Monday, October 7, 2013

Supernormal Profit - Consequences of Supernormal Profit and Monopoly in the Businesses

It can be argued that there is no firm that is really a monopoly because true monopoly exists when there is only one producer of a commodity that has no close substitute. However, it can be said that monopoly exists when one firm dominates a market. The demand curve is downward sloping and the monopoly firm is the price taker. Monopolies are caused by economies of scale (can create natural monopolies) and a firm controlling an essential factor of production. (can create artificial monopolies).
Monopolies that are able to make supernormal profits, are not necessarily against the public interest, in fact, almost all, if not all profit based organization; aim to make as much profit as it can at any given time. i.e. maximise profit. The fact that monopolies which make supernormal profits could charge lower prices does not necessarily indicate that they can afford to charge lower prices for goods and or services offered to the public.
Perfect competition model and monopoly model will be used to show how supernormal profits are acquired by firms. Topics such as benefits and consequence of supernormal profits ( short and long run benefits of supernormal profits to a firm) , types of supernormal profits by firms, concept of supernormal profits in relation to consumer or public interest and efficiency and ways which firms make supernormal profits will be used to explain why monopoly firms are not necessarily against the public interest in regards to prices they charge for their products.
Supernormal profits are profits made in excess of normal profits i.e. excess profit made over the normal profit, while normal profit is the amount of money made by an organization that is just enough to cover its expenses and not go bust. Supernormal profits can be in the long run or in the short run. Not all firms make supernormal profits in the short run. Firms that make supernormal profits in any market are giving indications that the market is viable and that there is an opportunity for money to be made. These prompts new suppliers into the market and the theory of demand and supply play a major role in influencing how the supernormal profits are competed away. However, how fast the supernormal profit is competed away depends on the barriers to entry in the market or industry.
In a situation where perfect competition exists, there is optimum allocation of resources. Perfect competition is currently deemed as theoretical market and is based on some assumptions before it can exist in an industry. These assumptions are that : there must be no barriers to entry , there must be perfect knowledge of the market , there must be large amount of buyers and suppliers that neither can easily influence the market price , there must be homogeneous goods and low transport costs .However, supernormal profits can still be made by an individual firm in the short run. This could be as a result of a new innovation or new idea.
These assumptions in the perfect competition show that the consumer benefits because Average revenue equals Marginal revenue equals average total cost hence only normal profit is made. That is P=MR=AR .
Monopolistic competition, on the other hand, is a situation whereby there are many small firms that produce differentiated products and the price and output decisions of any of the firms can have no effect on the out put and decision of other firms. In a monopolistic competition, firms usually charge supernormal profits because demand is inelastic .This income (supernormal profits) is siphoned and redistributed usually to the shareholders. This means that if there are supernormal profits, there is also productive and allocative inefficiency. In the short run equilibrium in a monopolistic competition there can be supernormal profits but quickly competed away in the long run due to easy market entry into the monopolistic competitive market.
