1. Let's continue to complete the nested picture.
Let us add line 1, which has been skipped until now, allocated to direct investment:
| A | B | C | ||
|---|---|---|---|---|
| Child 1 | Child 2 | Parent | ||
| 1 | Direct investment | 100 | 200 | 450 |
| 2 | Turnover | 500 | 400 | 900 |
| 3 | Direct costs | 300 | 240 | {540 |
| 4 | Direct margin | 200 | 160 | {360 |
| 7 | Direct profitability | 40% | 40% | {40% |
Investments and assets refer to the same stock, because of what a balance sheet is in economic accounting proposal 4.6 While this stock is matched by another of financing, costs of all kinds are load flows (proposal 4.2.
Lines 2 through 4 are flow data. In line 7, the most significant ratio between these flows is from the P' profitability family Profitabilite . Distinguishing this family from that of profitability R and productivity P is in itself a progress that is accomplished by calling exclusively:
2. It makes economic sense for a stock to be at the top of the table.
The flows of turnover, costs and margins come from stocks. Balance sheets are stock accounts, income statements are flow accounts. When diagnosing the health of a legal-entity enterprise, economic logic requires that the current state and the recent past be examined: firstly , its balance sheets and, where applicable, its off-balance sheet commitments; secondly , its income statements.
3. When the parent enterprise is the legal-entity enterprise, the existence of direct investments is self-evident.
There is no legal-entity enterprise without a balance sheet that is periodically updated by the inventory of its assets. This is why, from its first edition, the French Commercial Code made it an obligation to establish such an inventory at the end of each financial year. It is not customary to qualify the investments of a legal-entity enterprise as direct, because this goes without saying: these investments belong to the contractual enterprise for which a balance sheet of at least an annual report is produced. They are nonetheless direct investments because they would be reallocated to another owner or destroyed if that contract business were to disappear.
4. An investment I by a legally constituted enterprise E is also likely to be a direct investment by several enterprises internal to E.
An example can be seen when going shopping in a large retail store. When this supermarket is a legal-entity enterprise (although its brand is possibly that of a chain of franchised stores), all its layout and all the stock of goods are part of its assets, in other words its investments. At the same time, some of these arrangements and stocks constitute direct investments by one of the departments. Within each department, the same applies to the departments: their direct investments are part of those of the department to which they belong. The stock of a product sold on one of its shelves, including any quantity in reserves, is a direct investment by the enterprise in the business that the sale of this product constitutes.
5. The sum of the direct investments of the children is often less than the direct investments of the parent.
This is the case whenever a direct investment by the parent is not also a direct investment by one of the children. For example, in a self-service store, the trolleys made available to customers and the checkouts are not direct investments of a department, nor of a department made up of several departments. The numerical illustration which serves as a common thread here takes this fact into account, with an amount in cell C1 (column C, row 1) that is higher than the sum of cells A1 and B1.
6. The most current value of an investment is its replacement cost.
But, experts in these matters will object, traditional cost accounting and management control as it is most practiced today take into account investments by including their depreciation in the costs, in the same way as in general corporate accounting periodic depreciation of fixed assets are part of the expenses, as well as any other expenses provisions. This last point is unquestionably correct, definitively correct. However, it does not allow the perpetuation of three errors of analysis.
Firstly, the depreciation of investments are provision-toppings for the renewal of these investments. Taking account of this need, which is essential in order not to overestimate final margins or underestimate cost prices, does not, however, exempt us from assessing returns on investments, in other words profitability in the sense defined above (point 1). Of two children who have the same direct profitability, as in the digital illustration of the nesting table (row 7, columns A and B), only one thing guarantees that they also have the same direct profitability: the replacement value of their direct investments is identical (in the digital illustration and as in reality very often, this is not the case: row 1, columns A and B).
Secondly, not all fixed investments can be amortised. This is particularly the case for land when it is not that of a quarry in operation. However, the value of these investments is part of what is, if necessary, to be taken into account when comparing direct rates of return. For example, child A may require the use of a land area for completely separate storage, while child B only needs a pallet store located in the main building where all purchases and sales are made, for both A and B.
Thirdly, two sets of investments may be subject to identical depreciation allocations even though their replacement values, the basis for calculating direct rate of return, are different. It depends on their weighted average amortization periods. Conversely, and for the same reason, two lots of investments may be subject to different depreciation allocations even though their replacement values are identical.
7. Depreciation and profitability are not the same thing.
Confusion is still very common. Indeed, we often hear comments such as: "This investment has been/will be amortized in so long, so it has been/will pay for itself at the end of this period". It is also a mistake in business management: it is not because a piece of equipment has been depreciated that it is without damage, that its profitability is zero or, even more so, negative!
8. Profitability Rentabilite does not express a duration.
Let F be the cumulative monetary depreciation-adjusted amount of a series of
9. No subset of a legally constituted entity has a complete balance sheet.
A complete balance sheet includes assets Actif and liabilitiesPassif. Only legally constituted entities have one. This is because a subset of a legally constituted entity cannot be declared insolvent, i.e. filed for bankruptcy. This impossibility, which is a matter of public policy (recall of this point below), has an econometric consequence. On paper, it is always possible to match the direct assets of a subset of a legally constituted entity with liabilities of the same amount. But this exposes us to distorting reality. For example, in a newspaper kiosk, the stock at the beginning of the day of the daily newspapers on sale. The supplier of this inventory invoices by weekly statement payable at 15, 30 or 45 days, for an additional 0.5% if it is at 30 days or 0.75% if it is at 45 days. It seems to be clear that the current assets constituted by this stock are financed only by supplier credit. However, it is wrong for the following reason. A legal-entity enterprise has more or less recourse to supplier credit and any other debts depending on what the relative amount of its capital to the liabilities of its balance sheet allows. Drawing as much as possible, moderately or not at all, on the supplier credit, as on any other cash flow "facility" (discounts, overdrafts, factoring), is only determined by the relative amount of the net capital (if applicable, losses from previous years deducted) to the liabilities of its balance sheet.
10. The direct investments of children A and B are financed by the same proportion of capital and credit.
When the direct rates of return of two children are:
11. The allocation of revenue to a due is not enforceable against a creditor.
This rule is a matter of public policy for at least two reasons91. It limits the contagion of misfortunes to the inevitable. It facilitates the honest contractualization of economic relations. However, on this second point, there is a flaw when the entity managed is a private non-profit association or a public authority. The former can call for donations that it announces are allocated to a part of its works; however, the only way to guarantee that this will be the case is to create an association solely dedicated to this part. The second can oblige donations, by creating or increasing a tax that it announces is dedicated to a new or increased expenditure; but the only way to ensure that this is the case is to create an agency which, via the public treasury, is credited with this levy and with it alone. Otherwise, there is a breach of the honesty of the economic relations between the voters (now all taxpayers) and the public authorities. Since the allocation of revenue to a due is not enforceable against a creditor, the allocation of a supplier credit to the sole financing of what has been purchased from this supplier is an expedient and not a sound management rule. On the other hand, increasing the direct cost of providing financial costs generated by the way in which it has been paid is good management.