Rethinking profit

[avevale_intelligencer]

Okay, the feeling of the meeting seems to be that profit can never be defined as "money you need."

I could sort this by redefining "need" for individuals to include books, CDs, a holiday every couple of years, that nice almost-Tiffany lampshade you saw in B & Q, or the Xbox Kinect that little Darius or Tiffany absolutely HAS to have or his/her life will be OVER--but then it would doubtless get redefined for corporations in the same way. Whether a corporation needs to go on holiday, or redecorate its offices top to bottom (while simultaneously laying off twenty per cent of its staff), or whether Monstrous Megacorp really needs to engulf Gargantuan Holdings because all the other cool corporations are doing it, is a moot question.

But this is the answer to Magician's point; si profitum requiris, circumspice. You and I take our profits in tangible form, as books and toys and musical instruments, or as it might otherwise be described, clutter. If it gives us pleasure, makes us feel better, gives us a reason to go on working, then it's profit. Whether that's a need or not is up to the individual to decide; again, if it is, it's a need that corporations, as such, don't share.

Speaking of shares...buying a share in a company is a one-off payment, and if it indicates a belief in that corporation and a desire to assist it in its work then that's very laudable. As far as I know, shareholders aren't required to go on paying every time the company needs a hand, and they're still regarded as holding their shares, so they don't lose out unless the company actually goes bust. I'm not sure how this bears on the question at this stage.

But I'm okay with it if people feel that the only difference between £875m declared by Colossalcorp and the £25.80 you or I might have left over at the end of the month is one of degree. It's a pretty large degree, is all.

Comments

[nancylebov.livejournal.com]

Does profit include reserves for emergencies? What about investments? For individuals, investment could include children and education.

[the-alchemist.livejournal.com]

As far as I know, shareholders aren't required to go on paying every time the company needs a hand, and they're still regarded as holding their shares, so they don't lose out unless the company actually goes bust. I'm not sure how this bears on the question at this stage.

They lose out because their shares are worth less.

Who do you think shareholders are? This table shows a breakdown of categories of UK shareholders (along with an unhelpful 'rest of world' category).

Of them, I'd say that the beneficiaries of pension funds certainly spend their money on necessities and the kind of luxuries you describe. So do many individuals. For example, I sold some of my stocks and shares ISA to pay for my wedding.

Charities and churches use their profits to provide services and/or 'tangible' goods to people. Similarly, insurance companies provide a service.

My financial literacy isn't really good enough to tell you what the others do, but I think what I'm saying is that the £875m translates into lots and lots of £25.80s for lots of people.

[keristor.livejournal.com]

I think you missed out a link to "this table".

But yes, exactly. Buying shares is the same sort of investment as buying a house (except less useful to the shareholder, because they can't live in a company's office, and a lot more volatile because house prices go up and down slowly in general, whereas shares can rise or fall by factors of 10 or more within a year). A "stocks and shares" ISA or other similar investment simply means that the money is spread across several institutions so that hopefully they won't all go bust at once.

Note that a lot of outside determinations of a person's monetary 'worth' include things like shares and house ownership even though those things can't easily be turned into cash (if you inherit a house, for instance, you will likely not be eligible for income support and the like because you are 'worth' thousands of pounds, even though you can't sell it immediately). So many people who the papers say are "worth millions" actually could never realise that money if they needed it because it's tied up in companies (as they could lose it all if the companies fold, I have several friends who were 'paid' in shares by their companies and those shares are now worthless, no one wants to buy them).

[keristor.livejournal.com]

How many people are employed by Colossalcorp? £309.80 per person in each year could add up to quite a bit if the corporation has thousands of employees. And note that, as mentioned before, the 'profits' reported in the press may be (often if not usually are) pre-tax (something which we generally can't do as individuals; unlike America, where individuals can claim a number of things against tax, we have been stripped of almost all of our 'deductables' like mortgage payment tax relief, about all that's left is ISAs). And also those profits have to be set against NEXT year's costs (as indeed I have to do as a contractor, because I have to be prepared for a year with no work as in 2002) because money comes in well behind outgoings.