A competitor and a monopolist have one thing in common and it is to maximize profits. They both have similar attributes except they operate in 2 different market systems. As we can see in the monopoly model, the marginal cost curve is not the same as it is in the perfect competition model, the demand curve shows he highest possible price that can be charged to a product at a given level of output. In this way, the monopolists can make supernormal profits by setting output level at Marginal Cost equals Marginal Revenue i.e. MC = MR and setting price for the product by choosing the point that intersects the demand curve and the vertical line drawn through the point where MC=MR.
For a perfect competitor, the price will always be equal to the marginal revenue , but for a monopolist the price will always be greater than the marginal cost. When a monopolist is making a normal profit , it doesn't necessarily mean that it has to be at the lowest point of the average cost curve.
Allocative efficiency is also known as Pareto efficiency and is based on the work of an Italian economist called Vilfredo Pareto . This particular work is called Manuel D'Economie Politique ( 1909 ). Allocative efficiency means that it is possible to improve one consumers welfare without making another consumer worse off. In order words , resources are allocated efficiently so that the welfare of a group of consumers are improved without making another group of consumers worse off in the economy.
Productive efficiency means production of goods and services at a minimum cost. This means it is not possible to produce more of any particular good without producing less of another. This means that there is no waste in the production process.
In a monopolistic competition, if both the allocative and productive efficiency are applied the consumers will be charged less and the monopoly firm will be making only a normal profit but the price charged will be higher than the marginal cost. This normal profit can either be used to maximize profits or to minimize competition .The demand curve plays a major role in determining output levels. However, monopolies have its downside such as allocative inefficiency, price discrimination cartels, artificial scarcities and productive/technological inefficiency.
Monopolistic firms also make supernormal profits by differentiating their products more from rival products and this could be through adverts or by just changing the product a bit. Another way for monopolistic firms to make supernormal profits is by having a overall cost leadership.
Perfect competition is an ideal model , but it doesn't really exist, for example share prices are decided by almost competitive markets. There have been criticisms against perfect competition and monopolistic competition. Perfect competition is good for customers because they will be getting goods at the least prices . This appeals to the public interest while monopoly is deemed as bad because goods are identical, produce less and consumers pay more than they should for goods and services when compared with perfect competitive market.
In the case of drug companies ( largely monopolies ), supernormal profits are needed so that the drug firm can spend more on its researching and developing to develop more medicines to help improve lifestyle. Other large firms are also able to develop new products that could bring more technological advancement, pay high staff salaries , give pay rise and bonuses due to the supernormal profits they make.
Shareholders always want high returns at all times and these increasing returns can only come from supernormal profits. An employee in a firm that is in a highly competitive market , will always be on the edge because he or she could lose their job anytime , an employee would like to be employed by a company that is well off rather than a firm that is always on the edge of break even.
In conclusion, it can be seen that monopolies are not necessarily against public interest because some supernormal profits are used to improve products the firms make and the public benefit from these research and development while some do go to shareholders.
Monopolies make supernormal profits in the short run but are quickly competed away in the long run by new entrants into the market due to easy entry barrier. Perfect competition is ideal because Marginal Revenue equals Marginal Cost, no abnormal profits, just normal profits but could deter future developments while monopolies will always have the price of their products higher than the marginal cost because when Marginal cost equals Marginal revenue profit is maximized.

