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Corporate Value Creation: An Operations Framework for Nonfinancial Managers by Lawrence C. Karlson

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CHAPTER TWO

The Envelope Equations

CHAPTER 2 TAKEAWAYS

  • In addition to new plant and equipment and software, companies routinely invest in quality control programs, productivity programs, research and development, marketing, sales, and administration. Companies also spend money on consultants, lawyers, accountants, investment bankers, and acquisitions. Expenditures of this type are also investments because the reason for such expenditure is to add or preserve value. If not, why would the company spend the money?
  • One could argue that any expenditure that isn't an investment is a waste of money. “Operating Expenses” are really poorly named as such and perhaps “Operating Investments” would be more appropriate.
  • Accounting for changes in Working Capital during the formulation stages of building a business plan is often not worth the effort. However, the importance of properly accounting for Working Capital requirements in the later versions of the business plan and managing Working Capital should not be minimized. There are many examples of companies that have gone out of business because they didn't manage their Working Capital (uncollectable receivables and poor inventory management) and ultimately ran out of cash.
  • To a significant extent, this book is about Cash Flow since cash is the basic resource required by a business. In the long run, Net Income is the only source of cash and so its importance cannot be overemphasized.
  • The amount of debt a company takes on is a function of ...

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