Investment Plans

C2BII will revolutionize the way investment plans are evaluated in every line of business, in terms of ease, speed and accuracy of produced information.

An example of such a plan might be the evaluation of the purchase of a new machine for the purposes of setting up a new production line in the factory. Once we have established forecasts for the related primary incidents (such as cost of machine, wages, electricity, rent, production volume, sales price, credit policy to the customers, purchase of raw materials, credit policy from the suppliers etc), we are asked to establish if, on the basis of the supplied forecasts, this proposed investment is going to produce a profit or not, for the total duration of the new machine’s useful working life. 

At this moment, this analysis is conducted thru the Net Present Value methodology and the use of a spreadsheet. Except for the fact that it is vague and hugely unpopular, the NPV methodology is full of inaccuracies. Also there are things that are humanly impossible to be calculated, and so no one will even attempt to address them.

Annual Budget

The need to purchase a software tool, as described in the previous section, is dictated by two deciding factors. These are the known established and recurring needs, and the spot cases. In practice, the spot cases will outnumber by far the known ones by a wide margin. However the established needs are still a very strong deciding factor.

One can notice that there is a specific business plan that, every company, in every line of business, always needs to examine on a specific and recurring time frame. That is the annual budget. The only difference between it and the new machine scenario, mentioned above, is that the budget is examined on a one year length time basis, while the new machine on the basis of whatever is the expected useful life of the machine (such as 5, or 7, or 12 years etc).

Presently the budget function is conducted in two stages.

The first stage is the entering of the forecasts of the primary incidents (sales, expenses etc) in the ERP. This is where the usefulness of these data ends. They are going to be used again next year for the creation of statistical reports such as “Sales: budget vs. actual” or “Expenses: budget vs. actual”.

In the second stage, the financial analysis department, in order to calculate the final forecast, which is the interest, takes all the entered data in the ERP and enters them for a second time in a spreadsheet of gargantuan size and unimaginable complexity. Let us not stand for long on the fact that in the 21st century the same job in performed twice instead of once, which we all know that it is contrary to all the practices that Information Technology stands for. Let us not even go long into the fact that we are not able to verify the calculated result, because of the unbelievable complexity of the spreadsheet, and the ease that a mistake can occur.

The most bothering part is the huge inaccuracy of the result. What is being done is that the total number of monthly payments and receipts are calculated thru a hugely inaccurate and full of assumptions methodology, and on the basis of that information the Budget Dept. establishes the average monthly balance of the bank account. Then on the basis of that average balance they calculate interest. In other words, they assume that on average everything happens on the 15th day of the month. We all know that this has nothing to do with reality (VAT on the 25th, salaries on the 30th, social security on the 31st etc).

Advanced problems

The Marketing problem

You sell at 4.40$ a piece and 60 days of credit to the customer. Can it be that if you sell at 4.20$ and 30 days of credit, the bottom line profit is greater? That’s the kind of question that runs in the dozens in every marketer’s mind.

Even though there are only four numbers involved, this is the most difficult Financial Analysis problem I can think of, and one that has never been answered, even though the importance of the price policy to the company is more than just obvious. Here are some of the most important reasons why this is humanly impossible to be calculated with today’s state of the art method (Net Present Value).

a) If you sell at 60 days of credit, on the 25th day of next month you borrow money to pay for VAT and create a negative cash flow (Interest Expense at 6.00%), and after 60 days you receive your money from your customer. If you sell at 30 days of credit, you collect your money well before you have to pay the VAT, and thus create a positive cash flow (Interest Income at 0.50%). The same effect of negative and positive cash flows is possible to take place if you take into consideration the credit policy from your supplier.

b) In order to accurately calculate interest you must determine on which days of the month the balance is in our favor (Interest Income at 0.50%), and on which it is against us (Interest Expense at 6.00%). Of course the final calculation will be based on the value balance, and not on the accounting one, after taking into consideration the banking days of valeur, and intervening weekends and holidays. The NPV methodology has only one rate, and so in effect treats in the same manner two materially different situations (Interest Expense at 6.00% and Interest Income at 0.50%).

But that is just only where the real calculation difficulties start to pile up.

c) Imagine you are in a company with many Business Units (the most common situation), in which every BU has its own credit policy and seasonality, dictated by the market reality of each product. It is possible that the hole your negative cash flow has created is covered by another BU’s positive cash flow. So you are not penalized with 6.00%, but you merely lose a measly 0.50%. And of course the reverse situation is also true. You don’t bring to the company a feeble 0.50%, but you prevent the other BU’s 6.00% from occurring. But of course there is the obvious task to determine, on how many and which specific days the cash flow, on the level of a specific product on one hand, and at company total level on the other, is positive, and when it is negative.

d) And as if the above situations weren’t humanly impossible to be calculated, let’s make things worse by noting that so far we have said nothing about incorporation into the calculation of the cash flow of payment of expenses.

By now, it is clear that by using today’s state of the art in Financial Analysis methods (NPV), it is humanly impossible even for the most experienced financial analyst to arrive at a meaningful answer (one that can stand up to verification and questioning), regardless of the time one is allowed to devote to that task.

Thru the use of C2BII, even a person with little to no skills and understanding of Financial issues (such as a Marketer or even a secretary), can with 60 seconds worth of typing, produce an answer accurate up to 2 decimal points, and one that its calculation can stand up to questioning, scrutiny and verification, or in other words cannot be doubted.

Variation on the Marketing problem

You sell at 3.00$ a piece and 90 days of credit to a customer who has enormous leverage (for example a big super market chain). Their buyer delivers to you an ultimatum. Either you start selling at 2.70$ a piece and 200 days of credit, or they stop buying from your company. This is a classic lose-lose situation, in which you must determine which scenario is the least harmful to your profitability.

Even though the final decision will surely include and evaluate strategy issues, the first step always is determining how harmful each of the two options is to your company’s bottom line profitability.

The Treasury problem

Your Bank lends you at 6.00%, and gives you 3 days of valeur when you deposit checks from your customers. Another Bank offers to lend you money at 7.00% and 2 days of valeur. Is it possible that the newer offer might be cheaper?

Again this is a “mission impossible” situation. All of the above mentioned problems in the Marketing problem exist, plus many other.

If, with the new scenario the value date of a cash flow is on Friday, with the existing scenario it is on Monday. That means not one but three extra days. The interest of 2 days at 7.00% is far cheaper than that of 5 days at 6.00%. But then what is the impact on the cash flows of the other days? We all know that the financial cost is the one that on many occasions can make or break a company.