Know When and How to Take Profits

No matter how well you enter a trade, if you never take a profit then it is all for naught. Like fishing, stories of the one that got away mean absolutely nothing compared to the big fish sitting in the frying pan. Back in 1999 an older brother of mine was sitting comfortably on over a million dollars in stocks and stock options. That is until the tech boom bust occurred in 2000. Within a few short months his wealth was reduced to a fraction of what he once owned. The impact on his financial security was so great that he even had to sell his multi-million dollar home, unfortunately before even the housing boom got underway where he might have made up for some of his losses. Like so many others, he didn't see a need to take the money and run, he just thought it would continue to increase in value. He didn't see a need to take a profit.
All good things come to an end and this is particularly true when it comes to market growth. Markets go through cycles where they increase in value and then the bottom falls out. Eventually they grow in value again, but they don't always reach prior levels as anyone that happened to own NASDAQ stock during 2000 can attest to.
Taking a profit is more important than the original entry, but most new traders tend to focus on techniques for entering a trade and ignore the exit. Unfortunately, many courses and books on trading only help to promote this failing since many never stipulate a means of exiting other than simply when a stop limit is exceeded. Exiting therefore becomes more of a loss prevention strategy rather than any intentional effort to maximize profits. So then, how and when do you take a profit?
First, it is important to understand that there are numerous techniques for determining when to take an exit and there are entirely different reasons for taking one as well. This is not a "one size fits all" matter. An exit to control losses is still invaluable and should always be part of your trading. What we are focusing on here is a different kind of exit, a proactive approach designed to capture profits before they slip away. Some of these approaches are based on reaching preset profit levels and some on either momentum or over-bought/over-sold criteria. In practically all of these methods an exit typically occurs either too early or too late, but the benefit is that a profit is actually taken out of the market and the inevitable vanishing act created by a market retracement is avoided.
Profit-taking is not about capturing all the potential profit, it is about making an actual profit while a trade is still profitable. It is important to understand the difference here. This means that a profit-taking exit will at times have you out of a trade while it is still producing and you will miss out on anything additional that it produces. Consider this a trade-off the next time you watch a profitable position slip away and turn into a loss.
In order to maximize potential profit, some traders will choose to enter with multiple contracts, shares or lots and as the criteria is reached for a profit-taking exit they will only exit partially, allowing the rest of the trade to potentially accumulate additional profit. This may include secondary profit-taking levels or even third, fourth or more. Other traders choose to exit their entire trade as soon as it reaches their profit-taking criteria. However a trader chooses to handle profit-taking, in all cases an additional and separate exit order that serves as a stop loss will always be in place just in case the profit-taking point is never reached.
So how do you determine your profit-taking criteria? Several methods can be applied, such as a set percentage or profit gain. For example, while trading the S&P e-mini a trader may set a profit-taking level at 2 points, which equates to $100.00 per contract. If you bought at 850 then you would exit at 852 irregardless of how strong the bullish trend might be. If the market moves to 856 then you will miss out on the additional $200.00. Even so, you would have made a $100.00 profit while you could. Many a trader would have stayed in the market until it reached 856 only to see it drop back down to 848 for a $100.00 loss, where their stop limit was set. No matter how far the market moves in your favor, it means nothing unless you are able to actually take the profit.
A method that I personally have found very effective is that of using channels. Using a channel can be as simple as drawing a trend-line, duplicating it and then placing it on the opposite side of a price trend. For example, during a bullish trend a trend-line is drawn off of the lows that have the greatest clearance and encompass all the price bars. Then this line is duplicated and placed on the high that places this line furthest out and clears all other highs within the trend. If a price bar reaches this upper line then a profit-taking exit is signaled and taken. Although the upper line is nothing more than a duplicate of the lower line's angle, it is amazing how often price will react strongly by declining immediately following price's contact with it.
An alternative choice is that of using either an over-bought/over-sold indicator or a momentum indicator. Divergence is a valuable part of using either of these, so if you choose this route make sure you understand how divergence works. As is true when using any indicator, it is imperative that you establish the very best optimize setting for the market and time frame you are trading. Most indicators have various settings and will require frequent adjustment or otherwise you are likely to see the quality of the signals degrade. Typically, the very best profit-taking indicator and setting will be quite differently than the best entry setting. What you use to enter a trade is not likely to work well for profit-taking.
Others find that using support and resistance levels is also good for profit-taking signals. Using prior highs and lows where the market reacted previously tends to be a reliable indicator of when a trend will stall or even come to an end. However, keep in mind that price will not always react exactly at prior price levels. It is prudent to allow a range for variation and take profits slightly before price hits a prior high or low level. For example, with the S&P e-mini you might have bought at 850 and the market is moving higher toward a prior high which topped out at 854. Often it is better to take an exit a little lower, such as 853 ½. A prior high will typically bring a strong reaction and this can bring a very challenging exiting situation. A few examples of what could happen if you wait until for price to reach 854 are:
  1. Traders will not allow price to actually reach 854 at all, so it fails to ever reach it
  2. It reacts so fast to reaching 854 that can't get an order filled at that price
  3. It drops so fast after reaching 854 that price is below 852 before you can ever get an order filled
Allowing a range of plus or minus on the conservative side will increase the odds of being able to actually take a profit, which is the goal of profit-taking in the first place.
Profit-taking is an important tool that every trader should add to his or her trading arsenal. The thrill itself may have been what initially attracted you to trading, but sooner or later every trader needs to make a profit. As you probably already know, the market really doesn't want to give up any of its money to you so don't expect it to. Instead, why not take matters into your own hands and actually take it from the market yourself?

