economics is a part of Economics and concerns the distribution of scarce goods and services. Choosing, this or that, that’s what it’s all about; in a world of ‘demand’ and ‘supply’.
Establishment of a company and treatment of problems concerning money right from the beginning are covered. This book starts with exact money calculus, and ends with the measurement of period profit, exactly, quickly and easily.
Basis for Better Business Administration and Management
This book THEORY is No.1 from a triptych: Business Economics VI_Period Profit Measurement quickly and easily
THEORY Business Economics VI_Period Profit Measurement quickly and easily
EXERCISES, PROBLEMS, QUESTIONS
Business Economics VI_Period Profit Measurement quickly and easily ELABORATIONS, ANSWERS
Students and their parents, try to protest against your trainers if they continue to ignore The Profit Formula® and continue badly taught business economics.