Integrated Profitability Blog

Change in Plans: Trumped by an Opportunity (Stong)

integratedprofitability — Mon, 18 Oct 2010 07:01:38 +0000

Change in Plans: Trumped by an Opportunity

An opportunity has presented itself which is too good to not seize. The result: I have taken a full-time position with a bank which will keep me very busy for the foreseeable future. Therefore, I am putting “Integrated Profitability” on the back-burner until it can be ascertained how much time will actually be available for writing.

Instead of posting entries every Monday through Friday, it may only be once a week. Or perhaps even less. We shall have to see.

Unfortunately, this means postponing two of my favorite topics:

● Momentum Analysis

● Business Relevance

In “Reporting: What is & Table of Contents for month,” I announced these two would be covered during the weeks of October 18, 2010 and October 25, 2010 respectively. As it turns out, paradoxically, the “How To” portion of Momentum Analysis was turning out to be much longer than originally anticipated. Which was leading me toward expanding the time for Momentum Analysis to two weeks in order to provide a pragmatic and usable “How To” guide. Now, I will be able to take the time to complete it the way it should be.

Let’s view this slight change in plans as an unanticipated sabbatical.

All the best,

Bill

William A. Stong

Email: william.a.stong@gmail.com

Telephone: 925-202-6244

Integrated Profitability Consulting^TM

“Insight knowledge for Profit Maximization”

Christopher Columbus’ Profit Report to Queen Isabella (Stong)

integratedprofitability — Fri, 15 Oct 2010 07:01:16 +0000

Christopher Columbus’ Profit Report to Queen Isabella

To King Ferdinand and Queen Isabella

~March 23, 1493

I have shown you the treasures we found in the Indies. Our first expedition but touched upon several islands…presumably on the outer perimeter of the main Indian continent. From Marco Polo we know that there are many more and much larger lands—presumably not far beyond the islands we visited.

The cost of the expedition was covered by my Italian investors and your Majesties. The local inhabitants we brought back have been well-received in Spain; as I am sure they will be when they visit our other investors. And, as their jewelry shows, the new lands are rich in gold and silver.

Your Majesties. Your investment in this first expedition yielded a small profit. More importantly, I claimed all the new lands for Spain and I estimate that your realm has increased by at least 25%.

But that is only the beginning. With a second expedition, consisting of more ships, perhaps a half dozen?; I anticipate finding much more of the Indies to bring under the sovereignty of your Majesties. With more lands, there will be much more wealth. By loading our ships with cheap goods unknown to the inhabitants of the Indies, they will readily trade their gold and silver.

So far, of course, we don’t know the source of their gold. May I suggest we augment the expedition with a few settlers? Perhaps a few clergymen. Both could help us find the mines. Securing land for colonists will be relatively inexpensive since the inhabitants appear to lack a knowledge of metal-working. Their weapons are primitive. The most formidable that came against us were crude arrows. A few soldiers accompanying the colonists will be more than enough. Perhaps another half dozen ships for these, shall we say, civilizing travelers?

There is a large benefit for having the next expedition consist of more ships, many of which will be carrying people we will be leaving in these new lands: there will be more holds for bringing riches back to Spain.

Even better, since I have already made the journey, we know the route. Which currents will get us there in the shortest period of time. We hope to find the best currents to bring us back. The time to make these journeys will shorten as we gain experience. Not only will your lands grow vastly larger, your subjects will increase, and your wealth expand. All of these will happen in shorter and shorter time periods.

May I respectfully inquiry how soon you will allow us to begin bringing these benefits to your Majesties?

Viajes de Colon

Bill

William A. Stong

Email: william.a.stong@gmail.com

Telephone: 925-202-6244

Integrated Profitability Consulting^TM

“Insight knowledge for Profit Maximization”

Icons/Photos:

1. Voyages of Columbus

http://en.wikipedia.org/wiki/File:Viajes_de_colon_en.svg

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Equity Capital Update: BP (Stong)

integratedprofitability — Thu, 14 Oct 2010 07:01:19 +0000

Equity Capital Update: BP

(This article is also published concurrently at “Contra Costa County Small Business Community” as part of the “Small Business Finance & Profitability” blogs. Please visit for the full series of articles.)