Increasing Profits Takes More Than Good Luck

There's one thing that always amazes us: the number of business owners who view profitability as a matter of luck. They tend to think that extremely profitable businesses got that way because market conditions were right, or they happened to have a product or service the world was dying for.
But let's get real. Do you really think that corporations like McDonalds, for instance, are run by individuals clutching rabbits' feet and keeping their fingers crossed, fervently hoping for another good year?
The truth of the matter is that the profitability of your business can be managed and purposefully grown. In fact, it must be managed if your business is going to reach its full potential.
While there is no magic formula for increasing profitability, there is a step-by-step process that can be applied to your business to discover the unique path that will result in the growth of your enterprise.
This process begins with an understanding of what drives profit and how you can affect those drivers in order to achieve your goals.
Put your focus where it belongs
Yes, there are uncontrollable factors affecting the profitability of your business. For instance, you can't do much about the state of the economy or whether or not there is a labour shortage in Alberta.
Now, you can choose to lose sleep over the unpredictable nature of being in business. You can cross your fingers and toes, hoping that your financial statements will show a profit for this year in spite of skyrocketing rent and labour costs.
Or you can recognize that much of life is unpredictable and that success comes to those who focus on what they can control.
What can you control?
There are only 4 factors affecting the profitability of any business, including yours, and you have some level of control over all of them. These profit drivers are:
  1. The price you charge.
  2. The quantity (or volume) you sell.
  3. The costs you incur directly in producing the products and services you sell. These are variable costs because they increase or decrease as your sales increase or decrease.
  4. The costs you incur whether or not you make any sales. These are fixed costs (sometimes called overhead) because they do not change with changes in sales volume - at least not on a day-to-day basis.
In order to make more money, you may have to increase your price, increase your volume or decrease your costs. It sounds simple, because it is simple.
Now, we're not recommending you simply dive in and change your prices or switch suppliers. Action without a plan is never a good idea, especially in business. Without some understanding of the potential ramifications of a particular action, you may end up taking some serious risks.
But doing nothing isn't the way to go either, especially if you did nothing last year. And the year before. (Doing the same thing year after year and expecting different results is the definition of insanity!)
You cannot just hope for your profits to increase, because they won't. Profitable businesses have owners or chief financial officers (CFOs) in the driver's seat, steering intently toward planned growth.
Here's the bottom line
There are only four ways to increase the profitability of your business.
  1. Increase the number of customers you serve.
  2. Increase the number of times customers come back.
  3. Increase the average value of each sale.
  4. Increase the effectiveness of your operations.
Within each of these areas there is a myriad of actions you can take. For example, in order to increase the average value of each sale, you can increase the price of your product or service, or you can create packages that will increase the amount each customer buys in a single visit.
Regardless of which route works best for you, the important point is that a small increase in the average value of each sale will affect your gross profit margin and your net profit margin.
A modest increase in each of the above areas--a few more customers, a few more visits per customer, a slight price hike and a couple of changes to your operations--can result in a dramatic increase in the profitability of your operation.
Step 1 - Developing a profit strategy
Increasing profitability requires a well-thought-out strategy based on calculation and the development of what-if scenarios. After all, a change in one factor is going to affect other factors.
For example, what if you increased the price of your products and/or services by 20%? How will that affect your volume? If the number of sales drops, will profits increase? Only the numbers will tell.
There's no point sitting in the driver's seat if you don't have a map. A profit strategy is your map, built on the unique requirements of your business. It allows you to make informed decisions as to which actions you will take in order to increase your profits.
Step 2 - Taking it step by step
Understanding what drives profit in your business and the 4 ways to increase profitability are the first two of nine steps to developing a successful profit strategy.
Step 3 - Evaluate your profit potential
Your next move is to quantify the amount of profit currently hiding in your business. How will changes to the four profit drivers impact your profits? How big of an increase can you realistically see this year?
Step 4 - Lay out your strategy
With analysis completed, it's time to choose a course of action and solidify your plan. How much more money do you want to shoot for? How will you get it? Will you increase prices or try to create packages in order to increase the value of the sale? Will you work on streamlining operations? Be specific.
Step 5 - Determine changes required in the business
What else needs to get done in order to implement your profit improvement strategy? Will you need to create new marketing material? Will you have to upgrade your computers and software?
Step 6 - Take action
This is the most important step, and the one where many owners fall down. Fear, resistance, life getting in the way--those are just a few of the reasons we offer for failing to take action on a plan.
Success requires that you just do it. But don't feel that you have to do it alone. Many people use friends, mentors, partners or coaches to keep them on track and motivated.
Step 7 - Measure results
Again, very important, and again, often skipped. How are you going to know if your actions are working? Measuring results allows you to make informed, accurate decisions based on what's really happening in your business.
Step 8 - Evaluate and revise
Did your profit strategy work? Why or why not? Use what you learn to refine your strategy for further growth.
Step 9 - Re-measure
The process of taking action, measuring, revising and measuring again will go on as long as you're interested in improving the profitability of your business.
Steven Walker is a Chartered Accountant in Calgary, Alberta and founder of BusinessWorks Chartered Accountants. BusinessWorks provides CFO-To-Go services for small and medium size businesses. The development of a tailored 'Profit Improvement Program' is instrumental in creating and managing solid business growth.

