Kyle Hawke, Matt Jochim, Carey Mignerey, Allison Watson

Standard cost-cutting programs typically start with a directive to reduce the previous year’s spending levels. As a result, executives naturally focus on the largest expense categories—the tallest trees in the forest. Xero-based budgeting (ZBB) instead asks everyone to rebuild their budgets from the bottom up, with no carryover from the preceding year. This process identifies many small pockets of waste that add up to big … [ Read more ]

Larry Jones, Joseph Duerr

Although activist investors are successful at improving margins, they struggle to drive growth. We analyzed 55 companies over the past 10 years in which shareholder activists had a significant impact on company governance and strategy, and compared their performance to that of their industry peers. (The aims of activist actions included business focus, board composition, business restructuring, director election, focus on growth, board representation, general … [ Read more ]

Camilo Becdach, Shannon Hennessy, Lauren Ratner

When embarking on cost-cutting programs, many consumer companies adopt a hands-off posture toward what they consider strategic functions—those they see as core to the business—and focus instead on finding back-office efficiencies. Companies have repeatedly searched for savings in their cost centers and support functions by implementing lean techniques as well as through more transformative changes such as automation and outsourcing. The core functions, on the … [ Read more ]

The Case for Stock Buybacks

If paying excessive CEO salaries is the most maligned use of corporate funds, stock buybacks may well take second place. Conventional wisdom is that CEOs buy back stock to manipulate the short-term stock price. They fund the buyback by cutting investment, and so firm value suffers in the long-term. As Senator Elizabeth Warren argued, “stock buybacks create a sugar high for the corporations. It boosts … [ Read more ]

Share Buybacks Are Corporate Suicide

When firms invest too heavily in buying back shares, there is likely to be trouble ahead.

Silicon Valley’s Unicorns Are Overvalued

New research examines fair market value of startups worth over $1 billion and finds huge discrepancies in their purported worth.

The Dangerous Seduction of the Lifetime Value (LTV) Formula

Many consumer Internet business executives are loyalists of the Lifetime Value model, often referred to as the LTV model or formula. Lifetime value is the net present value of the profit stream of a customer. This concept, which appears on the surface to be quite benign, is typically used to compare the costs of acquiring a customer (often referred to as SAC, which stands for … [ Read more ]

Startup Financial Modeling

A four-part series that aims to guide you through the components necessary for building your own financial model from scratch:
Part 1: The Why and What of Financial Modeling
Part 2: Assumptions
Part 3: Income Statement and Custom Detail Tabs
Part 4: Cash Flow, Balance Sheet and Keeping the Model Updated

“Option Games”: Filling the Hole in the Valuation Toolkit for Strategic Investment

The paper describes how strategic decisions can benefit from analysis using techniques drawn from both real options and game theory. It explains the trade-off between flexibility and strategic commitment and offers a toolkit for making choices in competitive markets.

How Customer Behavior Can Be Used to Value Your Company

When a business has a steady customer base, it’s easy for it to make estimations and projections. But that task is very difficult for companies that are non-contractual, meaning they have customers with inconsistent buying patterns. Wharton marketing professor Peter Fader and Wharton doctoral student Dan McCarthy are looking to close the data gap in their new research paper titled, “Valuing Non-Contractual Firms Using Common … [ Read more ]

Steven Sinofsky

[Mike Maples] spent many years watching people fight to move expenses to other teams, claim revenue for their own team, or even fight against the price of shared corporate services. This “allocation” dynamic is extreme “finance gymnastics” that grows exponentially complex as the business cross-dependencies grow. Ultimately the meaning of P&Ls derived from allocations becomes the undoing of most rational thought in an organization — hiring, investing, … [ Read more ]

Steven Sinofsky

Going back to the history of accounting, a P&L is a tool used by executives to inform decisions around resource and capital allocation, pricing, etc. In a large organization, it is very difficult to assign revenue and costs to a specific unit within a company and even more difficult to offer true span of control or accountability to a unit leader. The creation of P&Ls … [ Read more ]

Be Your Own Activist Investor

With these 10 principles for rethinking cost management, you can maximize value and avoid threats from Wall Street.

Warren Buffett, Charlie Munger

Borrowed money causes more people to go broke than anything else. Charlie Munger has said, smart people “go broke from liquor, ladies and leverage”

Top Excel Tips For Data Analysts

Data and business go hand in hand. And whether you’re analyzing a client’s data or using your company’s data to make executive decisions, your tools have to be able to handle the tasks you perform with that information.

If you’re a data analyst, most of the time you go through these stages of data analysis:
– Data Cleaning: Transform and rearrange the data in a way suitable … [ Read more ]

A Better Way to Understand Internal Rate of Return

Investments can have the same internal rate of return for different reasons. A breakdown of this metric in private equity shows why it matters.

The Return of Zero-Base Budgeting

The venerable technique has vaulted back into the consciousness of corporate leaders—for good reason. But getting it right is not easy and depends on five key elements.

A Refresher on Return on Assets and Return on Equity

There are several ratios you can look at that will help you evaluate whether your company can generate sales and control its expenses. I talked with Joe Knight, author of the HBR TOOLS: Return on Investment and co-founder and owner of http://www.business-literacy.com, to learn more about the Return on Assets (ROA) and Return on Equity (ROE) ratios and how managers can use them.