The final article on capital and equity was posted at the end of July: Equity Capital: In Conclusion. Since then, one of the most written-up examples of the need for equity capital to cover adverse conditions has published 2Q10 financial results: British Petroleum.

The explosion on the Deep Water Horizon, killing 11 people; its subsequent sinking; the ruptured oil well; and wide-spread environmental damage has added huge expenses related to fixing and cleaning up the problem. It is for exactly these types of disasters that capital and equity are needed.

A quick review of BP’s 2Q10 results highlights the following:

Income Statement

● Production and manufacturing expenses*:

Increased to $38.0 billion (from a ~$6.0 billion quarterly run-rate)

● Taxation:

Received offsetting credit of ($7.2 billion) (from a ~$2.5 billion quarterly tax run-rate)

● Profit (loss) for the period:

Became a ($17.0) billion loss (from a ~~$6.0 billion quarterly run-rate)

*: Footnote to Production and manufacturing expenses:

“Second quarter and first half 2010 include a charge of $32,192 million in production and manufacturing expenses, and a credit of $10,003 million in taxation in relation to the Gulf of Mexico oil spill.”

Source: Excel download from investor relations portion of BP’s website; “Copy of FOI_quarterly_ifrs_full_book”

Balance Sheet

● Trade and other payables

Increased to $45.5 billion (from $38.1 billion at the end of 1Q10)

● Provisions

Increased to $13.4 billion (from $1.6 billion at the end of 1Q10)

● Other payables

Increased to $16.3 billion (from $3.2 billion at the end of 1Q10)

● Deferred tax liabilities

Increased to $11.0 billion (from $20.2 billion at the end of 1Q10)

● Total liabilities (includes the above items)

Increased to $162.3 billion (from $135.7 billion at the end of 1Q10)

● BP shareholders’ equity

Decreased to $85.5 billion (from $104.1 billion at the end of 1Q10)

Notice the Income Statement’s 2Q loss ($17.0 billion) and the Balance Sheet’s decrease in Shareholder equity from 1Q to 2Q: $18.6 billion.

Which re-emphasizes the desirability of having adequate equity-capital.

Bill

William A. Stong

Email: william.a.stong@gmail.com

Telephone: 925-202-6244

Integrated Profitability Consulting^TM

“Insight knowledge for Profit Maximization”

Christopher Columbus’ Report to Scientists & Academia (Stong)

integratedprofitability — Wed, 13 Oct 2010 07:01:06 +0000

Christopher Columbus’ Report to Scientists & Academia

To Esteemed Scientists of the Academy and learned Professors

March 22, 1492

My recent trip across the Atlantic Ocean has proven not only that our world is a sphere, it has also shown the size of our celestial orb. It also proves that there isn’t an edge over which ships and sailors plunge to grisly deaths.

The cost of my expedition is well worth such proofs and insights. But there is so much more. I have found vast new lands to explore. How many of your own disciplines have, because of the expedition, suddenly become much larger and broader? How much is there to discover, and to learn? If your areas of study were crowded, limited, or exhausted before, what wondrous opportunities now face you? What fame now awaits you?

For the mere cost of my next expedition; consisting, I am thinking, of a dozen ships, their crews, and provisions. Let me ask you: what strides can you, gentlemen of academia and science, make in your fields? It grieves me to think you might take advantage of my efforts and kind heart; where I take mortal risks and you reap untold benefits from the comfort of the academy. But I am so awed with what lies before us that I force myself to selflessly share with you.

What advancement and fame can be made in:

● Geography

● Oceanography

● Cartography

● Biology

● Cultural studies

● Alchemy

● Potions & spells

● General human knowledge

Even better, sirs, with a few more ships, we could take your experiments and studies to these new worlds. On the way back, we could fill our holds with exotic samples from each of your fields—and you can reap the rewards of being the first with such marvels and rarities.

Interest is high in the next expedition. Perhaps you would find it advantageous to procure a priority for your particular field and interest? I am not sure how much space we have left….

Surely, a small down payment for achieving immortality in your field of study is of little consequence. Is it not?