Theory into Action - Calculating Damages Payments and Accounts of Profits in Patent Cases

It is all well and good to be encouraged to apply and obtain for patent protection. The main remedies for patent infringement are a narrow injunction to prevent future instances of the infringement, and either damages or an account of profits. In this article, we examine the measure of monetary compensation that may be awarded by these damages and accounts of profits and the factors taken into account in their calculation.

Claimants who have successfully proved liability in an action for patent infringement, either actual or anticipated, are entitled to elect their remedy. Successful litigants will discover that the measure of the award for compensation may vary widely depending upon their election between damages and an account of profits.

Comparison of the Remedies

The variance between an account of profits and damages exists because the focus is on the affairs of different parties: in one instance that of the claimant and the other on the defendant.


An award of damages focuses on the losses sustained by the claimant. There is no upper limit on the measure of damages that may be awarded. Relief for patent infringement may overlap with other areas of intellectual property; for instance the copyright of the claimant may have also been infringed (an instance being software). In calculating the sum to be paid in damages, a court will disregard whether the defendant could have avoided infringement by using substitute process and thus avoided a charge of infringement altogether. It is irrelevant. Losses not caused by the infringement are not recoverable.

An Account of Profits

On the other hand an account of profits focuses on the profits made by the defendant, without reference to the damage suffered by the claimant at the hands of the defendant. The purpose of the account is to prevent the unjust enrichment of the defendant by the use of the claimant's invention. The claimant is treated as if they were conducting the business of the defendant, and made the profits of the defendant. As such, the upper most limit of an award is the sum of profits made by the defendant caused by the infringement. In most cases, an award of damages will equal or exceed the maximum award in an account of profits; however an account of profits may greatly outstrip an award of damages in the right case. When assessing an award, to say that a defendant should have generated higher profits is immaterial: the claimant must take the defendant as he find them.

The profits must have been earned from the use of the claimant's invention, and if the infringed invention formed only part of the overall product or process, then only that part of the profit attributable to the patented invention is recoverable. This is where most difficulty is experienced in assessing the profits earned by the defendant and a number of approaches may be taken during the assessment. Courts take the view that this would be unfair upon the defendant for the claim to be awarded all of the profits where attribution of profits is possible. Manufacturing processes that use the patent in question as a small step in the manufacturing process provide a typical example, in that it clearly cannot be said that the entire profit of the application of the process is attributable to the infringement. Where it is appropriate to apportion losses, the reference for the assessment will involve splitting the profits between infringing and non-infringing parts of the process.

