Tag Archive: Financial Statements


How do you follow a lecture about male and female condoms including a video demonstration about inserting the latter?

And in particular, how do you compete with an erotic discussion about “social marketing” (not to be confused with social media) with a lecture about financial statements, fiduciary responsibility and market psychology?

The answer is to remind students that it all boils down to dollars-and-cents and return on investment (ROI).

There is no doubt that condoms, both the ubiquitous male version and the relatively new offering for the female of the species, do help defend against nasty STDs. And I will humbly submit that knowledge about financial statements from the top-line-to-the-bottom-line may help guard against long-time unemployment. It may also make you wealthy and fiscally healthy.

Take a look at a 2006 PRSA/Korn Ferry International Survey of average salaries from public relations practitioners. Financial public relations/investor relations pros averaged $165,620 (serious money); Crisis management specialists, $150,000; Reputation management, $143,000; Public affairs (lobbying), $98,500 and Community relations, $59,910.

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Yes, the survey has grown some moss in the last five years and the world is now in a global economic funk, but I seriously doubt the employer preference for those who know how to work with investors and positively impact share values has changed. There may also be some cross over between financial/IR and crisis management/reputation management, but they are all handsomely compensated.

When you take financial statements into account, a job applicant should be less prone to state that “I really work well with people” in an interview with a perspective employer. What is the ROI (return on investment) in that particular overused assertion? How can you separate yourself from your competition for a job if your only claim to fame is working well with people?

Keep in mind that any firm – profit or non-profit, private sector or public sector – is making an investment in hiring any employee. One of the primary factors for the nearly 10 percent unemployment rate is the massive amount of private capital sitting on the sidelines waiting for certainty from Washington and Brussels…err Berlin…something that may not happen until 2013.

And if these firms are making an investment, they are asking what is the return on the invested capital. Will this new employee get quickly up to speed? Will she or he bring existing contacts to the job? Does her or his prior have experience that directly relates to the job? Can she or he solve a particular problem? Does she or he speak our language? Can she or he become fluent in the lexicon of our company?

Corporate fluency includes understanding how a business operates. And this also applies to non-profits that are also governed by the tyranny of the financial statement. They may be not-for-profit, but at the same time they cannot consistently lose money if they want to stay in “business.”

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Do you understand what constitutes the top line other than it is located on the top of the page? Hint it has to do with revenues. What about COGS? If you don’t know, you need to find out pronto. The same goes for gross margin. Is it expanding or contracting? Year-over-year? Sequentially? Is your function included in SG&A? If so, how do you feel about being an “expense?” Can you distinguish between gross margin and operating margin? What is the bottom line other than being on the bottom of the page?

Companies also must comply with GAAP, but some will also use pro forma or non-GAAP and are required by the SEC to reconcile the difference (Reg. G). Don’t be the reporter in Chris Roush’s “Show Me The Money,” who asked a CEO what the Southeastern Conference (SEC) had to do with his business…He was referring to a different SEC, the Securities Exchange Commission. Oops.

In this tough job environment, doing your homework prior to the interview is an absolute must. Included in this study is coming completely up to speed on the language of business and that includes the financial statement and fiduciary responsibility.

Adam Smith stated that the (fiduciary) duty of a capitalistic endeavor is to make a profit and remain viable. Economist Milton Friedman said the job of business is not only to survive but to do well.

So how can you help your perspective employer or present employer in doing well? If you can answer this question affirmatively and convincingly, you should do well as well.

Editor’s Note: I am presently working on my University of Oregon master’s project creating a course, “Communicating with Wall Street.” Any insights on market psychology, media relations, crisis communications, analyst relations, social media and employee communications are greatly appreciated.

Ten years ago, a friend of mine was getting his knickers in a twist about a hugely successful, $101 billion energy-trading company from Houston, Texas that had just completed a takeover of his firm, a Pacific Northwest public utility.

