Thursday, October 20, 2016

Sizing the Profit

With the upcoming Ascension expansion I've been stepping back from the gears and levers of Project Vulcan and having a hard think about going forward.

When I restructured my operations to keep better track of my material purchases, factory costs, and transaction taxes so that I could more accurately provide dividend payouts to my new shareholders, and this led to a fascinating post with comments a year ago about value:
The reason I ask this loaded question is because as I entered dreadnought production and brought investors into my Project Vulcan operation, I decided to keep a closer eye on the books and more accurately track profits for dividend payout reasons. This led me into the question of the best way to calculate profit and that leads to what is the actual value of the minerals I use in building a ship.
The easiest answer, and the one I have chosen to go with as its the most obvious, is that the value of the minerals I buy is the price I pay on the market.
However, follow me along on this thought experiment. Say I buy a piece of trit at 2 ISK (there was a time...) and then use it to build a paperweight (no blueprint required) with a factory cost of 1 ISK. So it cost 3 ISK to make, correct? And I sell it for 4 ISK so my profit is 1 ISK, correct? But what if the market changes while my paperweight is building and the new price of trit is 5. Is my profit still 1 ISK or is it now -2 ISK because the cost of production went up to 5 (price of trit) +1 (factory costs) = 6 ISK?
Obviously, my wallet is 1 ISK higher so my profit must of been positive, right? Well, let's say I took my paperweight and reprocessed it back down to tritanium (assume perfect recycle and no overhead cost for this example) and I then sell that piece of tritanium for 6 ISK. Now my wallet is 3 ISK higher instead of only 1 from selling the paperweight.
In other words, should I calculate my profit based on actual wallet balances or potential wallet balances?
And the comments were intense:

Easiest question ever: calculate based on the market value of materials plus actual expenses at the time of sale. This applies even if the eventual calculation says you lose money.
If you disagree, sell me the rarest item in your house for the price you bought it for.
As an accountant, you take the price that you paid as cost. The price of the paperweight would go up to 7 or 8 to cover the higher costs. If not, just buy all of the paperweights to reprocess them until the prices equalize again. This is why many manufacturers hedge their materials purchases (probably a bit harder in EVE)
Yep. If building a single item it's fine to use actual costs incurred. But if running a longer-term operation, you start getting into purchases made over time. Oh God, shall we introduce him to FIFO, LIFO and average cost? And let's not forget about amortizing the cost of blueprints, which according to Universal Accounting Standards must be done over no more than 1 year.
In economics, the value, profit, and revenue are all real values, calculated from actualized results. What you're describing is opportunity cost. Because you used the resources to achieve these actual results, what was the value of the best alternative option you could have pursued?
But that's a theoretical calculation to talk about efficiency, given perfect prescience.
Always use actual prices. If you stockpiled trit to build a dread and trit prices go up (without dread prices), then don't build a dread but sell the trit. More money, less work.
You seem to start to realize that trading (buying low, selling high) is much more profitable than actually doing something.

If there was ever a post that made me feel ignorant, that was the one. And I took a introductory course to economics in university! 

Since my operation was small and slow and casual, I went for a simple profit calculation based on what I paid for each mineral load per capital and the price I sold it for. And when I started into Astrahus production I followed the same pattern. 

However, as time goes on there are several problems with this approach.

First off, as I stepped up production and start planning for Raitaru production, I want to bulk purchase minerals with larger long running buy orders rather than putting up buy orders for each build. But the spreadsheet requires me to enter in a price-at-this-time value for each separate build, getting to the point where I seem to be spending more time entering values into the spreadsheet than actually manufacturing. I want to do the work in game and calculate profit holistically of the operation and not per item.

Secondly, there was always a fuzzy line between where my assets and ISK ended and the operation's assets and ISK began. This was never an issue when I was working for myself, but I feel ambivalent about treating everything as mine own when investors' ISK is involved, even though I've paid out in dividends enough to pay back their investment and then some.

Thirdly, and the main cause of all this rumination, is that I'm considering setting up a Raitaru engineering complex. How does that figure into the calculations of profit? Do I amortize the cost of setting up the structure across all profit math for all future builds? And how do I account for fuel costs? I already ignore jump freighter fuel (ISK)  and hauling costs (time) in terms of each build's bottom line, but I'm not sure I'm ready to swallow the cost of building and running a Raitaru so my investors can profit more than I will. And what if I want to branch out and open my Complex to other manufacturers and charge them fees? Should my investors get a cut of that pie?

