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Date: 2019-07-16 Page is: DBtxt001.php list0300-Money-profit-1

Definitions for TrueValueMetrics
Money Profit

Money Profit Money profit is at the center of modern capital market oriented economics ... while value is at the center of the TrueValueMetrics (TVM) system of socio-economic metrics. Profit is a very good metric for performance measurement within a for-profit corporate organization, but it does not take into account impact on society and social responsibility.

What is profit? In corporate accounting, the basic computation of profit is that it results from sales revenues exceeding the cost of sales. Generally Accepted Accounting Principles (GAAP) have been developed to that there are rigid rules about how sales revenues and how cost of sales are calculated.

Phony profits! GAAP rules should ensure that profits that are reported have economic substance ... but the system of rule making in recent years has preempted reality and reported profit can be meaningless. The fundamental principles of good accountancy used to require that financial reports reflect a true and fair view of the financial situation of the organization ... but this idea has been totally disregarded in modern financial reporting in case after case ... modern bank accounting ... the accounts of General Motors ... the accounts of Enron ... and a whole host of large complex organizations.

What value arises from profit anyway? Money Profit has a value in its own right ... the revenues are bigger than the costs ... so on the face of it there is a positive outcome. But there are derivatives of profit that are even more important that arise because a “market mechanism” values a possible future flow of profit, and a history of past profit in a way that creates a market value ... that is price ... that is more than the real value increase taking place in the business accounts. The Initial Public Offering (IPO) is a vehicle for monetizing the market value associated with a flow of business profits.

Money Profit ignores social impact! Profit as a measure of performance for the corporate profit maximizing businesses (PMBs) ignores social impact. Because so many profit maximizing initiatives have negative impact on society even though they increase profit performance ... for example environmental pollution, relocating production to lower wage locations, etc. ... profit gets better while society deteriorates. This is not a good outcome ... but the social impact dimension is not part of the profit metric.

Sustainability Profit may translate into positive cash flow that makes a business sustainable ... but society can only be sustainable when economic activities are both sustainable in themselves AND are providing positive value increments for society ... for all the value elements of a society including the people and their complete physical environment.



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