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Readers write to say that there is an opportunity cost of not switching to IFRS; that management should emulate investors by judging markets' ability to deliver cash profitability in the long term; that Ben Franklin was indeed a fitness buff; and more.
CFO Staff, CFO Magazine
September 1, 2008
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Discussing your article "Going for the Gold" (July/August) with my 13-year-old soccer-playing daughter, I worry that women's professional soccer may yet again miss the mark. Cost-containment is indeed critical to the success of any start-up, but to attain long-term success as well as the robust returns any investor (or sponsor) seeks, it needs to win the hearts and minds of those very girls who will be tomorrow's Women's Professional Soccer stars. If my daughter is any indication, the spending power of this target market is impressive, and worth pursuing. But to avoid becoming another sports footnote, Soccer United Marketing must differentiate the product and understand this unique target market. We wish good luck to WPS, and hope for a franchise in Denver!
I wish the WPS all the luck in the world; it will need it. As the former marketing director of a very successful professional soccer franchise in the old North American Soccer League, the Seattle Sounders, from 1974 to 1979, I would strongly echo a couple of key points you made in the article.
First, they need to play in a stadium that is small. I'd much rather have a 50-seat restaurant full than a 100-seat restaurant half full. Second, they should come to grips with the idea that those who love to play don't necessarily love to watch.
The Major League Soccer teams face the same issues, especially playing in big stadiums. And televising those games with most of the seats empty is not the best way to promote things.
Charles C. Scott
Pelleton Capital Management Ltd.
In Defense of Ben
Shame on you for the libel against Benjamin Franklin (From the Editor, July/August). In fact, Mr. Franklin was a great proponent of physical fitness, keeping a routine of daily swimming during a time when exercise in general, and swimming in particular, was considered dangerous. He encouraged others to swim and credited his activities as a reason for his good health and longevity. He would have been considered "buff" even by today's standards. I applaud your reference to his famous "indoor activities," which during his later years became so important to the revolution's success.
B&H Systems Inc.
Elk Grove Village, Illinois
Worth the Trouble
In "IFRS and When" (Topline, July/August) you failed to describe the opportunity cost of not switching to international financial reporting standards compared with all of the training required to make that switch.
I'm inclined to believe that we can absorb the cost to retrain in IFRS. On the contrary, U.S. companies cannot afford to carry the burden of U.S. generally accepted accounting principles and remain competitive in the global market. Especially in high-tech industries, GAAP has much greater negative externalities compared with IFRS. Poor business decisions are often made because they fit neatly into GAAP, and at the end of the day, the customers lose out because companies think first about how to account for services and not about what is the best service they can provide.
As a whistle-blower in a Sarbanes-Oxley case against a global multi-billion-dollar firm, I can attest to the problem with moving to a fewer-rules-based system. How will the little guy be able to dispute decisions? As a little guy making a strong case about a $9.3 million accounting irregularity, I can tell you that even under our current system the opinion of the average Joe is meaningless. What happens to internal whistle-blowers under IFRS? They will be even more quickly disposed of than they are today.
I understand the frustration of Americans who love to complain about outsourcing or insourcing of talent ("Coming to America," July/August). But globalization is forcing a lot of Americans to face the fact that they are part of the global economy, and that they are competing with talent from all over the world. The truth is that some foreign nationals make better employees than local Americans, and the fact that there is an unmet demand for financial talent is no news to anybody familiar with the industry. The situation will only get worse after the SEC sets the date for implementation of international financial reporting standards. There is going to be a huge influx of foreign nationals who have IFRS experience where no American has had any.
Hard as ROC
I totally agree with the idea that operating return on capital is useful for predicting value — with caveats (By the Numbers, June). The question is, What should management do to boost value growth of the businesses in its control? There are some very practical things it can do in the near- and long-term to get a real and substantive boost in value growth.
In the near term, management needs to get an ROC measure at a granular level, in three dimensions (offerings, customers/channels, and geographies). In fact, even operating income is not a great measure, and management needs a cash profit ROC if it is to avoid making some bad investment/growth decisions.
For the long term, this sort of information is needed for the market, in these three dimensions, at a relatively granular level. Look out 15 years; this horizon captures two-thirds of the business's intrinsic value. This is where the rubber hits the road, and some real strategic value can be added by CFOs.
Investors already look to cash profitability. Management should be doing so, too. Indeed, investors are judging markets' ability to deliver cash profitability in the long term. Management should do so as well. Management teams must start looking at business issues with this sort of perspective, or they will keep making mistakes like Kodak did with digital cameras.
V. Rory Jones
Business Intelligence Associates LLC
It's true that using market measures to compute ROC imposes too much variance and overlooks what companies really have control over. At the same time, I will say that the accounting world is moving toward market-based asset valuation, which really obscures the amount of hard capital actually deployed.
All entrepreneurs know several basic facts, such as how much cash is on hand and what assets actually cost. With a recent propensity to alter asset costs on the balance sheet, computing returns on the cost of capital deployed is getting harder and harder. This fact can take one away from the realities of business-model evaluation and can actually obscure how much value is created and lost by management.
President and CEO
Spirit Finance Corp.