Rizal Philippines
April 9, 2017
1. The basic equation for any investment in business is ROI - return on investments, return on capital. That is why we have the Dupont Formula
GP/Sales x Sales/Total Assets x Total Assets/Stockholders Equity
(Patong) (Paikot) (Laway)
Margin Turn over Leveraging
When we cancel sales, and total assets, we are left with GP/SHE which is the formula
for ROI (we have to fail an MBA student in a panel defense, who cant have the correct
formula for ROI)
Our SEC requires Du Pont Analysis:
1.1 To have ROI it is thus important to have sales, and asset turn over
Margin (patong refers to efficiency) cost reduction. You cant have margin, if the basic business model is wrong, ie sales - cost = GP. No matter how high your sales is, if your are selling less than your cost, you can never have patong. It is the goal of every business thus to:
Increase sales (through marketing and sales efforts)
Reduce expenses, through efficiency, and canvassing lower cost of inputs
1.2 Paikot
Your working capital must be turned around. It must produce sales several times over. If it only turns one round, or less than that you cant expect ROI
How do you increase turn over?
1. By having more cash sales (how do you do this? By offering cash discounts)
2. By having shorter collection period
3. By having dedicated collectors
LEVERAGE (Laway)
1.3 As much as possible, you cant spend 100% of your equity in your business. You must employ OPM (other peoples money) or borrow. Many top execs or industry leader, disdain using their own money. May I call this the Meralco or Tony Garcia (of Philchem) formula. Meralco was bought by the Lopez after the end of Laurel Langley agreement from GTU using the cash flow from operations to pay off the installment on the balance. The cash flow from operations paid the equity. the IPO paid off the loan for the D/P. Tony Garcia showed me how to do it, when he bought a school using practically nothing of the money of the investor
This is only possible if you recognize the risk, ie that the business would be profitable enough, generate the cash flow to meet the agreed repayment period. I had several deals early on when we had terms, and the cash flow from the business sales paid off the balance. You must be decisive enough and bold to generate cash when the payment time comes. During high interest regime, we cant have much of 1.3
The biblical stories and parables support ROI
2. ROI is like growing the mustard seed. You start with seed capital and make it grow. The DUTCH model for investment is noteworthy. Grow your business as you would grow a plant or tree. Let the rings of the tree slowly grow over the core.
Avoid following the shooting star or the mushroom model. You grow so fast and then burn yourself out. Over expanding can implode your business.
3. The parables of the:
SOWER
TALENTS
support the idea of 2.- growing the seed. As much as possible you want to start and grow your business in an entrepreneurial way ie to use less or none of your resources. You use more of your spirit or your capito - your head. If the seeds fall on good grounds, the capital, the seed would grow. If it falls on hard rock, or infertile soil, the seeds will not grow. Lance Gokongwei warned and said he did not learn it from his father, and found out that in order to earn millions, you have to invest billions. (This is surprising because John invested so little to earn millions, and his millions grew into billions)
Our goal as businessmen under parable of talents is :
1. To multiply the talents we have for the good of others, and to benefit the world, Gods other creation
2. As Gods steward, to multiply the resources we have in control of :
1. to benefit the customers so that they get excellent products
2. to generate jobs and employment
3. to generate wealth so that there will be more seeds to plan
4. to pay taxes. The govt is biggest employer, and it needs huge cash
to pay the salaries of both local and national employees. Without the farmers, ie
the planters of seeds, there will be lesser trees to bear fruits to have 1, 2 3, and 4
4. Thus our goal in our jobs:
1. Is to be productive - to produce more than we receive. To support our jobs, we have to generate 10 x the revenues vs our salary expense
2. To give more than we receive
3. To always think as we start the day, how to be achiever: how to help and lead others to :
1. SELL
2. COLLECT
3. TO DO the function that is asked of us: thus if
We are hr - to recruit; make sure our people understand our business and our
communications
We are CSS2 - to produce delightful interments
We are transportation specialists - to fulfill tripping assignments, and make sure the vehicles are roadworthy always, carry out TPM
We are CSS I to generate prospects, make people aware of our products and services
As leader and managers to make sure that processes are carried out well, there are no mistakes and inefficiency, we remind our people to be positive, to have the right spirit and right attitude
It is thus important to have purpose driven life, to set clear goals and standards, as ROI for business which drives the sales formula, and cost reduction
Even Dr. Jose Rizal has something to say about this; that a life not dedicated to an important purpose is like a stone that does not even form part of edifice
5. When we have goals the plan and execution must be SMART
S pecific
M easureable
A chievable
R realistic
T imebound
The last one is important. The ROI achievement must have a timeline. There is value for achievement of a goal in time. One of the most important resource of a business organization is time. Not money, machinery or manpower. Time. Alexander the Great told this, Henry Sy told this Time is gold. Time lost is lost forever.
The math of investment tells that it is an important part of interest equation I = P(rincipal) x Rate (%) x T (ime). I saw a case in our company, where we borrowed P5 m for a project. The engineer did not do his job, and we pay P400,000 in interest (P5,000,000 x 8%) for two years because nothing was happening to the project. No backfilling, or construction was happening
We have made investments: down payment in two projects but nothing is happening. The opportunity to make returns on the millions of money is gone. It is lost opportunity. This is a sure recipe for business failure.
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