Bill

William A. Stong

Email: william.a.stong@gmail.com

Telephone: 925-202-6244

Integrated Profitability Consulting^TM

“Insight knowledge for Profit Maximization”

Icons/Photos:

1. Columbus Map

http://en.wikipedia.org/wiki/File:ColombusMap.jpg

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Christopher Columbus’ Report to inhabitants of the New World (Stong)

integratedprofitability — Tue, 12 Oct 2010 07:01:52 +0000

Christopher Columbus’ Report to inhabitants of the New World

To the Residents of these Indies

October 20, 1492

I am pleased to report on our mutually successful trading over the past week. While you have provided us with fresh water and hearty food, which has returned most of my officers and crew to robust health; we have provided you with colorful clothes and shiny baubles which you hold in high esteem. And which make your women, if I may be so bold, quite becoming.

These items which we have traded are but the beginning of bright and useful items we will bring to trade with you; not only for nourishment which is important to us, but also for other items. Like those pieces of jewelry you are wearing.

And you have nothing to fear. Our ships may appear large, but they are tiny compared to the ocean. Which means our trading will be of limited frequency. It takes a long time to cross between our two lands.

And since this is your land, you will have maximum control over this budding trade. It is with great anticipation that I look forward to a mutually profitable, and expanding, trading relationship between our two peoples.

In order to test the market for your craftsmanship, may I trade my hat, with its beautiful feather, for your necklace?

What’s that? Oh, fine. And my cloak, too.

Bill

William A. Stong

Email: william.a.stong@gmail.com

Telephone: 925-202-6244

Integrated Profitability Consulting^TM

“Insight knowledge for Profit Maximization”

Icons/Photos:

1. Columbus’ First Voyage

http://en.wikipedia.org/wiki/File:Columbus1.PNG

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Columbus Day & Report to his crew (Stong)

integratedprofitability — Mon, 11 Oct 2010 07:01:36 +0000

Columbus Day & Report to his crew

Cristobal Colon

Today is Columbus Day.

From a business, profitability perspective, this is a double-edged day. For Europe, it opened up vast new territories and markets—albeit not along 21^st century commercial models. Vast wealth was funneled out of the New World to Europe. From the perspective of the indigenous populations, it meant the wholesale crushing of how they conducted business. Although, one might make the argument that the Aztec and Inca overlordships of surrounding populations were merely displaced by an all-encompassing one of the Spanish.

In any event, here are two websites covering Columbus Day:

● The Library of Congress

● Wikipedia

***

Cristobal Colon’s Report to the Crews of the

Santa Maria, Nina, Pinta

October 6, 1492

To the Officers & Crews of the Santa Maria, Nina, Pinta

Two months ago, on August 3, we sailed from Palos de la Frontera. On September 6^th, after reprovisioning, we left the Canary Islands. Our three ships had been loaded with enough water, food, and grog to last the entire journey. This amount of provisions was based on full rolls of officers and crew, for all three ships, less an historical attrition due to accidents, diseases, complications from disciplinary actions, and executions of those found guilty of capital crimes or attempted mutiny.

Since our departure, we’ve consumed:

● 75% of the water

● 80% of the food

● 65% of the grog

At full rations, this leaves us with about:

● 10 days of tepid & disgusting water

● 9 days of mostly rancid food

● 12 days of pain-numbing grog

If we go on half-rations, we double our time. Quarter rations, twice again. If the death rate increases because of doing so, even more for the hardiest.

I believe there are two alternatives:

1. we turn back

2. we keep going

Given the amount of noise coming from you rummy lot, it appears you favor Option # 1. Let me elaborate:

Last terra firma was the Canary Islands 30 days ago. If we turn around, at quarter rations, we might just make it back. But we’ve been sailing with current and wind at our backs the whole trip; we’d have to fight that going back and all the food, water, and grog will run out long before landfall and we all starve to death.

Going forward, I see three outcomes:

1. we don’t find land and we die anyway

2. we go over the Edge of the World—what a rush that would be, eh?

3. we make landfall. And we survive with fresh water, meat and fruits. We may find other people—whom we can trade with…or loot. Either way, you come out richer. And, having gotten to the Indies, we load our holds with spices and other goods which will make us all rich and famous back in Europe.

So, we keep going. Right, lads?

Enjoy Columbus Day!

