When calculating your income to secure your proper tax credits, many things must be taken into consideration. If you have been saving your receipts, pay stubs and checks you have done well. All of your monetary amounts you have received for the previous year need to be totaled. This will give you the amount of money you have earned. What needs to be determined next is how much of it is taxable. Your taxable income is ultimately what it comes down to. Tax credits can offset the amount in the form of pre-paid credits. This is why it is important to gather all of your finical records to get an accurate amount of your total income earned. You should even have your childcare receipts and other similar records available. The pay stub from the end of March will show how much you have earned year to date. Always make a copy of this and save it because it is important for taxes. For the self employed you will also need various records but some differ from regular employees. Bank statements, detailed information about business profits, tax returns and business expenses need to be produced. Once you have all of the documents in place, simply use a calculator and add them up. You should now have the amount of your total income.

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Marketing and training are examples of expense items, money which is ’spent’ in the course of generating sales, and not money ‘invested’ in assets – things which a business owns and maintains in order to operate at all. In private life, the distinction is unimportant; it is our prerogative to choose to starve seated in period armchairs, or to eat lobster while reclining on bean bags. ‘Investment’ is something we may choose to do with any money we are lucky enough not to need to spend. A business, in contrast, must ‘invest’ the money it is provided with, or it will achieve nothing. It requires assets which will enable it to trade effectively in its chosen sphere. Thus, no matter how good its lobster, a restaurant is unlikely to succeed unless it also invests in chairs for customers to sit upon.

Once again, the great diversity of the business world can come up with exceptions, but these only prove the rule, as the expression goes. Yes, there are businesses for which investment in the financial sense is their actual trade; ignore these. There are also restaurants without chairs, notably in the Wall Street district of New York where there are far too many people for everyone to sit down at street level; these are not restaurants in other than a very functional, obsolete use of the term, and are better called lunch counters. It is not known whether there have ever been restaurants where the customers sat on bean bags – it may have happened in San Francisco at some point in recent history. An American text from the seventies records the story of experimental restaurants where the customers brought and cooked their own food. This concept was ‘brainstormed’ in response to the criticism that one thing people did not care for about contemporary restaurants was the lack of home-cooked food. There are no prizes for guessing how they fared.

Financial theorists have developed detailed mechanisms for determining appropriate discount rates, the theory being that there are two elements that make up the risk associated with the project. One part is the risk that is inherent in being involved in the industry, the environment and the world surrounding the project, and this is called the systematic risk, to reflect which a suitable discount rate can be computed using independent data. The other element is the specific risk for the particular project, and this is deemed by the theory to have been fully investigated by the management team preparing the cash flow forecasts. In a theoretical, perfect world, all available information has been incorporated into the forecasts, all of which have been prepared under comparable sets of assumptions.

This has a validity if alternative projects are actually being compared, but it is often the case that individual investments are subjected to this process. As they say in the computer industry, garbage in, garbage out, so, if the forecast cash flows are garbage, sophisticated computation of a discount rate will make no material difference, and attention is being paid to the wrong end of the equation. The chances are that any major investment big enough to warrant discounted cash flow evaluation is going to have a significant impact on its marketplace, likely to change its nature. The effect of this cannot easily be forecast, because it will probably induce competitive reactions, the nature of which the competitors themselves cannot predict until the event occurs, unless they have a predetermined set of responses for every contingency. Using management consultants to ask competitors what they would do is not really helpful, because you cannot assemble the group of people who would actually take the decision – and, if you could, do you think they would tell you?

Comparing alternative investments under different sets of assumptions can be done, and if a particular one is consistently ahead, that should be the choice. Usually, two scenarios (an optimistic and a pessimistic) would be the limit, if only because of the work involved. The point really is that major projects are actually undertaken by big businesses as part of a strategic commitment, rather than on a purely economic evaluation. The forecasts are reviewed and revised until acceptable financial consequences are projected. (The parallel for the small trader is to revise the projections until the level of overdraft is acceptable to the bank manager.) The difference in the big business is that it takes more people to manipulate the cash flow forecasts. The wisdom they acquire in the process is not usually available for the people who end up running the subsequent project, who may find the reality something of a shock. On the other hand, as Eurotunnel has demonstrated, banks are unlikely to foreclose on multibillion pound projects.