He told me that these Texans were so friggin’ smart, in fact they were “The Smartest Guys in the Room” – I believe their names were Ken, Andrew, and Jeffrey – and that I needed to buy stock in their company pronto.

So I did some homework. And even more homework. And still some more homework…And I just couldn’t for the life of me figure out how this company made money. And the more I read, the more dazed and confused I became. Why would anyone pay gobs of money to this company to broker energy deals…sounds like a very expensive middle man?

Out of frustration because of my lack of business acumen, I didn’t invest a dime in this company. I think it was called…Enron (NYSE: ENE).

Which brings me to Somali Pirates and the question of whether there should be an IPO (Initial Public Offering) for their business?

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A cursory check on the CNBC website indicates that no NYSE-member company has the ticker symbol, PRT, or Pirate, and no NASDAQ-member has the ticker symbol, PIRS, for Pirates.

More importantly Somali Pirates has a “devastatingly effective business model,” according to the most recent edition of The Economist. The UN estimates that the annual cost of piracy lies somewhere between $5 billion and $7 billion (top line?). The Economist reported that Somali Pirate “earnings” (bottom line?) reached $238 million. To top it off, the pirates are now accepting ransom payments via electronic funds transfer.

“Great Investor” Peter Lynch has repeatedly stated that the difference between investing and gambling is that investors need to clearly understand a company’s business model and why they are buying shares. CNBC’s Jim “Mad Money” Cramer has repeatedly reminds his viewers that share prices are a leading indicator of the anticipated direction of a stock and that he is not interested in a stock’s past, only its future.

If you take both Lynch and Cramer at face value, and many other Wall Street talking heads, then you have to be excited about investing in Somali Pirates. We can all figure out how they make money (e.g. seize shipping, demand ransom, receive revenues either in cold, hard cash or via EFT). Got it. Wish that Enron was that clear…or maybe not.

Better yet, they are a minority-run-and-operated business. Do you think they would receive preferential treatment from the federal government?

What are the COGS (Cost of Goods Sold) on the financial statement for Somali Pirates? Mostly speed boats, AK-47s, rocket-propelled grenade launchers and scaling ladders. They have reduced these costs somewhat by using “mother ships,” often captured deep-sea fishing vessels that they use as floating bases for their fast skiffs. Even though there are no hard-and-fast COGS numbers, there is every indication that the gross margin for Somali Pirates is expanding, not contracting (WallStreetease…).

What about personnel costs? Somali Pirates hail from the ultimate low-cost state (or more accurately, no state), Somalia. They don’t need to outsource to India. Let’s see that means that we can enter almost zero next to the line on the financial statement for SG&A (selling, general and administrative), unless you consider demanding ransoms to be “selling.”

How about R&D? The response by naval forces in the region about the size of Western Europe poses a risk to the business model of Somali Pirates, forcing them to operate further and further away from Somalia. Obviously some more work needs to go into supply over such long distances. And apparently they have not been successful catching up to ships making 18 knots or more…Sounds like they need to invest in competitive research focused on speed-boat technology.

Okay, so now we should have an operating income figure. Which brings us to taxes? What taxes? How about GAAP reporting? What’s Generally Accepted Accounting Principles to a bunch of pirates?

And finally, what about the threats to the business model of Somali Pirates? And will they prefer, similar to Facebook, to remain private…at least for the time being? There is a very real possibility that there will never be an IPO for Somali Pirates.

Maybe Goldman Sachs will just set up a hedge fund and invite wealthy investors to take their own stakes in privately held Somali Pirates. Besides who needs the headaches associated with quarterly earnings reports, pre-announcements, chairman’s letters, annual meetings of shareholders, SEC enforcement and the prospect of corporate raiders?

Think of it this way, if Wall Street-types could embrace Enron with irrational exuberance, then what’s to stop them from investing in a bunch of pirates?

http://en.wikipedia.org/wiki/Enron:_The_Smartest_Guys_in_the_Room

http://www.investopedia.com/university/greatest/peterlynch.asp

http://www.cramers-mad-money.com/

http://www.economist.com/node/21015664

PR = SG&A?