Bill

William A. Stong

Email: william.a.stong@gmail.com

Telephone: 925-202-6244

Integrated Profitability Consulting^TM

“Insight knowledge for Profit Maximization”

Icons/Photos:

1. Christopher Columbus

http://en.wikipedia.org/wiki/File:Ridolfo_Ghirlandaio_Columbus.jpg

Permission
(Reusing this file)

This is a faithful photographic reproduction of an original two-dimensional work of art. The work of art itself is in the public domain for the following reason:

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This applies to the United States, Australia, the European Union and those countries with a copyright term of life of the author plus 70 years.

Please be aware that depending on local laws, re-use of this content may be prohibited or restricted in your jurisdiction. See Commons:Reuse of PD-Art photographs.

2. Toscanelli Map; 1474

http://en.wikipedia.org/wiki/File:Atlantic_Ocean,_Toscanelli,_1474.jpg

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Trends: Maximizing Benefits (Stong)

integratedprofitability — Fri, 08 Oct 2010 07:01:06 +0000

Trends: Maximizing Benefits

To reiterate, in order to maximize benefit from profitability reporting, you must have:

● Sufficient history

● Comparable history

Sufficient history

Do two points make a trend? Although you can draw a line between them that has a slope, I would say “No”: at least three points are needed.

Assuming your profitability reporting is done monthly, that implies a minimum of 36 months of rolling history (actually, 37 months is even better). Why? Because financial reporting for corporations is done on a yearly basis (whether calendar or fiscal), and that means three years.

Ideally, you would want to include the number of months that covers three business cycles; whatever the business cycle is for your company’s industry. If the business cycle ebbs and flows on a yearly basis, then three years should be sufficient. If your industry has an eighteen month cycle, then 54 months of history provides the “3-point” reference.

Marketing departments, as opposed to finance ones, generally want even longer periods—ideally five years or more. The longer time period lets them see other patterns that might exist for the industry.

Comparable history

Comparable history allows you to make the most of trend reporting. If all the data has the same content, utilizes the same calculations, and uses the same attribution/linking rules (e.g., customers to officers; products to business lines), then users or analysts of the data can spend all their time focused on what the data is telling them, looking for drivers, ferreting out connections, figuring out cause-and-effect, and using all of those to make faster, more accurate business decisions.

If the data is not comparable, then time must be spent to isolate the incomparabilities so that reporting can be normalized; i.e., eliminating inconsistencies. If your business is constantly buying or selling companies, divisions, product lines, customer portfolios; then it might be very difficult to isolate a single set of data that is comparable over, say, a three year period.

The point is that business decisions made on incomparable data run the risk of being inaccurate or invalid. Business decisions based on comparable data begin with a much clearer picture of reality.

Bill

William A. Stong

Email: william.a.stong@gmail.com

Telephone: 925-202-6244

Integrated Profitability Consulting^TM

“Insight knowledge for Profit Maximization”

Trends: Why important? (Stong)

integratedprofitability — Thu, 07 Oct 2010 07:01:26 +0000

Trends: Why important?

Trend reporting is important because it provides a dynamic component to the static “point in time” reports of the Balance Sheet (e.g., end-of-month/quarter/year) and “period in time” reports of the Income Statement (e.g., the month of July; the 3 Qtr; full year). Trends indicate how the financial numbers are moving over time.

Assuming comparable data, the longer the time period, the more insight that can be garnered.

In a very simple example, let’s say you have $10,000 to invest in the stock market. Which is more revealing:

● A single intra-day stock quote

● Three months’ worth of daily end-of-day closing prices

● Five years’ worth of daily end-of-day closing prices

● Five years’ worth of daily opening, intra-day, closing prices

These include peaks and troughs during each day

● Five years’ worth of daily opening, intra-day, closing prices; adjusted for actions affecting the stock such as splits

The more trend data you have, the more you will know about how the stock price behaves, when it goes up/down, and by how much. A graph of the data will indicate certain cycles, and will give hints as to which way the price may be heading. Of course, anyone in the market knows that:

1. “past performance is no guarantee” of future performance and

2. it is incredibly difficult to forecast tomorrow’s price

The point is that with a sufficient amount of history and comparability, you are in a much better position to have an informed opinion about where the price may be heading. Without the information, it’s like flying a plane from a cockpit that has no windows and no instruments. You can do it for a while but the likelihood of a crash goes up astronomically.

