Funny (somewhat green) label for du Pont formula

Every generation needs a revolution - an entrepreneurial revolution

The du Pont formula is used for detailed financial analysis of ROI  (Return of Investment)    (We failed a candidate in  a panel examination when the candidate can not explain what ROI is)

Thus du Pont formula (which SEC also requires in financial reporting is:

            Income  Margin                 x        Turn Over                x Leverage    =    ROI

            Patong                                          Paikot                        Laway

            DI BA GREEN?!

            Net income/sales                   Sales/Total Assets            Total Assets/Stockholders equity

                           Cancelling out common terms, sales and total assets  =  Net Income/Stockholders equity

Thus to increase your ROI you have to do any of the following:

1.  Increase margin (raise prices or reduce cost)

2.  Reduce total assets (via outsourcing, reducing receivables and inventory)

     Thus BPO and outsourcing is simply following this formula

3.  Increase borrowing to reduce your Stockholders Equity

You do not need consultants or high caliber Auditing firms to improve your financial performance.  

Thus a milk company narrated that during a financial crisis in the 1980s survived by doing these things:

     1   Sale with leaseback of their plant and equipment;

     2.  Floor financing of their receivables

     3.  Discounting of receivables

Remembering this formula opens up innovation for financial management.   

The tyranny of one page report, analysis or recommendation.

Every generation needs a revolution - an entrepreneurial revolution

When this post was taking up MBA, he often encountered the tyranny of one page analysis//recommendation.  You do this after reading a 50 - 100 pages of case.  Its rather challenging:

     1.  You do not have much time to read well, much less comprehend the case;

     2.  You really have to dig deep into your brain to come up with a brilliant insight

     3.  You are trained to simplify your thinking, if not clarifying the issues.

     4.  You are trained to look at both the forest and the trees;

     5.  You are trained to "BLINK"   (reference to book by Malcolm Gladwell)

As you manage the business, you look up to your subordinates to be able to do this task.  Oftentimes, they clutter their thinking by coming up with more problems, and complicating issues.  

What rigorous training we had with our MBA

Financial analysis - likened to evaluation of suitor by a lady

Every generation needs a revolution - an entrepreneurial revolution

This post is reminded of the comparison made by a finance professor of financial analysis with a lady being wooed by many suitors.  The lady has to ask this question:

      1.  Does he have plenty of money (checking liquidity)

      2.  Is he stable (DE)

      3.  Does he have plenty of assets?

      4.  Is he indebted?

The professor I understand now heads an insurance company which sponsors many champion cyclists.