Do It Yourself: Figure Out Your Company's Information Productivity 2

By Larry Dignan  |  Posted 2004-10-18 Email Print this article Print
 
 
 
 
 
 
 

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Figure out how well your company manages information.


Want to figure out how well your company manages information? Here are the steps and financial data you need to calculate your own Information Productivity. You will need two financial reports from your company: • Income statement • Balance sheet

You want the most recent full-year statements, audited by an outside accountant. If your company is public, these will be found in the most recent 10-K form filed with the Securities and Exchange Commission by your company's top executives. If your firm is privately held, you will have to ask your chief financial officer to provide the statements or make the calculations.

You will also need access to a Capital Asset Pricing Model. Links are provided below to a free calculator and a related measure of risk called the beta factor.

Part I: Calculate the value created for your company by managing information effectively.

This is the Information Value-Added (IVA). There are three pieces to this calculation:

The Profit of your company, adjusted for one-time events and preferred dividends

The Rate of Return your owners expect (a.k.a. cost of capital)

The Shareholders' Investment in your company, which is the total amount of capital invested by its owners

A. Profit

Find the income statement of your company. Look for a line item that reflects profit after taxes, but before dividends and special charges.

The name might be "income before adjustments" with unusual items

being write-offs, currency or non-operating one-time losses or similar

nomenclature.* Enter that number here: ________________

B. Rate of Return

Find the rate of return your company's owners expect for the capital they provide. This means consulting, at a library or online,

one of these Capital Asset Pricing Models: Standard & Poor's ( http://www.standardandpoors.com/ ), Thomson Financial Reports ( http://www.thomson.com/financial/financial.jsp ) or Value Line Reports ( http://www.valueline.com/ ).

Each site above requires a subscription.** You can estimate your company's expected return with the free calculator that

can be found at: http://www.moneychimp.com/articles/valuation/capm.htm .

The Beta factor can be found on Yahoo Finance (http://finance.yahoo.com). Get a stock quote for your company,

then click on the Key Statistics link.

When you're done, enter the percentage shown by the Capital Asset Pricing Model for your company's expected annual rate of return to

shareholders here: ________________

C. Shareholders' Investment

Find the balance sheet for your company. Go to the bottom half of the Liabilities section. Look for the line item called "shareholders' equity." Enter that amount here: ________________

Multiply the rate of return (B) by shareholders' equity (C). Enter the result here: ________________

Subtract that amount from profit (A). Enter the result here:________________

That is your company's Information Value-Added (IVA).

Part II: Calculate your company's Information Productivity.

This shows how much it costs your company to add that value from effective management of information. The highest results come when there is great value added and low information transaction costs. You need just one new number, the transaction costs.

A. Transaction Costs

Find the line item on the income statement that is called "sales, general and administrative expense" (colloquially referred to as SG&A). Sometimes it is listed just as "sales and administrative expense" or another shortened form. Enter that number here: ________________

B. Information Productivity

Divide Information Value-Added (from first calculation) by your transaction costs.

This will result in a percentage. Enter that result here: ________________

Voila! You have just calculated how productively your company as a whole

manages information for the basic goal

*Alternately, find "net income after taxes" and add back any dividends paid to preferred shareholders, plus one-time charges reported by your company.

**In most instances, the Capital Asset Pricing Model price can be obtained from subscription-based sources. However, most textbooks on corporate financial analysis will also contain instructions on how to come up with this number using published data from the Federal Reserve Board and quotations from stock exchanges that list the fluctuations in the price of a firm's shares. Here is one such explanation: http://www.investopedia.com/university/concepts/concepts8.asp .