Bill

William A. Stong

Email: william.a.stong@gmail.com

Telephone: 925-202-6244

Integrated Profitability Consulting^TM

“Insight knowledge for Profit Maximization”

Trends: Challenges (Stong)

integratedprofitability — Wed, 06 Oct 2010 07:01:04 +0000

Trends: Challenges

There are two major challenges facing trend reporting:

1. How much historical data is available?

2. How comparable is the available historical data?

By definition, trends consist of multiple points of comparable data. The number of points needed to make a trend report useful depends on the characteristics of the business.

● Available Historical Data

For businesses that are always the same, fewer points are needed to provide useful information. For businesses that are cyclical, the number of points needed increaases to cover at least two, preferably three such cycles.

Example of a constant business: Food

The demand for food is fairly consistent since we all need it to stay alive. Week to week we may consume roughly the same amount. Therefore, a few weeks of data may be enough to show whether or not business is doing well (e.g., growing) or not. “Cyclicality” might be limited to blips when people traditionally consume more food (e.g., Thanksgiving in the U.S.) or less (e.g., fasts).

Example of a cyclical business: Gasoline

Consumption of gasoline increases once schools are out for summer and decreases once schools are back in session.

See the Market Watch article, Road Warriors, by James Cordier and Michael Gross

● Comparability

The biggest challenge to trend reporting is the comparability of historical information. With change being a constant companion of the business world, it is frequently the case that data being reported is not comparable over the full amount of history, either in terms of content or the way certain data elements are calculated. Incomparability makes it hard to analyze data and draw accurate business conclusions.

For example, if year-over-year sales have increased for a certain Sales Officer, is it because,

● They made more sales?

● They inherited someone else’s client(s)—but no history?

● A competitor was purchased?

Common comparability issues include:

● Acquisitions and dispositions/spin-offs

● Definitional changes

e.g., determining “middle market” clients

● Expansion or reduction in data elements

e.g., adding or eliminating the number of products offered

● Increasing or decreasing the degree of granularity

e.g., having five product features vs. combining the five into only two

The normal way to handle incomparable historical information is to, well, normalize it. That is, exclude or adjust data that make the full history incomparable so that what is left is, in fact, consistent and comparable. For example,

● One-off transactions can be highlighted and explicitly excluded from analytical work

● Data related to acquisitions could be back-loaded prior to the time of acquisition to produce content-consistent data for analysis

Trend reporting is most useful when there is enough comparable data to allow analysis to feed accurate results into high-quality business decisions.

Bill

William A. Stong

Email: william.a.stong@gmail.com

Telephone: 925-202-6244

Integrated Profitability Consulting^TM

“Insight knowledge for Profit Maximization”

Trends: What are (Stong)

integratedprofitability — Tue, 05 Oct 2010 07:01:20 +0000

Trends: What are

Trend reporting consists of a series of comparable points or periods of time. The purpose of trend reporting is to show how different components of your business are performing over time. Trend reports give a sense of movement; they provide a dynamic view of how your business is changing.

Trends help you evaluate how well you are doing. Increasing revenue is generally a good trend, although if your expenses are increasing at a faster rate, then your net-profit is taking a hit and that, at least over time, is not a good trend.

Net-interest revenue may be increasing, which is also generally a good thing. It makes a difference, however, it that increase is because interest rates are higher on deposit accounts; or huge numbers of new loans have been booked. The risk profiles of these two Balance Sheet items are totally different.

Likewise, increasing expenses could be a problem; or they could be great if they’re funding new sales that are bringing in massive amounts of new revenue. Expenses remaining the same could be a gain in productivity—if transaction volumes have increased significantly.

Point and period in time reports are excellent for telling you where you are, and for showing the change from point-to-point or period-to-period. Trend reports fill in the space between and show where your company is coming from.

And those trends can provide some indication as to where your company may be heading.

Bill

William A. Stong

Email: william.a.stong@gmail.com

Telephone: 925-202-6244

Integrated Profitability Consulting^TM

“Insight knowledge for Profit Maximization”