Profits but also liabilities

Lehman Brothers ….short terms profits and finally long term liabilities

In our economical environment, the social entrepreneurship trend seems to increase. The social entrepreneurship appeared in Europe and in the United States during the 90’s. This economical model, by opposition to the traditional economy, is not based on the maximization of profit, but is focused on social en environmental aspects, and these enterprises allocate their profit to meet these two requirements.

I often hear some remarks about social businesses who receive some subsidies from the authorities. People are wondering if the authorities are doing a good usage of their money when they are giving subsidies to social enterprises, subsidies that are necessary in some cases, in order to be on a break even position. This question is totally justified. The public money need to be allowed to projects that presents a real added value for the society, projects providing a return on social, environmental or public investment. But by asking such question, it is interesting to analyze two aspects of businesses or activities: profit and liabilities. The goal of companies, and specifically the one’s quoted on stock exchange markets,is to maximize and to make comfortable profits. We agree that profit is necessary to ensure the financing of growth and development of activities on a long term basis, but this maximization of profits is not always based on a long term view. By cutting costs in order to increase their short term profits, we nearly hear each day companies cutting in jobs. But by suppressing jobs, you are losing know-how. The question is to know, what the return value of the know-how is, on a long-term basis. By cutting in your know-how, you are cutting also in a potential source of long-term revenues. By re-injecting your profit in manpower development, you will probably do a better investment. And the cost for the collectivity would be less expensive. Indeed, people loosing their job depend of the collectivity. Here is a first example of the privatization of profit and the socialization of the liabilities.

Let us talk also about the financial crisis, linked to the sub-primes, where banks made profits at a certain time, and when the wind began to change, with a flow of bad news, with the bankruptcy of some banks like Lehman Brothers, the bills were presented to the governments, who had to inject money in safety plans, to protect the money of the citizen. In fact, it is the citizen who had to pay the bill to protect his savings.

And what about the environmental liabilities? Many industries are consuming raw materials, extracted from the hearth. The impact on the environment is important, when the companies try to minimize the preventive action to avoid a negative environmental impact, in order to minimize costs related to that prevention. Here again we are in front of a new example of privatization of profit, and socialization of liabilities. In a social enterprise model, the environmental impact will be minimized by using alternatives that will be probably more expensive, but financed with a part of the generated profits. In this case, the financial profit will be lower, but the environmental liability will be lower too. And let us take about the potential social positive impact. By using for instance recycling businesses and technologies to minimize the environmental impacts, we can create jobs for low or non qualified people, and so decrease also the social liability impact.

By mentioning these few examples below, I wanted to underline that it doesn’t make sense if you consider only profit and not liabilities, only private profit and not public liabilities. And often, the short profits are lower than the long term social, environmental or financial liabilities. These are the consequences of lack of long term view, of ethical vision. Some companies probably created financial value on a short term basis, but destroyed value on a long term basis, and the invested amounts and energies to reach finally such results appear to be a huge waste. Long term vision, quality and ethic are the component of sustainable businesses, and it is not so stupid to say that each business should be social, if you consider that the economy is there to serve the human being, and not the opposite. Economy can not exist without human being. There are running the economy and each of them should benefit of it.

What the figures don’t say

 

What figures don't say.

Each company is obliged legally to keep an accounting and to present balance sheet and income statement one or few times a year. For quoted companies, the main concern is to publish figures on line with the budget and expectations in order to give satisfaction to the investors.

It is obvious that a company needs to have an organized financial information system in order to drive the business, to see the evolutions, to compare actual figures and to compare with budgeted figures, and to take the appropriate actions in order to reach a determined target. It is always good to show good performances and else better performances than expected. But we have to keep in mind that such statements show only a picture on a time T. In order to measure trends, we need to compare statements over several periods. But is such analysis giving a good picture of the health of a company? Do positive figures mean that everything is fine in the company? Of course, figures need to be commented, but are the comments reflecting the entire reality? No, because comments will only speak about figures.

There are a lot of elements that a financial statement doesn’t show, but which could have impacts on the mid-term and long-term results of a business. Let us take for example the human resources. The human capital is the motor of a company. A lot of human resources aspects can produce negative or positive effects on the business. The satisfaction level of your employee is an important key indicator for your business. If people are not satisfied by their job or work conditions, they will probably leave the company. The result will be a loss of know-how, an increase of recruitment costs and a period of lower performance of the new employee who need a certain time to learn before to be fully operational. The consequence of a high human resources turnover and a decrease of know-how contribute to de-organize the company, with a negative impact on the activities, and a negative impact on the customer satisfaction. If you have a look on a financial statement and you see a profitable business when the accounts were closed, you can wonder how many times it will do so, if there are for instance human resources problems.

Often, we can note that companies are focused on human resources costs, and frequently try to maintain or decrease such expenses. If we have a look on the concept of cost or investment, costs or investment are commonly defined as a cash-out amount that will provide future economical advantages. In this case, the question to be asked is to know what will be the economical advantages produced by the employees. The performances of the advantages will be or could be proportional to the level of satisfaction, because satisfaction contributes to motivation, and to provide better performances. We can see here the importance to define the objectives of each collaborator and to give him the tools to reach the goals, by giving training programs for example. This implies a mid and long term view. Such view is important when we notice lacks of specific profiles on the market. When somebody is leaving the company and you cannot find somebody with the same qualification level, it could impact your business negatively and for small structures, put your business in danger. When for example, if a small software company has troubles to find software developers to develop or improve a product, the business will be negatively impacted and could rule the company to bankruptcy.

By taking such example, we underline the fact that a financial statement represent a instantaneous picture of the company but does not show the quality level and controls of processes. The question is to know if the incurred costs are the result of a mid and long term view and if they will generate sufficient revenues, contributing to ensure a sustainable business. This means that not only financial results indicators are important, but also qualitative measurements of all the constituting components of a company.