What the Administration Can Teach Business about Stock Value (Part 1)
The 9/11 tragedy has raised new security concerns throughout the world. This has affected issues of new driving licenses, since checks to prevent illegal immigrants and terrorists from accessing such documents is vital to national interests. The Homeland Security Department introduced sophisticated identification procedures, but when States found these methods to be expensive, modified the system. The new method achieves the same level of security, but costs much less. Similarly, the Office of Management and Budget has acted on a report from the Government Accountability Office, and has clamped down on First and Business Class travel by officials on duty. Again, this measure has released scarce funds for priority public projects.
Top, Middle, and Bottom Lines of Stock Analysis
Cost effectiveness rarely gets the praise from stock investors it deserves. Quarter on quarter top-line growth in some stock market circles is celebrated regardless of proportionate changes in net profits. Profit improvement is also more striking when it is part of buoyant growth conditions. Market share and rank improvement is often at the cost of profitability, though such improvements may not always be sustainable. Many operating and discretionary expenses are variable, and hence their expansions are ignored as long as the going is good. Industries with luxury and essential goods are particularly prone to extravagant spending, which margins in lean times cannot bear.
Travel, promotions, gifts, and interest-free credit, are some major heads against which a business can leak cash without stock owners knowing. Large companies with spatial spread are most vulnerable since top executives in plush headquarter offices have no verifiable means of knowing whether all expenses are fully justified. Subjectivity in allocating overheads, opaque replacement costs, and transfer prices, are other issues which can confound best efforts to contain costs. New costs creep in to financial statements during years of top business performance, but they prove to be intractable during down turns.