Where a human personality is actually subservient to – or expressed through, as you prefer – the personalities of the brands the person chooses, this phenomenon is referred to as a projection of situational self-image. This could not arise without publicity, and frequently has something to do with advertising. (Someone once remarked that if you can create a public image without advertising, it is immensely valuable. Unfortunately, it was John Delorean, whose credentials were rather discounted after his eponymous motor car factory closed with losses to creditors and HM Government before any cars were sold.) Awareness is important in ostentatious brands, since it matters to the consumer to be seen, for example, to carry Louis Vuitton luggage or wear a Rolex watch. This depends upon other people recognising the choice, and of course, these have to be ‘the right’ people. A division develops between mass and exclusive brands in such circumstances – for so-called adults. Exclusivity is essentially at odds with market share, so for frequently purchased goods, exclusive brands tend to be small scale affairs where the commercial objective is to sell out available production capacity for the maximum revenue. The products actually have to be high quality as well.

In the final analysis, persistent advertising claims which are unsupported by the products they represent fail, much as the marketing industry would like to have the final say. The person who wrote the slogan ‘great taste, great value’ (which appears on a pack, not an advert, in fact) may have been particularly pleased at coming up with something undeniable. It features on packets of catfood, so the human cannot comment on the taste, nor the cat on the value. The cat can refuse to eat it, though, and has the last miaow.

At the BBC, it was determined that physical accommodation should be costed, and where the Corporation owned freehold buildings, the equivalent market rent should be used. This is potentially a nonsense, because one reason for owning property is that it is cheaper than renting it. Otherwise, how do property companies make profits? Some budget centres worked out that it would be cheaper to move out of BBC premises, but this route had to be denied to them, since a move to rented accommodation would obviously result in overall increased expenditure. So much for freedom of choice.

In the case of the Television Centre, there was no market rent, since there is no other organisation in the UK which would want such a building. Instead of realising that this gave the BBC a major scale advantage over other TV businesses (namely that it was big enough to afford its own TV centre which cost only maintenance) the powers-that-were insisted on allocating the TV centre a cost that would apply if it were an office building. The result was that budget holders shrank the space they used, and producers started hiring external studios, leaving their own empty. It is pretty fundamental to the market system that the achievement of economies of scale through investment in production facilities results in a lower overall cost position, an advantage actually denied to the BBC by its own ‘market system’.

It not known how the decision about the TV Centre was taken, whether by an individual or a committee, but whoever it was should realise that to play God requires not just omnipotence but also omniscience. A depressing aspect of this whole process is that the Corporation was advised throughout by the consultancy wings of two of the world’s largest accountancy firms, who should have cut their teeth on accounting for profits. Such nonsense is still about. A recent news item reported that the new system of internal charges for the BBC’s record library meant that any programme maker wanting to use the same CD twice would find it cheaper to buy from a shop, which was exactly what was happening ¡ª several times over!

Identifying the things and the customers at the same time introduces the product-market concept, something central – but often overlooked – in the ‘classical’ approach to strategy developed by H. Igor Ansoff. Any firm operates in an environment which is not static but dynamic, being in the broadest sense influenced by political, economic, social and technological factors, which need to be examined. This is the so-called PEST (or STEP) analysis. Within this environment, the firm operates in a number of product-markets, as do its various competitors. The concept of product-market is crucial, defining the firm’s activities not just by what it sells, but also to whom it sells the ‘what’. Statistical classification of industries usually involves one or the other, but both are needed. A manufacturer of animal foodstuffs is in the same productive arena as a major bread producer, but not the same market; it is in the same market as a tractor manufacturer, but not the same industry.

For each of its product-markets, the firm may compare itself with its competitors, in terms of its relative strengths and weaknesses. This can be difficult to do objectively, and has given rise to the concept of benchmarking – finding out what others achieve to make direct comparisons. At the same time, anticipated events and trends in the environment raise the prospect of opportunities for growth or new product-markets, and threats to existing business. The examination of strengths, weaknesses, opportunities and threats is known as SWOT analysis.

SWOT seeks to identify product-markets in which the firm has a comparative advantage over its competitors, and these are the key business activities in which the firm should concentrate. It should then endeavour to protect its superiority through the building and reinforcement of economic barriers to entry. The origins of comparative advantage can be explained in part by economic factors such as economies of scale in production, research and development, or frequently, marketing and distribution. It can derive from intangible but definite factors such as the ownership of intellectual property rights (patents, trade marks etc). It can also be because one firm is simply better at certain things than its competitors. This ‘being better’ is termed distinctive competence.

That this is the same root as the modern core competence should not come as a surprise, since specialisation is as old as firms themselves. When a firm forecasts that it will make a superior profit, the question should be: why? If this question can be answered satisfactorily and objectively (and it is not based on some innate belief such as ‘we have never failed yet’), then the particular procedure chosen for the analysis is unimportant.

- to increase the size of the purchase (make me buy more)
- to increase the frequency (make me buy more often)
- to increase the penetration (make me buy when ordinarily I would not), which can be split into: more trials, and more switches. Trials are of product categories I do not normally buy; switches are changes of brands.

