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.And the comments were intense:
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?
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.