The added value statement is not just a means of looking at the financial consequences of a firm's activities. It also describes the set of relationships which constitute the firm. These relationships include its suppliers, its customers, its employees, and its investors. The firm must have relationships with the governments of the countries in which it operates, and its performance is influenced by its relationship with its competitors. It is the totality of these relationships which defines the individual firm and creates its distinctive identity.
The first task of the management of any business organization is to ensure the consistency of its contractual relationships--to establish that the planned output can be achieved with the planned inputs of labour, capital, and materials. For each of these contractual relationships there is a corresponding financial flow. The firm receives sales revenues from its customers, makes payments to its suppliers, meets its wage bill and its tax bill, and pays a return to its investors. These are totalled and summarized in the added value statement, while the competitive environment--the relationship between the firm and its rivals--determines the degree to which added value can be created. The purpose of business activity is to put together a set of relationships which maximize that added value.
Commercial relationships are of many kinds. Some are contractual-- specific and legally binding obligations which can be enforced in the courts. Others are informal, or implicit. Often contractual relationships will be supplemented, or effectively superseded, by implicit terms. Most formal agreements between firms and their competitors are illegal. These relationships are defined by the rules of the competitive game, which may be disciplined--an understanding that everyone will lose from a price war--or may be unstable, aggressive, and undisciplined. Interactions with the government are imposed through tax legislation, may be prescribed by regulation, or may involve the public sector as provider of services or user of output.