Distributing Profits from Capital
This article outlines two ways of distributing profits from the use of Capital. The first way is the standard way of profits from ownership or Private Capital, and the second is profits from sales or Public Capital.
Profits from Private Capital
Two financial reports are the Profit and Loss Statement (P&L) and the Balance Sheet. The P&L shows the money spent and received, and the difference is the operating profit. The Balance sheet shows the Capital received and distributed, and the difference is the Capital gains or losses.
Transactions link the two reports. Some examples follow. When owners put cash or other Capital into the business, it goes into the P&L as cash and is recorded in the Balance Sheet as ownership of shares. When a business purchases an asset, it is not treated as an operating cost as it appears as an asset on the Balance Sheet. If an Asset value depreciates, it becomes a loss on the P&L and decreases the shareholder Capital. Periodically the business profit is calculated and appears on the P&L. The value of shares changes by the same amount on the Balance Sheet.
The Balance Sheet records the Capital in the business. It does not show the profit generated by the Capital. Instead, it uses a market in ownership of Capital to determine the gain. The business executives determine the profit distributed to the business owners. How they do this is opaque, and the value of profits and how much goes to the owners of Capital is hard to understand. It is complicated and is open to manipulation.
The Financial System distributes Capital earnings, and its high cost is only one of its problems. It results in the maldistribution of Capital and the earnings from the wealth. The system encourages the exploitation of resources to benefit some at the expense of others. Public Capital is one way to address some of the problems.
Increasing Capital Productivity
Productivity comes by using fewer resources to achieve the same outcome.
In economics, we measure effort by cost. People become better at tasks the more often they do them. Businesses are the same. The more times a business sells something, the lower the cost of production. However, improvements have limits, and increased production brings complications and barriers to change. The system of investing is no different. It is large, complicated and expensive and is ripe for innovation and change.
One way to reduce costs is to reduce the cost of distributing Capital by removing the need for markets in money. Instead we can distribute Capital through the existing markets in goods and services. In accounting, it means including the profit from Capital in the P&L statement first and then moving it into the Balance Sheet as we do with operating profits.
Regular investing gives a return by giving back more money than the money invested. It increases the amount of Capital. There is another way to get a return on investment, and that is to reduce the cost of production and for investors to pay less for Goods and Services. This approach is widely used to increase sales with shopper dockets, everyday rewards schemes, Frequent Flyer points, shareholder discounts, and discounts on prepayments for goods and services. Public Capital is an adaptation of the idea of discounting prepayments.
A prepayment purchaser becomes a part-owner of the business because prepayments are defined as Capital not a payment until used. If prepayments acquire the right to a discount, the discount becomes a return on Capital. By agreement of all Capital owners, the capital component of a sale transfers to the purchaser as a future prepayment. The transfer means a purchaser of goods and services becomes a part-owner of the business, and prepayments transfer Capital from one entity to another. The cost of prepayment transfer of Capital is included in the payment of goods and services, reducing the need for Capital markets.
Prepayment with Capital transfer is called Public Capital in contrast to Private Capital as all buyers acquire Capital. Private Capital markets restrict who can purchase Capital, whereas Public Capital goes to all buyers.
As there is no marketplace for Public Capital, it is not a financial product and does not incur the costs of a Private Capital market place including the cost of dividends and interest. Public Capital will always be cheaper to acquire than Private Capital. The savings are shared between the buyer as a discount and the seller as a higher price.
As there is no cost to transfer Capital, it does not matter when Capital is moved, which further reduces the cost of Capital transfers and removes unpayable debt and the issues involved with compound interest.
Buyers acquiring Capital with each purchase is an evolution of the money system that reduces investment costs and makes Capital more transparent and understandable.