On the other hand, there are instances where it is appropriate for the claimant to recover all of the profits of an invention, however whether this is so turns on the facts of the case.

Making the Calculations


It is trite to say that the claimant is entitled to be placed in the position they would have been had the infringement not taken place in the context of damages. The test for the measure of damages in patent cases is seen in the application of the 'but for' test, and the damage must be the natural and direct consequence of the defendant's acts. Although the claimant must prove their loss, they are assessed liberally. Courts recognise that monopoly rights lead to higher prices or licence fees, so this is the peg to which damages are assessed.

A court is generally prepared to imply that inference with the claimant's monopoly will cause damage in the ordinary course of events, and the absence of a precise means to calculate damages will not necessarily result in an award of nominal damages, but a fair sum of what a reasonable person may expect to have lost, with reference to the general trade that has been interfered with by the defendant.

There are two ways to calculate the damages suffered by a defendant, and the method turns on whether the claimant manufactures the patented invention or whether manufacturing of the invention is licensed to others.

The Reasonable Royalty

Where the patent owner licenses the production or use of the invention to others, the measure of damages is the lost royalty profits.

A court is usually inclined to award a reasonable royalty to the claimant, notionally asking: if the claimant did grant a licence to use the patent, what would they reasonably be expected to obtain in the market?

The damages are limited to the lost licence fees that would have been payable by the defendant. Where previous licensing fees have been agreed, the determination of the price as it has been determined in the free market will be persuasive evidence of the proper sum payable, as that is the sum that the infringer will be presumed to be asked to pay. The sum may be increased where standard licence fees impose restrictions upon the licensee which are not similar to the conduct of the defendant when committing the infringing acts. Thus when a product is usually made available on a usage only basis, and the infringer has manufactured and sold the product with purported licences to further develop the invention to its licensees, an uplift in the award payable is likely.

Where there is no precedent of licensing by the claimant, calculation of a reasonable royalty may take into account:

    the patent owners' previous conduct in pricing and terms
    Percentages standard in the trade
    cost of designing around the patent monopoly rights

The proper sum for the notional licence fee is the sum that a potential licensee would be willing to pay to enter the market.

Where there is no licensing activity, the court may use this notional licence fee to calculate damages. Evidence of the quantum to be awarded may be a quoted licence fee by the claimant. Where there is no quote for a reference point, the measure will be the rate that a licensee who is not in the market would pay, regardless of whether they might have been able to make non-infringing equivalents.

Manufacturers of Patented Inventions

When the patent owner manufactures the product, the patentee is entitled to lost manufacturing profits.

When the patent owner is a manufacturer rather than a licensor, it has often been said that the appropriate figure cannot be arrived at with mathematical precision. It is the profit that the claimant could have made that sets the baseline for the award. Some allowance may be made for the exertions made by the defendant, as it is presumed that not all sales made by the defendant would have been made by the claimant had there been no infringement.

Heads of Damages

Depending on the type of case, the following heads of damage have been established by previous case law:

    Loss of profits
        in the form of sales diverted away from the claimant by reason of the infringement;
        lost margins on sales not made due to the pressing need to reduce prices due to price depression caused by the infringer.

    Loss of goodwill and reputation to the claimant, which arguably has several dimensions;

    Sums representing the benefit of the use of the invention by defendant in the market, which is qualified by taking the market value of the use. It is damages for the unauthorised use, which resonates as a licence fee for the use and restitutionary damages (sometimes referred to as 'gain based damages'), an area of damages law rarely pressed.

    Lost profits on sales lost on goods that are commonly sold with the invention

    Springboard Damages: damages that are suffered after the infringement by establishing a market presence through infringement and early entry into the market.

