Chapter 2: Your business may rot from the inside

The stupendous use of industrial economic glasses in post-industrial society is detrimental to companies' profitability and competitiveness and has opened up to a hidden economy that is negative for society as a whole.

The fact that we are living in an ever faster economic pace shows the fact that companies have gone from yearly reports to quarterly. A "continuous" financial reporting that should not vary that much from one quarter to another.

Despite this, it’s happening too often that a company suddenly turns around and large negative structural problems come up to the surface.

Economists failure to replace their industrial glasses for those of post-industrialists has opened up for a hidden economy that allows a company to rot from the inside without any seeable notice on the facade (Balance Sheet and Income Statement). As soon as the rot breaks down, it turns out that the company has profound problems that were unknown to the market – and the bubble bursts.

A very hot topic is how businesses can do tax plans by letting profits appear in countries with favorable tax terms.

The Swedish newspaper Ny Teknik 2018-03-21. Quote: "A controversial proposal for a 3% new tax on large digital companies' sales in the EU is on its way. Scores include American online giants like Facebook, Google and Twitter. "

The EU's proposal as above is just scratching on the surface of the hidden economy. The EU should instead focus on guidelines that force economists to wear the post-industrial glasses. Guidelines that, in the context of GAAP (Generally Accepted Accounting Principles) in combination with a relevant post-industrial product cost compass, allow the authorities in the different countries to check where the value-added values arise. This means that soft refinements and investments must be managed based on the same premises as the hard refinements and investments.

The precautionary principle has become the principle of smokescreen

Quote from Wikipedia: "The precautionary principle is an accounting principle within the economy, which means that all values ​​in the accounts must be done with reasonable care. Assets and liabilities values ​​are dependent on future events. "

One of the purposes of the precautionary principle is that external players, such as shareholders, investors and even employees, should be able to trust that the values ​​reported in the Balance Sheet are not inflated. That the values ​​have a market economy financial coverage, and demonstrate credible muscles in the company to be able to be used forward.

However, a precautionary principle that results in soft values (such as IT, quality and process investments) ​​not being balanced as assets in the Balance Sheet means that the precautionary principle turns into a principle of smokescreen. The hidden soft assets of the firm (financial muscles) can decrease and increase without being reported in the Balance Sheet and the hard assets values ​​in the Balance Sheet are increasingly dependent on the hidden soft values ​​and refinements.

Notable in the quote from Wikipedia: "Values ​​of assets and liabilities are dependent on future events." That is, the precautionary principle means that soft values ​​should be balanced if they affect future product development, competitiveness and profitability.

The Hidden Treasure Chest

A summary from the book The Hidden Treasure Chest (1993, Bergstrand et al):

Hard soft w text 2png

If the increasing soft refinement was handled on the basis of the same premises as the hard processing, the smokescreen would be dispelled and result in three things:
• A functional post-industrial product cost compass, the company's compass to increase competitiveness and profitability.
• That the economic drivers would get the businesses, just as they do with their hard assets, proactively work with maintenance processes (planned maintenance) to extend their lifetime to their soft investments, such as the skills of the company.
• Over time increasing assets in the balance sheet (soft balances) and thus corresponding earnings improvement. Viewed from a societal perspective, this would result in increased resources for the common community.

The industrial orchestra of economic instruments must be replaced by an orchestra with instruments designed for post-industrial society

Smokescreen economypng

Managing a company is about creating products that cost less to produce than the customers are prepared to pay for the products (ie profit). The product cost must be the compass needle, which helps companies to secure a profit-generating business both in the short and long term.

The difference in product costing between the cost of manufacturing the products and the sum of what the products generate in terms of revenue from customers constitute the company's earnings, ie equal to the foundation of the Income Statement.

To get a working product cost compass requires three things:

• The consumption of resources and investments made can be linked to the products that use the resources and/or the investments. That is, the minimization of the refinement smokescreen. This in turn means that the work that is done behind the office desks in companies can no longer be protected by an overhead charge but must be directly related to the value increase of the products.
• Investments, ie resources consumed over a number of years, respectively stock of components, semi-finished goods and wholly manufactured products are balanced over the year-end. Unless a Russian Roulette accounting arises where products suffer from costs that should hit products next year or even later. That is, for a working product cost compass, soft investments and stocks of soft components, semi-finished products and wholesalers must be balanced in the Balance Sheet.
• An accounting plan that is in full harmony with the product cost compass focusing on refinement where costs are charged to revenue based on a product and customer perspective. The Swedish organization Mechanical Association's Normal Accounts Plan had a focused refinement perspective. This account plan was replaced in Sweden by the BAS account plan that opened up a smokescreen covering rapidly growing overhead costs. The question mark must be resized to the current BAS account plan’s suitability in business.


The New Digital Economy

In The New Digital Economy, we will show how the Post-Industrial orchestra and its instruments are a key to accessing the issues posed in this chapter. A key that drives a focus throughout the company on customer interaction.

The financial instruments in the public sector are harmful to society

In the private sector, the customer's money as the compass needle is more or less efficiently controlling the business. In the public sector, it is unfortunately the taxpayer's money that, to a large extent, sets the compass needle and where the customer is somewhat diffuse and foggy.

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The public orchestra of economic instruments is in a significantly worse condition than the industrial orchestra of economic instruments to handle the challenges of post-industrial society. It requires a more thorough reengineering and the outcome becomes a significantly more efficient public sector with more satisfied customers, better paid employees and dramatically decreased of tax consumption bureaucracy.

Later in this book we will address the public sector more specifically.

Bert-Olov Bergstrand & Stefan Johansson