… am I wrong? If so, how? Would love to hear your thoughts.
@macgenie yes .. but surely .. ideally .. more for less ?
... eg replace a 5 person team in a factory with a robot .. that robot can now work 24 hours a day ... so produce more ... for less?
@JohnPhilpin What you're describing (with shareholders) at least in the US is called a corporation, either an S or C corporation. You're using a more general term, business, for that. But a business could be a corp, a partnertship or a sole proprietorship. The latter two types of entities are businesses without shareholders. Your statement: "The larger the profit, the better the shareholder value" is an oversimplification. It could be true in many cases, but there are many things besides profit that could raise or lower SH value. For a full conceptual understanding of the possibilities, you should learn the simple mechanics of double entry bookkeeping, first described in Luca Pacioli's math book published by Gutenberg in 1494. It is a totally simple but extremely powerful system, which is at the heart of business accounting all over the world. With an interest in business, it is the most important thing you could learn about by far. Once you fully understand that, everything else will fall into place.
@JohnPhilpin It is really context dependent. What came to mind for me was a company adding automated customer service in place of real people. They do less service while imagining that they've replaced humans with a phone tree that is 100% unhelpful. Or situations where there are "redundancies" and the redundant employees' responsibilities are just added to the remaining employee's job description.
@Ron @macgenie ... thankyou for responses .. and will come back in more detail ... including why I am doing this .. one thought Ron ... if I used the term ‘stakeholder’ rather than shareholder ? I get where you are coming from .. and I am purposefully over simplifying ... but what I end up with is not just about corporations. .. it is business .. all the way along to the family owned ice cream store.
@JohnPhilpin Then just use the word "owner." All businesses have owners. In fact, double entry was invented to help the owners. And no need to over simplify, because accounting is already reallllly simple. So stick to the truth. Use the Accounting Equation. Assets = Liabilities + (Owner's) Equity. So simple algebra tells you that Owner's Equity = Assets - Liabilities. So Equity can increase from any increase in assets and/or any decrease in liabilities. Net income (the P&L) is just a subset of the Equity, so it is shown as the last line at the bottom of the Balance Sheet). The P&L is just an expansion in detail of that last line. There's your Accounting 101 for you. No extra charge.
@JohnPhilpin Examples. The city council votes to double the property tax rate on business equipment because they need to pay for new blacktop on the main streets downtown, so the liabilities of the ice cream shop go up and thus owner equity goes down. Or a tornado comes through & knocks out power lines for three days. All the ice cream melts, so inventory assets drop from the lost ice cream and owner equity goes down. Or they don't lose power, but the owner feels so bad about the neighborhood where many lost their homes, that she takes half of her inventory asset of ice cream and gives it to the folks in that area to cheer up the kids. Assets have gone down, so owner equity has too. None of these changes in equity were caused by anything related to sales or the P&L. Small businesses often focus on the P&L, but the Balance Sheet is the ultimate accounting tool, so it's good to teach owners about the Accounting Equation and the Balance Sheet.
Thanks - though I think the best thoughts are coming from @ron and @macgenie 😊
Consolidating and compressing - trying to get to a bald all encompassing statement that 'those in the street' would get and understand - because I am building on it as part of my People First Thinking.
@JohnPhilpin No problem, I look forward to it. I will also be interested in hearing about accountants who class people as liabilities. I've never seen or heard of such a practice. Those in my generation would never do that, but maybe it's a new fangled invention that I haven't heard about.
@Ron not so much the people as the cost of the people ... on a BS don’t their salaries, expected bonuses, commissions appear as some kind of liability ?
@JohnPhilpin Kinda, but remember a Balance Sheet only reports the status of the accounting equation at one moment in time. Yes, for a bit of time the cost of obligations to the staff people show as liabilities, as those amounts are properly owed to those people at that time. But soon after, all those obligations are paid to the staff, which is then an expense to the business, thus reducing their tax bill and meanwhile it is income to those hard working people, providing resources for them to use to live at whatever standard of living that income stream makes possible. It's just the way money flows around inside a business and then out to the staff and community around that business. Not a bad thing at all. Just an accurate depiction of things as they stand at one moment and then shift to something else a moment later.