    Diminution of value in subsidiary companies owned by the patent owner due to the loss of sales by them where the profits flow through to the holding company.

    Depending on the nature of the patent, there may be losses sustained by loss of sales on products commonly sold with the patented products, provided it is foreseeable and caused by the infringement.

    As a general rule a claimant was entitled to recover for losses and expenses reasonably incurred in mitigation.

Where the patent owner has reduced prices in a competitive market, a court may have regard for the argument that the patent owner could not have maintained their sales at current prices in that environment. This is a matter that goes to causation of damage - the claimant is not entitled to recover losses unless the defendant caused them.

In the case of infringement of a product, a good starting point for assessing damages is to obtain evidence of the number of infringing products made and in the alternatives sold, the sums received and the approximate costs incurred. This creates a reference point for the calculation.

The point needs to be made that the damages recovered in any particular case depends on the facts of the case. The general principle of awarding tortuous damages applies - that any losses caused by the infringement are recoverable, whether or not the particular heads appear in the list above. A defendant is said to take the claimant as they find them, and thus damages outside these heads of damages which are peculiar to the claimant will be recoverable in the appropriate case.

Making an Accounts of Profits

Defendants are not obliged to hand over the gross profit obtained by reason of the infringement. In keeping with the approach that the claimant is said to stand in the shoes of the defendant, a court will make allowances to the defendant for parts of the gross profit that are attributable to proper expenses associated with making sales, such as advertising and marketing; increases in value of goods or services once sold or provided and additional features of the product or service that are outside the infringing invention (such as value added services).

In the event an infringer makes a loss in a manufacturing process, the sum by which the infringing process reduces those losses are recoverable on an account.

Where it is difficult to separate out the different components of a process in order attribute a proportion of the profits, courts may decide to assign a percentage of the profits on the same percentage that the costs and expenses are attributed to them by adopting an accounting approach. A judge will make a reasonable approximation. Account may then be taken of the relative importance of the relative attractions of different parts of an infringing product. In this way the courts reserve a discretion to grant a larger slice of the profits where the infringement can fairly be said to play an important role in the profits obtained by the defendant. This approach takes a 'base allocated profit' percentage and then that percentage is weighted for the importance to the profits obtained.

There are cases where the patented invention has readily discernable impact on profits, either positively or negatively. For instance, the patented invention may reduce the costs associated with the manufacturing process, making the process more efficient. In that case a larger share of the profits would be payable to the claimant on an empirical basis. It involves a comparison between the profitability achieved when the patented invention is used and on the other hand when it is not used. This brings consideration of efficiencies introduced by the invention into consideration for the calculation of the slice of the profits to be awarded to the claimant.

Making assessments of damages and accounts of profits after an infringement of a patent frequently requires the involvement of forensic accountants with some knowledge of the industry in which the infringement has taken place. As a general rule, an account of profits will probably be preferred in cases where the claimant cannot point to any damage in their own business. This will usually be the case where the margins of the defendant outstrip the profits that of the claimant.

What is Profitability?

