At an event in Edinburgh on Monday I met an elder statesman of the UK environmental consultancy industry. I won’t mention his name because I can’t be sure he would want to be attributed to what I am about to write. Needless to say, I thought his points were valid and worth repeating.
Earning vs. Saving
Among some interesting points about Combined Heat and Power, he also mentioned how businesses (and households) tend to forget one of the elementary economic rules: profit = income less costs.
This matters because most forms of income come with costs attached. Let’s say you run a business selling bananas (Bananarama Ltd). You have to buy the bananas that you sell, so your profit can never be 100% of the sale price. On top of this you have to pay for somewhere to store your bananas and staff to help sell them plus the sundry costs of power, heating, water and taxes.
Your balance sheet for each banana might look like this:
Selling price of banana: 25p
Wholesale cost of banana (the price you paid): 10p
Wage costs (per banana): 3p
Sundry costs (taxes, waste, transport, energy bills): 2p
Average profit per banana = 7p
So, how many bananas do you need to sell to make £1 in profit? 100/7 = 14.28 (let’s call it 15).
15 bananas to make £1! It’s a wonder anyone bothers. But then, as we know, most people selling bananas also sell lots of other things and generate sufficient turnover that all their small margin items add up.
Now, compare the cost of earning £1 with saving £1:
Bananarama Ltd spends £1,000 on paper for their office each year. They decide to enforce double-sided printing throughout their head-office.
Assuming this can be achieved by assigning someone to do it as part of their normal job (i.e. they don’t get additional salary to set it up and train staff in the new procedures) the company saves in two ways. Firstly they need to buy paper less often and secondly they have less waste to dispose of (by recycling we hope!). They could conservatively expect to save £250.
Equivalent number of bananas that would have to be sold to achieve the same profit: 3750
These calculations work on anything you care to think of. Whenever you can save (avoid expenditure) it is worth more to you than trying to earn the equivalent.
Relevant for households too
Householders pay tax so, on average, £1 earned is actually worth around 78p. On the other hand, if the household saves £1 by avoiding food waste, they save a full £1 to spend on something else.
It’s this kind of common sense logic which should help us focus all on the best strategy for sustainable economic growth.