Growth, Revenue & Profit Sources

Value to business is its ability to provide a utility of offering(s) to its targeted customer base with expansion through an increasing number of consumers. Accomplishing this requires ongoing improvement in knowledge of product utility, consumer usage, and the economic and social engagement of the employed human capital. Effective implementations will ultimately result in a growing enterprise with consumer recognition of proactive attention to market(s) served. Growth is an important focus of investment managers and market strategists in the determination of business (corporate) valuation and investment decision metrics. Most growth expectations are revenue (sales) based which flow to net earnings in a consistent, efficient operation [margin improvement]. However, growth in earnings (bottom-line) with flat periodic sales (top-line) is a reflection of operational or capital structure improvements. In an effort to review some common finance evaluative metrics used in business decisions, I have added them to the categories on the Basic Summary of the Business Process graphic. A few important observations to note: 

1) Cash Flow and Return are specific to evaluations of Income (earnings) which include tax implications relative to ownership distributions;
2) Turnover metrics evaluate sales volume relative to distribution and operational efficiencies.
3) Equity Valuations specific to publicly traded stocks depend heavily on growth compared to expected returns compared to industry peers.
4) Return on tax liabilities rendered is not a metric!


Prior to making project investment decisions, each corporation has an analysis benchmark to satisfy expectation of return on invested capital. Growth is part of the evaluation and as evident in the listed metrics, the analysis is firm specific. So, what is the source of growth? New products or services? Competitive product defeat? Vertical or horizontal business combinations? Increased consumer consumption? New markets (domestic or international)? Is the industry growing or shrinking?

Each answer has an implication on the economy, policy, and overall employment levels. They also reflect the differing objectives and directives between Corporations and Governments. Business finance decisions tend to be very firm specific while governments must maintain the rules of fairness and policies to support balanced, sustainable economic growth of opportunities for all citizens to prevent social disruptions due to biased misallocations. While corporations look for revenue and earnings growth via new customers/consumers and operational efficiencies to improve the retention of each sales dollar received, governments are looking to invest in projects that improve the lives of citizens through educational access and services to maintain certain standards of humanity. Additionally, governments ensure equal and fair citizen access to the necessary resources for improvement to livelihoods through market creating rules & conditions and the collection of taxes from beneficial commerce of infrastructure investment. When domestic sales growth slows, companies generally look in other geographic locations for opportunities. Investment in local under-served communities is also an opportunity for additional consumer development; however, many companies do not consider the investment due to the longer duration in payback (return on investment) of population educational improvements and wage increases. Two things governments can accomplish from collected taxes are the re-allocation of investments into education & skill development as well as targeted technology research to match and create marketplace opportunities. Just as business looks to maximize return on investment, governments should invest in the societal groups that stand to gain, or improve, the most (those below normal standards). Diversity in investment will yield diversity in ideas, developments, thoughts, innovation, and achievement.


Basic Summary of Business Process

Corporations and Social Value

 

Social Value - Larger concept which includes social capital as well as the subjective aspects of the citizens' well-being, such as their ability to participate in making decisions that affect them.

 

Governments around the globe have multiple performance measures employed to monitor and manage society for peaceful, stable and progressive improvement. Corporations are entities used for the efficient employment of resources in addition to government efforts. At one time, natural resources were thought to be public property of the “state” and access sold to individuals or groups of individuals who would best utilize the resources for the benefit of the society by providing adequate return of investments. Risk of loss has always been part of the assessment and contributed to the creation and development of the insurance industry. Assessments include but are not limited to the best utilization of human capital (education & employment); purpose and uses of the identified natural resources; economic development of the society in which the enterprise would operate to convert the natural resource. Other areas for consideration include government regulatory and safety concerns. However, I will not focus on these in lieu of a larger point to be made.

Expanding economic activity can lead social development around bonded communities requiring greater inclusion for successful, diversified, and balanced growth. Much effort was provided by government actions through laws and customs (old and new) to counter corporate self-interested, monopolistic control. The mechanism used to counter these actions was the creation of increased competition. Early U.S. economic competition was more direct by definition after Theodore Roosevelt’s anti-trust legislative initiatives. Increased competition introduced more product differentiation, greater technical product utility, and created new services which extended industries.Wikipedia definition:

Competition in economics is a term that encompasses the notion of individuals and firms striving for a greater share of a market to sell or buy goods and services. Merriam-Webster defines competition in business as "the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms."^[1] Competition, according to the theory, causes commercial firms to develop new products, services and technologies, which would give consumers greater selection and better products. The greater selection typically causes lower prices for the products, compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly).

The increased competitive environment required more corporate efficiency due to the limitations on pricing power with lower market share and greater product alternatives. The efficiency focus can also be extended to human capital and requires corporate leadership to emphasize the resource values of the corporation. Natural resource material requirements are easily identified and pricing controlled within a specified range of competitive demand. However, the extension and growth of the corporation and industry is the result of investment in human capital and social collaboration (skills, education, leadership training, knowledge sharing, & shared responsibility) to create new ideas, products, uses, and other related opportunities. Such requirements make valuation of the (human capital) resource more difficult because usually it is the created environment that produces and develops the creativity. Your employees are the consumer market of other industries, if not your own. Cost cutting efforts among the human capital to achieve increasing profitability disrupt the environment by reducing longer-term future value in exchange for increased administrative productivity gains and short-term profitability. However, from a social perspective the lower profitability is acceptable compared to higher unemployment and lower levels of skill development. Capitalistic principles of obsolescence work when there is continuing investment and development of technologies creating new opportunities. So, what is expected from a “public” company? How does society balance between the emphasis of the two interests (public investment and private returns)?

The American system was designed to allow entrepreneurial access to capital that would expand an opportunity to effectively employ capital for increased productivity and profitability by matching private interest with public resources. Under these terms, are the investors in mutual funds and savings instruments receiving enough compensation for the successful business endeavors and economic expansion relative to money managers (salary and bonus) and entrepreneurs / primary shareholders (business controlling interest)? Granted the business owner created the business and also received in many cases 500 to 1,000 times the initial investment leveraging the use of public money. The original savers through pensions, mutual funds, and other bank deposit instruments receive returns anywhere from 5% to 500% (.05 to 5 times investment) which effectively transfers public money into private profits and bonuses. This scenario is even more pronounced within hedge fund activity where the greater returns are accumulated by the financial institutions over business owners and stakeholders. I do not disparage the capitalist system; let’s just accurately identify what is taking place. Where exactly is the risk of economic loss in the system relative to the individual returns? Should economic risk and computerized financial system risk be compensated similarly? Is the risk in the stock market pricing and valuation techniques or with the actual longer term company performance?

The American government has always taken a varied clandestine and active participant role in businesses and industries deemed vital to the nation’s security interest (i.e. petroleum and computing technologies/internet). The largest financial market in the world is not and should not be an exception. The refocus on investment, productive uses of funds, and proper identification of risk and related return is a good thing for the American society and the global leadership influence.