IX PROFITS AND RESERVE FUNDS 1. WHAT CONSTITUTES PROFITS Profits Earned and Profits Realized-Smallness and Variability of Profits-Definite Factors-Different Classes-How Estimated in Trade-In Life Insurance Companies-Profits Between Departments Transfer of Fixed Assets-Departments as Virtually Separate Concerns-The Profits of a Corporation. 2. THE DIVISION OF PROFITS Divisibility of Profits-Profit-Sharing—Methods of ProfitSharing-Advantages and Disadvantages-Profit Insurance. 3. RESERVE FUNDS Classification-Sinking Funds not Charges-Trustees not Directly Accountable-Life Insurance Reserve-Conclusion. IX PROFITS AND RESERVE FUNDS A 1. WHAT CONSTITUTES PROFITS "PROFIT" may be freely defined as the gain ac cruing from the conduct of a business. If the price for which goods are sold is greater than their cost to procure, handle and sell, the difference is a gain, or profit. If the selling price is less than this cost, however, the difference is a loss. Profits Earned and Profits Realized.-A very clear distinction must be made at the outset between "profits earned" and "profits realized." The word "earn" means to reap, and is derived from an ancient root meaning to plow. There is no suggestion of money in the word, which clearly implies that corn once harvested must be considered as earnings, or something gained by labor. And the principle of including, as profits, earnings that have not been received in the form of money has for centuries been accepted in trade. The division of profits (as dividends), however, must result only when the earnings have been made tangible, if not actually rendered into cash in hand. As to the fundamental meaning of profits, the gross profit earned in a trading concern is the amount by which the proceeds of trading-whether realized in cash or not exceed the cost of acquiring or manufacturing the articles dealt in. The net profit is the amount by which the aforesaid gross profit exceeds all expenses of establishment and of realizing the gross profit. The fact that goods have been sold to a customer who (when the accounts are prepared) is known to be insolvent does not affect the gross profit earned, but of course an adequate provision for loss must be made before a true statement of net profit can be arrived at. It is generally held impossible to lay down rules that will always enable one to ascertain what profit has been earned in any particular case. Profit can seldom be more than estimated, seldom figured as an absolute sum, for liabilities may exist which are not known. An illustration in point would be the depreciation of mines. One may obtain the best expert opinion as to the resources of a mine, and before the year is out a "fault" may be discovered which will at once show that these opinions are valueless. In mining, therefore, no figure can be accurately written off for depreciation. In many mining and other concerns profit is accordingly estimated, subject to this unknown contingency. It should, of course, be understood in such cases, by shareholders and creditors, that the concern does not charge any depreciation of its permanent assets against revenue. Smallness and Variability of Profits.-Considered in the full sense of the word, profits will be found comparatively small in most individual business concerns, and in many they will be found not to exist at all. The average business man may be considered successful if his returns consist merely of a fair interest on his capital invested and a moderate compensation, serving as salary, for his own supervision of the business. A small farmer's profits are unlikely to exist at all. At the end of the year, after he has paid for the support of his family and all the expenses of the farm and allowed a moderate interest on the value of his farm, how much is he actually able to place in the bank? In farming the item of depreciation is of almost as great importance as in manufacturing. One of the important matters to be considered in regard to profits is their great variability, in all types of business, from year to year. Profits depend upon variable factors-price of raw materials, wages, volume of sales, and price obtainable for products. All of these factors |