Any particular promotion may involve a combination of the three.

In the interests of making a scientific observation, I took a stroll round a nearby supermarket to see what kind of offerings brand managers were making in the spring of 1997. There are a couple of important things to note about my expedition: firstly, I am expressing my own reactions, to which I am quite entitled, and I am not supposing that any particular person might behave in any particular way. (I mention this because there are people who believe it is politically incorrect to attribute behavioural patterns to social groups.) Secondly, my conclusions are in two senses invalid. The only arbiter of success is the sales figures (or profit) that are attributable to the exercise – it is the aggregate effect across all consumers that counts. Also, as I did not buy the things I noticed, I cannot suppose that I would react the same way if I had actually been shopping. Finally, it is not always clear whether a promotion is the work of the manufacturer, the store, or a combination of both. The flexibility provided by bar coding makes the difference difficult to discern; specially printed packets might suggest the manufacturer is the source, but with the largest retailers, even these can be specially prepared.

The first thing I noticed was just how many promotions there were. As stated, I cannot speak for anyone else, but following a shopping list usually restricts my own view to those items on it. Also, three members of the public, seeing me with a notebook in hand, asked for advice, and although no member of staff challenged me, I do not think I will do this again. In no particular order, I selected:

- Frozen Oriental Express Veg Mix, normally $1.45, now 99p until the end of the month
- Mini Muesli (single serving) 23p
- Persil, 3kg $4.69, with Free Comfort (2 litres) worth $1.79
- The Store’s Honey 89p for 227 grams, but only $1.35 for 454 grams
- Ready-to-Eat Jelly, down from 35p to 25p
- Finish Dishwasher powder 1kg $2.99, get 800g of the same free, worth $2.29
- Variety pack cereals, normally 6 packs, now 8 including two packs free
- Gordon’s Gin, buy 2 bottles, $1 off each
- Luxury Quilted Toilet Tissue, nine roll pack – buy 1 get a second half price while stocks last

Later, imagining that I had bought these items, I mused as follows:

The $2 off for two bottles of gin increased the size of purchase, the question now is what effect it will have on the frequency. Presuming our home consumption of gin is neither compulsive nor routine, it is possible that we may get through it a little faster for having plenty around, or be less likely to have a period when we have none in stock. It might be worth it from the brand manager’s perspective, though the discount is bigger than it seems in terms of forgone revenue, because of the excise duty included in the price.

It is difficult to see how buying the discounted luxury quilted toilet tissue will make any overall difference to our total consumption (!); it could represent a small triumph for the store manager who is temporarily increasing contribution if enough people go for a bigger spend. It depends upon how many people visit the store over an extended period ¡ª in the extreme case, if every shopper goes for it, next month’s toilet tissue sales will be minimal. This suggests a straight swap – a ‘trade-off as it is known – between size of purchase at the expense of frequency.

Neither of these promotions is likely to increase the penetration – increasing my total spend on an item increases the perceived risk, which is the basic barrier to switching in the first place. The marked-down frozen stir-fry vegetables were designed as a penetration improvement. The idea made sense; indeed, it rang a bell, and when I got home, I discovered in the freezer a similar packet bought several months ago. The brand has some work to do on the frequency front.

The mini muesli seemed a great idea, a nice low risk, penetration attempt which might in turn lead to regular use of bigger size packs. Breakfast products are a complex area, since children have a large say as to which cereals appear on the table. I would speculate that variety packs have a pretty high penetration (that is, most households consume them at one time or another), but suffer from low purchase frequency compared to larger cereal packs because they are seen to be expensive. Therefore, this is probably a frequency attempt – to get variety packs back on the shopping list until someone decides they have to go – but there are additional complications, as the variety pack contains various brands each of which has its own independent – and potentially mind-boggling – status with its consumers.

The promotion of the fabric conditioner with the washing powder appears sensible. It is the practice of manufacturers not to identify themselves, so the choice of the preferred brand of powder acted as a guarantor for the conditioner, and – since conditioner is not essential – efforts which encourage its use are to be applauded. In contrast, it is difficult to reason out the dishwasher powder; who would buy a one kilo pack simply to get an additional 800 grams free, who would not buy the one kilo pack anyway?

Of course, the honey made sense. Thanks to the shelf display (and possibly the fact that I recognise 454 grams as 1 lb) I could see that the larger jar was cheaper (by 24%, though I only worked this out when I got home). I fancy that the large jar on the breakfast table may encourage overall consumption – though the price difference might just be a reflection of the relative costs of bringing them to the market. After all, honey actually costs nothing to make! If this is true, it represents a missed opportunity perhaps, for there is no reason why a price should relate to a cost, provided consumers will pay the price. With ready-to-eat jelly, I was left wondering if consumers will only pay 25p if that price appears to have been reduced from 35p. What exactly is the total purchasing proposition of a tub of ready-to-eat jelly?