In conclusion, the current model I've been using is not going to work going forward. But what to replace it with?

I don't want to have to be or hire an accountant, and I don't want bookkeeping to be the main activity of my project.

What I've decided to do is use the expansion as a starting point for a fresh start, and to do that I need to restructure the corporation as a separate entity from my personal property. This restructuring will require some changes to the shares in order to ensure that I can get paid for my efforts from the profits without just dipping my hand into the corp wallet whenever I want a new shiny ship. This also means a complete audit of the corporation's assets versus my personal assets (and deciding if the corporation has any assets to start with and if they need to buy/rent from me). 

Once we have a clean and audited slate for the corporation, I can determine its starting net worth and then every six months or so do a new audit to determine the new net worth, and the profit to be paid out in dividends will be the difference in the starting and new net worth. 

What I hope this means is that I can run the operation without constant bookkeeping on every mineral value and transaction tax, thus allowing me to work more at make profit rather than tracking it. You know, without hiring an actual accountant.

What this means for my shareholders: less frequent dividend payouts, but hopefully larger payout overall. If they want to use this restructuring period to sell back their shares, I have the capital on hand to do so.


  1. This sounds more complex than many real-world corporations... you're a brave man for managing all this!

  2. If this was an actual real world business then procurement of the minerals, the manufacturing, and the sales/marketing would all be separate divisions. Procurement and manufacturing would be cost centers and the sales would obviously be a revenue center. Profit calculations are extremely easy since your bookkeeping entries for the first two are negative and your entries for the sales are positive (you hope). The key here (as in the Real World) is to do your bookkeeping on the basis of fiscal time units (usually quarters). You simply add up all the costs over the last 3 months and add up all the sales over the last 3 months and subtract the two. It is more of an accounting nightmare to run the bookkeeping on a per unit basis!

    As for your engineering complex you can handle that the same way it's handled in the Real world (and the post you quote mentions it but it can be made easy). Just decide how quickly you want to payoff the investment. If you think you should have it paid off in a year and you've got quarterly accounting then divide the cost by 4 and each quarter you subtract the cost from your quarterly profits. Treat the investment as a loan to be repaid by the profits spread out over how every many quarters you think is right (or your investors think is right).

    Linked to the quarterly report of profit, revenue, and costs is a statement of assets. You would list any items up for sale,items in manufacturing, minerals, and the citadel/engineering complex as assets valued at the current listed prices. This value would tell your investors how much value they have if you were to dissolve the project and payout to your investors.

    You can in fact do all this through the API and the transactions journal and import the results into a spreadsheet for given time periods. You don't actually need to setup a separate corporation even so long as you setup different wallet divisions and maintain discipline - only buying minerals from one division, setting up jobs from another, sales in another and so forth. It actually makes the effort easy once it's set up.

    The important thing to realize is that this setup makes it possible to break each effort (procurement, manufacturing, and sales) into discreet activities that can be independently optimized. I have a spreadsheet that lists a number of possibilities --- what is my cost if I source minerals from buy orders/sell orders, what is my cost if I sell the product to buy orders/sell orders. This allows me to make decisions on a case by case basis when there are market changes. If you have a bottom line on what you want to accomplish profit wise this will always tell you when your effort isn't worth it and you can continue the business or close it up.

  3. I'm surprised that your shareholders would support your setting up of a Reitaru. If I was investing in the current business, I would seriously consider withdrawing my isk (from your project) when poses disappear.

  4. Kirith, have they made clear the idea of third-parties being able to use the engineering complex for a fee set by the owner? That could make a lot of the partnership elements simpler in that people can pay to use your facility. Granted it doesn't make your investor relationship easier. :)

    Oh, and you may have taken econ (and that's good for a lot of Eve) but yeah, this is all Accounting and Finance. You can get into First-In-First-Out accounting and all that. Too bad LMEVE (or similar) doesn't cover this for you?

  5. From my own experiences:

    1. Take a financial accounting class.

    95% of what you are trying to do and the questions you have are covered in any intro to financial accounting class. Specific topics for accounting for a manufacturing business may not be covered in the introductory class, but once you know the basics it shouldn't be hard to pick up.

    2. Decide how much information you want to collect and report on.

    If you decide that you want to know the profit and cost of goods sold/manufactured for each line of products you build... get ready for a lot of tedious record keeping.

    If you decide you just need to know the profit and cost of goods sold/manufactured for the entire business, without digging into details, it's much easier and less work. You'll go from tracking costs of each individual material bought and used, to periodically tracking the wallet ins and outs and your current inventory value.