No, a shareholder has no obligation to buy more shares if the company is in trouble. But if no one does help the company out, those who have invested in it may well lose everything they invested because the company folds. And the point of any investment is to get something extra back, otherwise no one would bother (they might as well keep it in a box under the bed).

Note that this is why it is proposed that the massive bonuses being paid to executives should be mostly in shares, it provides an incentive for the people to make sure the company doesn't founder. Where you or I are concerned, of course, we can't do much if it is going under, but the executives being paid the obscene bonuses are employed because they are crucial to the business (or at least that's what they claim).

[coth.livejournal.com]

I haven't been fully in this conversation, but has anyone made the point that profit is partly a reward for taking the business risk in an uncertain world?

This bears on why shareholders are sometimes required to pay again when the company needs a hand. If a company needs or wants fresh capital it is sometimes raised by 'rights issues' of new shares, where the shareholder must buy new shares to maintain their stake in the company. (Massively simplified example: Company is deemed to be worth £100. Shareholder A owns one of 100 shares (i.e. 1%) of the company. Company needs or wants capital and issues 100 new shares at £1. If Shareholder does not buy a second share she now owns only 0.5% of the company, so she must buy a second share to maintain her 1% stake. Can the company sell all 100 additional shares for £1 each? Maybe it can, if potential shareholders think the capital is being raised for good reasons, i.e. to invest in new business; all shares will sell at £1 and the company it might now be worth £200 or even more. But if, as is quite common, the capital is needed to repay debts or remedy past mistakes, then it won't sell all its new shares at £1 and overall it may be deemed to be worth less than the total put in by shareholders - who have lost money.

There really are good reasons for the way all these things work.

[the-magician.livejournal.com]

Exactly what I was going to say, but phrased very nicely :-)

Zander: Yes, companies can indeed ask existing shareholders for more money. Also shareholders are investing, which means that they want to see some "profit" from their shares, whether in the form of a higher share price, or in the form of dividends. So if GargantuanCorp has 100 million shares, and makes 400 million pounds "profit" (after tax and anything else they want to spend money on) then each share could get a dividend of £4. So if I (or my pension fund) has 100 shares, I'll get £400 (which I probably then have to pay taxes on). And it's a gamble. My company (Nokia) shares were $63 each in 2001, and are $8 today. If you invested your savings then, you'd have had some dividend payments over the years, but your shares would now be worth 1/8th of what they were at the peak of the dot-com boom.

And of course you're positing expensive things for the corporations to do which have no real value to the shareholders, the customers or employees ... and that's actually quite rare (and quite a small percentage of the company's turnover) ... in general the Board of Directors (who represent the shareholders) would fire the CEO who did that, unless she/he also was making tons of money for the company, in which case they might allow a small amount to be spent on "non-essentials".

This is as true of people as it is companies ... if a person insists on driving an expensive BMW and buying £3,000 tailor-made suits from Saville Row, they'd better be making enough money that they can afford them! Appearance and style and reputation are as important to companies as they are to certain professions (you might be ok with your brain surgeon coming to work in tatty jeans and a megadeth t-shirt, and I'd probably be too, but that's not true for all patients, and not for all careers either.

Many people are putting money away to buy a pension for when they are too old to work, and as everything is going up in price, then they are relying on those investments making money over time to at least break even against inflation.

But this is the answer to Magician's point; si profitum requiris, circumspice. You and I take our profits in tangible form, as books and toys and musical instruments, or as it might otherwise be described, clutter. or in petrol to drive to Westbury, or in money to pay for Chinese food or cinema tickets or convention memberships and other non-tangible/non-clutter items which aren't "necessary" but are variously desirable.
The "profit" in visiting you is the good time I will have. The cost is not trivial however. So like any investment, I have to weigh up my resources and decide whether it is a "good" investment (and of course it is!) ... but the only "profit" in that is our joint happiness, not an accumulation of wealth.

si profitum requiris, circumspice

[the-magician.livejournal.com]

Yay for Sir Christopher Wren!

Re: si profitum requiris, circumspice

[pbristow.livejournal.com]

On behalf of my very-nearly-an-ancestor... Thankyou. [BOW] =:o}