The great majority of people working in business are not overly concerned with profit, it is just something that happens, often in mind-boggling numbers. Any individual person’s contribution, even if it were measurable, is swamped. People setting out in business for themselves tend to ask two questions – at the outset: ‘How much profit should we expect to make?’ and, after a period of trading: ‘Where is it then?’

Neither question is easy to answer, but the second can at least be interpreted; it often means: ‘The accountant has said we have made a profit, so why is there no money in the bank?’ The explanation is that profit is not necessarily cash.

Accounting profits
There is something definite about cash.1 Something called a bank statement provides immutable, independent evidence of its existence. Provided it is error-free, you can’t argue with a bank statement. Profit however, as measured in the accounts of a business – the bottom line of the Profit and Loss account – is the result of a number of conventions. It is noteworthy that the definition of business does not include the word ‘profit’, and indeed, in a world without taxes, an independent business could continue quite happily without knowing whether it made an accounting profit, so long as it always had enough cash to pay bills and the proprietor’s wages. The Inland Revenue thinks differently, and insists on a profit calculation which it uses as a basis for corporation tax on companies and schedule D income tax on unincorporated businesses. Self-employed people generate profits from their trade or profession which are subject to taxation independently of how much they transfer from the business to their personal bank accounts.

Another group of people are interested in profits, namely those individuals and executives who are collectively known as the stock market. They like to see the companies in which they invest showing profits. Economists have long since recognised that cash is ultimately what matters for any size of firm, and the more applied amongst them have developed theories that the stock market value of a firm is equal to the discounted value of all its future cash flows. The stock market, meanwhile, continues to think that the price of a share should be some multiple of its earnings per share, which is, roughly speaking, the accounting profit divided by the number of shares in existence. This multiple is called the P/E or Price-Earnings ratio.

The interests of these various bodies give rise to potential accounting schizophrenia in that, from a perspective of liability to taxation the firm would naturally enough want to show the lowest possible profits. On the other hand, from a perspective of obtaining the highest share price, the profits should be as great as possible. Private firms, mostly but not exclusively small, tend to follow the former route, and ideally would like to prepare a different set of accounts for the Inland Revenue than for their bank manager. (To some extent, this has been achieved in effect by the preference of the bank to lend on the basis of cash flow forecasts.) It is said that before Manchester United Football Club received a stock market listing, the chairman’s principle objective was to avoid paying corporation tax. In those days, the sale and purchase of players were shown as entries in the Profit and Loss account, so, to avoid tax, Man Utd would simply buy some more players! Now that it is a quoted company, it wants to show itself in the best light which, as for other listed firms, means reporting good profits. (Interestingly, its football results are better as well.)

The above hints that manipulations of profit figures take place, and they do – but this is a whole area beyond our current scope. Even before any creative accounting takes place, profit is a dangerous concept, because it is part of the going concern principle. Profit is the difference between revenue and expenses. Revenue is income generated from sales to customers, but they do not need to have paid for their purchases to be counted. Under principles of accrual accounting, sales take place at the point the customer takes delivery of the goods, and this is counted in the accounting period when it happens. Expenses, for the Inland Revenue’s purposes, must be incurred ‘wholly and exclusively’ for the purpose of the associated sale, and while the accounting definition may perhaps be a little looser, it is entirely possible that the firm has incurred other expenses which are not part of this profit calculation. The obvious case is where the firm has obtained or produced a large quantity of stock, which, on the principle that it will one day be sold, is given a value that could not be instantly realised. Methods of valuing stock are to some extent flexible, and with enough flexibility, a range of profit figures can potentially be produced. With small firms, the Inland Revenue has the advantage of statistical information from many tax returns and tends to query claims outside the usual range.

It is not unusual for the type of small firm owners who rely totally on their accountants to prepare figures for them, upon being told that they have made a profit, to ask where it is. With larger firms, year on year differences are usually proportionately smaller, and the working capital changes mentioned above are more limited in their effect on the divergence between profit and cash. There is another respect in which profit differs from cash, that of the depreciation charge. This is included in expenses, but it is not a payment from the bank account. It is an adjustment for a payment that happened some time ago. Consequently, when other things are equal, profit understates the cash generated from trade. It is the convention amongst corporate strategists to talk of a company’s cash flow, this not being a reference to the statutory document called the cash flow statement, but a more useful measure of what the business is actually achieving from its trading activities. In most cases, most of this will be reinvested to appear as growth in assets.