Adonis Diaries

Revised economic fundamentals for enterprises (November 29, 2008)

Revisiting the essential criteria in financial sheets for stock evaluation

Within a month of the Wall Street financial crash, major EU industries (excluding the financial, real estates, and insurance institutions) have laid off over 62, 000 jobs and the USA over 77, 000 jobs.

There is no end in the forthcoming months and the jobless rate has broken all record high.  The communication, auto, computer hardware, retail stores, airline, and chemical companies are the hardest hit so far.

As the jobless rate increases then society would drift into unstable climate of insecurity in individual health and safety and retention of their properties.

Without a climate of security no influx of investment can repair the long-term malaise in the slow moving society to recovery. It is a definite pattern that in any downturn the workers, elderly and new employees, are the first to be laid off. 

As if it is the manpower was the culprit and not the management.  Consequently, a revised understanding of what constitute the worst case impact on a society should be evaluated.

Economical models for the productivity of enterprises need to be revised to include the sustainability of enterprises under fluctuating and cyclical financial crisis that is fast becoming the norm.

The working capital should be able to remain intact for the demand cycle and the value added in manpower quality of the main industry units unaffected by the flux of capitals.  Consequently, I suggest tackling two fundamental concepts.

First, the working capital should be managed differently from the general acceptable accounting procedures to resist fluctuation in central rate and money devaluation.

It is very reasonable that the retirement funds of the manpower and the stocks purchased in the company by the manpower be within the working capital management.  The manpower should then feel highly active to evaluating and discussing how the working capital is allocated and invested.

Second, we need to start a new field for defining added-values and how to measure it concretely instead of rationalizing it as a proxy ratio.

Added values should be measured accurately because it is intrinsically related to the quality of manpower.

Added-value is what makes an industry viable economically to the workers, stakeholders, and society in general.  It would not be a piece of cake to operation value-adding parameters; otherwise I would not be suggesting a new economic field for the characterization of what we mean by value-adding economy.

Every industry would have to define its value adding element such as in the service industry, hardware products, software products, chemical, car, heavy duty machineries, tourism industry, commercial banking, and financial investment banking, and so on.

Every industry has it proper cyclical market demands and its competitors, localized or multinational, dependent or not on cyclical supplies of raw materials or manpower.

I am afraid that the first criterion that would jump to mind is for the concept of value-added economy to be represented in monetary terms, which is not the proper criterion.

Value-added economy is the investment in the manpower; for example, programs in continuing education, acquiring new skills, versatility and flexibility to fill vacancies, knowledge of the competition, the products, the tools, and the equipment.

Value-added economy is raising the quality of the manpower so that a large company would aid in subsidizing private complementary companies, from among its qualified personnel, when the tough gets going.

Value-added economy is elevating the knowledge of the personnel and assisting them to find new jobs during harsh downturns.  The only monetary value or ratio associated with added value would be the expense (value added capital) invested for manpower quality relative to working capital (VAC/ WC) for raising the quality and professionalism of the manpower.

When this ratio diminishes then a company has gotten lax and is turning away from the new fundamentals.  Obviously, an independent team should be hired to prepare, control, manage, and evaluate the effective progress in manpower quality at all levels of skills.

Quantifying the quality of workers and employees is the main task in measuring value-added industries; it is feasible and its time has finally come and it should be the optimizing factor in equations instead of rates in profit, shareholders equity, return on capital and so forth.

Inevitably most of the variables used in current optimizing model of financial and economic problems would still be effective, many with significant re-definitions, but when the re-orientation is based on the added value of manpower then a new picture would emerge and standard financial analysis re-discovered. 

The quality level of the manpower can be defined as the potential added value (PAV) in time of crisis and the working added value (WAV) in normal business cycles.

WAV is the criterion that stocks in the market are valuated in addition to other financial criteria; PAV would have critical significance in times of hardships, especially, if the company recorded the events when this potential was managed and directed in previous situations to overcome serious market or natural conditions.

As armies conduct maneuvers to test the readiness of its effective so companies have the duty to conduct maneuvering re-organizations of potentials to test and evaluate its field readiness and re-evaluate its programs for value adding quality in manpower. 

I think that the more credible and frequent the organizational maneuverings the higher the market value of the company.  The more frequent the maneuverings the more evident would be the needs for downsizing and decentralizing and retaining coherent and manageable number in work force.