Why We Don't Guess

Here at Forward View, we love data and quantitative models. (Our founder's wonderful math teacher is hopefully smiling right now.) Why are we so attached to numbers? We don't guess. Our work is based on detailed and repeatable methodologies, especially on the research side of the firm. By creating formalized, data-driven procedures, your business can also develop a structure for growth. Let's explain with a couple of examples.

Recently, we presented a valuation of Big 5 Sporting Goods in our initiation report on the stock. As a part of the rigorous mathematical analysis, we calculated the company's value and its cost of financial capital. See below.

Modeling technology courtesy of finbox.io

Immediately after we published the research, somebody complained, "That WACC [weighted average cost of capital] is quite whack." We asked what type of calculations the complainer would use to determine the cost of capital. The response: "Probably a standard 8, 10, or 12 depending on the firm's risk profile." In essence, he would guess and assume that every company is paying 8%, 10% or 12% for its financing. Assuming that he's correct, Big 5 Sporting Goods, a profitable retailer with 438 stores, would have a negative value. In essence, the business would be bankrupt. We know that's absolutely absurd. When you guess, though, everything goes awry.

One other point worth making is that we would use the same financial modeling process to compute the value of a family-owned restaurant as we would to perform a $100 billion corporate valuation. Other than adjustments for accounting policies and the number of business units in a major corporation, the restaurant and corporate spreadsheets would look alike. We believe that an academically-justified and real-world-tested financial model should be applicable to any company.

By developing flexible, yet defined, business procedures, you can save yourself an incredible amount of time! If, on the other hand, a new process must be created for every budget, forecast, investment or decision, you'll never be able to grow. New employees must enter an organization with a culture of success and proven methods for achieving goals. Creating useful business processes and supporting databases/documents will take time. They should also be refined as your firm changes. Still, there's no excuse for guessing in business!

Nathan Yates

Forward View Consulting, 288 Crack Rock Road, Clintwood, VA 24228, USA

Nathan Yates has been fascinated by technology and finance since he was young. He was the kid devouring the business section of the newspaper (remember those?) while others read everything else. Nathan believes that the American economy is built from the bottom-up, meaning that small businesses and local nonprofits are the foundation of our nation's success. These organizations are the lifeblood of towns and cities across the U.S. Unfortunately, most consulting firms overlook companies or organizations that don't have eight-figure budgets. Nathan thought Forward View Consulting should be different. And we are. As Lead Consultant, Nathan works with each client to deliver only the best financial and/or website development services. Nathan's years of web design experience and his business degrees ensure that professional expertise is brought to each project. Our network of contacts can offer additional specialized guidance if needed. Before creating Forward View Consulting, Nathan worked for an independent equity research firm as a Research Associate covering the industrial and energy sectors. This work involved preparing quarterly 15-40 page reports on multi-billion dollar corporations along with timely analysis of M&A activity and industry-wide news. He also managed research distribution and the company's online presence. Nathan also spent a summer serving as a local financial adviser's Research Intern. Nathan earned a Bachelor's degree in Economics and Finance from Southern New Hampshire University, graduating summa cum laude. He then earned a Master's degree in Finance from Southern New Hampshire University, where he was named the Outstanding Student in his particular concentration. Now, Nathan is an adjunct professor teaching economics and finance for his alma mater. In his spare time, Nathan enjoys fishing, reading, time with family and serving as a volunteer webmaster for the Clintwood United Methodist Church.