Speaking before a group of Santa Clara University integrated marketing students recently http://www.scu.edu/, I presented them with an overly simplified but relatively accurate representation of a financial statement for a publicly traded company:

  • Total Revenues: $2.0 billion

–      COGS: $1.0 billion

  • Gross Margin: $1.0 billion

–      SG&A: $300 million

–      R&D: $400 million                  

  • Operating Income: $300 million

–      Income Tax: $50 million

  • Net Income: $250 million.

 

After providing them with a few nanoseconds, I asked the undergrads where does public relations or marketing or brand management fall within this financial statement. The unanimous answer following a bout of serious contemplation was SG&A or Selling General and Administrative. http://en.wikipedia.org/wiki/Financial_statement

I then inquired whether they were comfortable with that answer. What is SG&A? The answer is that selling, general and administrative is an “operating expense” on a financial statement. http://en.wikipedia.org/wiki/SG%26A

Do we really want PR, marketing, brand management, crisis communications etc. to be regarded merely as an “operating expense?” And if we interpret PR as an “operating expense” what will be the view of accountants and controllers in a Finance Department that are looking to control spending and improve the bottom line?

Do we really want to risk having your function zeroed out or greatly diminished in the face of mounting financial pressures? What does that mean in terms of job security?

How about a different way of thinking?

Doesn’t public relations contribute to revenues or the top line? Doesn’t brand management help expand gross margin? Doesn’t marketing play a key role in keeping a company in the black, rather than the red?

Before we go further in this discussion, please keep in mind that public relations/marketing/brand management/social media/crisis communications cannot defy gravity. If customers are retrenching in the face of an economic downturn, if inventory is building rather than declining, then an entire company will be impacted and most likely start reporting red bottom-line numbers.

And also be mindful that PR/Marketing/Branding will most likely always be classified by accounting types as SG&A. Nevertheless that doesn’t have to be our mindset. We need to convince internal decision makers that our responsibilities are not a mere operating expense.

Public relations practitioners can and should always demonstrate ROI or Return on Investment. Our jobs as communicators are not just to spread the good word to external audiences (e.g. customers, suppliers, partners, analysts, editors, bloggers…), but to internal audiences as well. And included in this definition of “internal audiences” are company executives, including the CFO and the company’s Finance Department. Think of it this way, these internal audiences make the hiring and firing decisions and more to the point whether we will receive a paycheck or not.

If the company is publicly traded, then it must report to the SEC and the world. Translated, the company must issue quarterly financial results, pre-announce all “material” differences from prior quarterly guidance, issue an annual report, hold a yearly meeting for shareholders, publicize all major M&A activity, and announce all major executive appointments and restructurings. A good public relations department will know how to effectively manage this information to get maximum mileage out of good news and mitigate the impact of bad news.

Aligning a corporate public relations department with the CFO, Investor Relations, Legal and Corporate Development in not only reporting to the SEC and investors, but becoming an integral part of their daily activities, is battle-tested job protection. We want a seat at the table.

What is the impression of existing customers and prospective customers to a company’s image and products? Obviously, the products have to work and the company needs to execute. Assuming that is the case, then how is the company building and enhancing its reputation? That sounds like an activity that is far more than just SG&A. Is marketing and brand management helping to drive revenues, expand gross margin and contribute to the bottom line? Yes indeed.

We need to document (not exhaustively) what we are doing on behalf of our clients. Whether we like it or not, contributing to our monthly reports should be a daily activity. It is far easier to remember what you did on Monday on that very same Monday, than a month later.  I have always been mystified by those who write their monthly reports two weeks into the new month. How can you accurately recount what you did six weeks earlier, 42 days or more ago?

The bottom line for public relations? Remember ROI, the top-line, gross margin, profitability and stay away from the dreaded SG&A mindsets. Besides who needs career-limiting thinking in this economy?

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