What is Profit and Value Added ? [Supercharge Your Business]
Excerpt from Supercharge Your Business by Simon Weiner
As this book focuses on internally generated value added, it is important to understand the concepts and to differentiate between profit and value added, especially since business people and accountants in small- to medium-sized companiestend to concentrate on profit without addressing value added, which can be far greater (more on this subject will be explained later in this book). For relevant definitions of technical accounting terms, please refer to a Glossary of Terms at the back of this book. Profit is generally known and, for the purpose of this book, it is the difference between revenues and costs. Also for the purpose of the book, value added is the increase in value of an asset that has gone through a process, and it also includes profits. The concept of value added is well understood in large companies and it’s not clear why it has taken so long to trickle down to smaller organizations. Hopefully, this book will do its small part to change this. The fundamental differences between profit and value added can be seen in two areas: realization and the final beneficiary. Profit is realized in the short term (say within 1 year maximum), while value added includes the whole time spectrum. Additionally, the final beneficiary of the value-added exercise can be the business or owners in terms of increased profits or increase in the market value of the business. Thus, owners of businesses should be most interested in value added, since, with a few steps, they may be able to turn their companies into a gold mine. Here are some examples to make this subject clearer.
ProfitExample 4.1:If you sell a product at 100, the cost of it is 70, and overheads are 25, the profit you made on it is 5.
Value addedExample 4.2: A company adds a mezzanine floor to its warehouse, doubling capacity, and rents the additional space created to a third party. In this case, the total profit for the business on the extra floor space is the total value of the rent less the cost of the mezzanine floor. In addition by doubling the warehouse capacity, then, you conceivably double the value of the building, as warehouses are generally valued at x amount per square meter of usable space, and this increase in value is defined here as value added . If the business were to sell the warehouse at some point in the future, the beneficiary of the added value would be the business. However, if the warehouse were kept till the company was sold at some point, then the beneficiary of the added value would be the owner. You can see from this example that profit as well as value added for the business and for the owner may all happen at different times in the course of the business’s lifetime but they are all, nevertheless, important.This book is focused on increasing value added rather than just profits because assets don’t necessarily create short-term profits, but they can create a huge amount of value added. Business people need to take both of them into account when they look at their company’s performance and exploit their business assets to make this happen. Moreover, value added can far exceed profits, as those who have invested in property in the past can confirm when they compare rents (aka profits) with the capital gains (aka value added) on the properties.
By now, the idea of golden nugget hidden somewhere within value-added opportunities may have dawned on you. I will clarify this in more detail in later chapters where I will explain how to look for and find these opportunities.
As this book focuses on internally generated value added, it is important to understand the concepts and to differentiate between profit and value added, especially since business people and accountants in small- to medium-sized companiestend to concentrate on profit without addressing value added, which can be far greater (more on this subject will be explained later in this book). For relevant definitions of technical accounting terms, please refer to a Glossary of Terms at the back of this book. Profit is generally known and, for the purpose of this book, it is the difference between revenues and costs. Also for the purpose of the book, value added is the increase in value of an asset that has gone through a process, and it also includes profits. The concept of value added is well understood in large companies and it’s not clear why it has taken so long to trickle down to smaller organizations. Hopefully, this book will do its small part to change this. The fundamental differences between profit and value added can be seen in two areas: realization and the final beneficiary. Profit is realized in the short term (say within 1 year maximum), while value added includes the whole time spectrum. Additionally, the final beneficiary of the value-added exercise can be the business or owners in terms of increased profits or increase in the market value of the business. Thus, owners of businesses should be most interested in value added, since, with a few steps, they may be able to turn their companies into a gold mine. Here are some examples to make this subject clearer.
Why not Supercharge Your Business & Never Worry about Money Again? RT https://t.co/hZW71TRjqu #smallbiz #business— Simon Weiner CGMA (@simondweiner) November 26, 2015
ProfitExample 4.1:If you sell a product at 100, the cost of it is 70, and overheads are 25, the profit you made on it is 5.
Value addedExample 4.2: A company adds a mezzanine floor to its warehouse, doubling capacity, and rents the additional space created to a third party. In this case, the total profit for the business on the extra floor space is the total value of the rent less the cost of the mezzanine floor. In addition by doubling the warehouse capacity, then, you conceivably double the value of the building, as warehouses are generally valued at x amount per square meter of usable space, and this increase in value is defined here as value added . If the business were to sell the warehouse at some point in the future, the beneficiary of the added value would be the business. However, if the warehouse were kept till the company was sold at some point, then the beneficiary of the added value would be the owner. You can see from this example that profit as well as value added for the business and for the owner may all happen at different times in the course of the business’s lifetime but they are all, nevertheless, important.This book is focused on increasing value added rather than just profits because assets don’t necessarily create short-term profits, but they can create a huge amount of value added. Business people need to take both of them into account when they look at their company’s performance and exploit their business assets to make this happen. Moreover, value added can far exceed profits, as those who have invested in property in the past can confirm when they compare rents (aka profits) with the capital gains (aka value added) on the properties.
By now, the idea of golden nugget hidden somewhere within value-added opportunities may have dawned on you. I will clarify this in more detail in later chapters where I will explain how to look for and find these opportunities.
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