We all know what profit is: the surplus left over from revenue after covering expenses. Profitability is the measure of profit generated on an ongoing basis. Profit is generally measured in dollar terms; profitability is measured as a percentage of sales. You need to focus on both.
For many small businesses, profit equals the owner's paycheck. If your profitability from operations doesn't generate enough cash flow, you don't get paid. The first step is to figure out how much you need to pay yourself--to cover your basic needs and desired lifestyle, savings and retirement, and to pay your taxes. Then, figure out how much money your business needs to bring in to cover its expenses and pay you this amount.
This is an eye-opening experience for business owners. Your initial reaction may be dismay: "How can I ever bring in that much revenue? Am I doomed to just scrape by?" But, given your financial goals, you can begin looking seriously at how to restructure your business to give you what you need financially--or else get out of it and go on to something else.
Profit is more than your pay
Even if you are a sole proprietor, learn to view "profit" as separate from what you pay yourself. Pretend that your company is a corporation, where you earn a regular salary, and that makes a profit beyond that. You get paid to work there, and as owner, you expect a profit dividend.
Profit is more than money
Here's how small businesses should look at profitability:
o Profit is ROI--return on investment. You (and perhaps others) put capital into your business and you expect to get it back someday with a suitable rate of return. For an established yet vulnerable small business, a suitable ROI can be from 20% to 30% per annum.
o Profit is ROE--return on effort. Many people start their businesses largely with sweat equity, putting in thousands of hours of their own time--unpaid--to get the business up and running. Can you ever recoup the value of your time?
A business run by the owner should look at profit as the financial return per unit of your effort. For example, suppose you work 2,000 hours in a year, and your company's profit is $250,000. For that year, you could say that you had a return of $125 for each hour you put in. If you want to operate with greater ease, make sure you don't increase profit by dint of harder work and longer hours. More on this in chapter 11 of my book "How to Grow Your Business without Driving Yourself Crazy" in the section on "Leverage Your Effort."
o Profit is a tuning fork. It tells you how well tuned your business instrument is. When you are doing things right--working productively and cost-effectively, selling the right things to the right people, serving your customers well, treating your own people well--profit is the measure that amply demonstrates that.
The opposite is also true. When your business is not tuned properly, it sounds the discordant notes of low productivity, unhappy employees, dwindling customer base, and mounting losses. Profit is acknowledgement that the business is tuned properly.
o Profit is flow. Profit provides the surplus that helps you weather the lean times. Profit allows you to be generous.
o Profit is energy. Many small business owners say they are more interested in achieving their vision than in making a big profit. But without adequate profitability, you get worn down, burnt-out and discouraged.
An unprofitable business fails unless outside money is continually pumped in. You cannot make the contribution you want without bringing in a good profit.
The uses of profit
As your attitude toward profit shifts from (a) what's left over that you use to pay yourself, to (b) a resource you use for critical business needs, you can plan your operations so that they regularly generate profit beyond what you pay yourself. You can create a "profit budget" to calculate how much you need to cover such items as:
o Fund for expansions or upgrades. How much do you need to set aside each year for anticipated upgrades and expansion?
o Cushion to cover downturns. How much should you set aside each month to provide an insurance policy against short-term financial reverses?
o Fund for bonuses and financial incentives and profit sharing. What proportion of sales revenue should you allocate to incentives and bonuses in order to motivate top performance?
o Retirement programs. What proportion of salaries and wages should you set aside to fund retirement plans for you and your employees?
o Paying taxes. How much must you set aside each month to pay taxes on the profit you anticipate?
o Debt repayment. How much cash flow must be available after taxes to pay down your debt--including repayment of money you have put into the company?
Calculate all these amounts that pertain to you and add them up. This is the amount of profit from operations you need each year. If you divide this sum by your projected revenue, you get a percentage that shows what proportion of each dollar of sales revenue should be available for these uses. One of the most important uses for this percentage is to set prices that assure the desired level of profitability.
Your accountant may gnash his or her teeth over the above paragraph, correctly pointing out that many of these items are business expenses, not profit. I agree. However, for small business owners who are trying to make a transition from a cover-the-costs mentality to a generate-surplus mentality, developing this profit budget is invaluable. These are the very items that they otherwise fail to account for in their planning, their projections and their pricing decisions.
Need help?
Several of our books, workshops, and e-tools help you boost your profitability--and to figure out how much profit you need. These include:
o How to Grow Your Business without Driving Yourself Crazy, esp. Chapter 13, "Build a Culture of Profitability" and Chapter 15, "Calculate the Benefit and Cost."
o "Build a Culture of Profitability" available as e-book and tel-online workshop.
o "Sources and Uses of Cash" template. A crucial tool in projecting cash flow.
o "Success in 2007" plan workshop helps you put profit in the context of all other facets of your business.