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.
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!