Surplus economics is usually defined as the positive effects that occur when assets are greater than liabilities. This term is commonly used on a national level, although it can also be applied to a business-level wealth creation. Many business owners, directors, and managers have transformed their financial analysis procedures to include surplus economics measurements. Traditional financial analysis focuses on a company’s income statement and identifying sales trends. Modern business managers often focus on their company’s balance sheet to determine how well the company is managing its assets and liabilities. This analysis determines the economic wealth or surplus generated by a nation’s economy or a company’s business operations.
Nations often experience surplus economics when tax revenues are higher than government expenditures. This surplus can then be invested into a nation’s public or private sector infrastructure developments that will lead to higher tax revenues. If properly executed, this cycle can continue for many years and continue to generate positive returns, leading to future economic stability for a nation.
Surplus economics may also be generated in a nation’s economy when individual consumers have more income to spend on consumption purchases. This surplus usually relies on nations keeping tax rate percentages low and allowing consumers to retain more of their income from each paycheck. While this may seem counterproductive for increasing a nation’s economic value, it encourages consumers to purchase more goods or services. These purchases often result in higher tax revenues on a volume basis. Increased consumer purchases require businesses to make larger investments for increasing production output of consumer products. Increased business investment usually requires companies to pay more taxes at each stage of business growth, allowing governments to generate multiple tax revenue streams in the economy.
Surplus economics can also be applied to financial statement to create an important business indicator. This indicator helps manager’s understand the true value of their company’s business operations. Net income is an accounting figured that exists only on paper. Many companies in the business environment have positive income trends but lack true economic wealth creation. This lack of economic wealth may occur when companies use extensive amounts of outside financing to purchase or maintain business assets.
Companies often generate surplus economics through increasing cash flow and using this capital to pay for various business assets. Cash flow can be generated from business operations, financial investments or selling business assets for a capital gain. While the former cash generation method is common to most companies, the latter two are often used by larger companies with consistently positive cash flows. Rather than maintaining high cash balances, companies will invest this resource into wealth-generating investments.