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Friday, May 14, 2021

Business Transformation

Jacobs Matrix Surpasses Mobley Matrix™

Both Mobley Matrix™ and Jacobs Matrix acknowledge the unity of the balance sheets at the start and end of the period under consideration, the income statement for the period, as well as the cash statement for the period. Everything has to fit perfectly. However the major difference between Mobley Matrix™ and Jacobs Matrix is in the construction of the income statement. Period profit has to be measured purely, of course inclusive of interest, tax and including all relevant factors. Jacobs Matrix does, Mobley Matrix™ does not; the latter is a nominal system that disregards substantialism. The income statement of Mobley Matrix™ cannot stand the test.

Over the long term, companies should at least measure and generate three healthy bottom lines: cash flow, profit and return. Mobley Matrix™ misses two out of three; it does not really measure period profit nor return. A more embracing, much better presentation is dearly needed, to make interconnections crystal clear. Jacobs Matrix deals with everything: nominalism, substantialism specific (the entity concept) and substantialism general i.e. to care for the purchasing power of the proprietor’s capital, all at one at the same time. Mobley Matrix™ is in need of external systems, which emerge into arbitrary figures for e.g. depreciation (tangible assets) and amortization (intangible assets) – beside interest costs and the burden of tax – for which there is no proof. Jacobs Matrix needs no more to start with, than basic input data, e.g. interest rate and tax rate, the ruling values and standards, and what it gives as output is an ‘integrated financial instrument panel’ – containing all measures required to safely navigate the corporate ship.

Jacobs Matrix bridges the gap between ‘strategic investment’-evaluation and the (improved) measurements of traditional accounting, presenting the best of both worlds, and it offers a single panoramic overview. Regarding profit calculation, economists/accountants discuss principles (i.e. conventions and/or underlying assumptions), not gauging and measuring. For ‘measuring’ there are a number of issues (the best possible model true to nature, unprejudiced data gathering, a fixed zero, etcetera) which have to be settled completely before one can really call the process ‘measuring’. Everything around the measurement has to be indisputable, resulting in a transparent outcome. Re my free downloadable paper ‘First Gauging, then Measuring Period Profit’ http://ssrn.com/abstract=369461

In profit measurement – in my opinion – one will most likely encounter an ever-expanding set of values and standards. First, they all (i.e. all values and standards representing ‘the state of the art’) must be known, before measuring the one and only true economical period profit. Profit figures should not be blindly accepted, it is always necessary to see test and proof.

A series of anticipated (extra) period profits is the ultimate result of a strategic investment. It starts with generating cash and after deduction of value differences and taxes, net profit remains. Period profit, share capital or equity or stock (embedded value – what is really present for proprietors), shareholder value (economic value – what might happen, additional to the existing activities or ‘the market value of the company’s shares’) and various cash flows, are all inter-related. DCF (Discounted Cash Flow), P/L-accounts and also Shareholder Value form a unity, exemplified by an integral calculation, Re my paper ‘A Trinity DCF, P/L-accounts & Shareholder Value’ http://ssrn.com/abstract=864444

Mobley Matrix™ is not reliable, it does not give a faithful representation. It fails to show a true and fair view of the reality and consequently it does not offer the opportunity to make smart decisions about future behavior. One can spend only cash, but period profit is essential data in order to calculate yield, capital return. WACC (Weighted Average Cost of Capital, the costs of the different parts of the total capital related to the capital structure) must be calculated as accurately as possible according to up-to-date information, re my paper ‘The One and Only Standard WACC’ http://ssrn.com/abstract=756105

Managers need an ‘integrated financial instrument panel’ in order to navigate the corporate ship, containing three basic measures at the least. All firms have to stay focused on the goals of cash (to pay its bills), profit (to pay dividends) and yield (some ratio that links profit to capital; a sufficient return on investment is necessary to be competitive with alternative investment opportunities) in order to have a big picture perspective of how the firm is operating. And “if a company isn’t measuring and generating three healthy bottom lines (cash flow, profit and return) over the long term, it really isn’t focused on making money (Kremer C., Rizzuto R., and McKeown K., Friendly Finance, Finally: A Total Systems Approach for Business Finance, (updated version), May 2001, p. 97.” It is hard lines on Kremer et al. that two out of their three basic measures fail, because of the fact that Mobley Matrix’ income statement is good for nothing. The beauty of Jacobs Matrix is not only that each line adds and subtracts horizontally (indeed in one line wherever possible, sometimes necessarily with reference to another line), so that one can easily see how each balance sheet item changed during the year because of activity in income and cash, but it fits in all respects, not only the accounts beyond, but also the calculus before, the point of no return. Unity between starting and ending balance sheet, P/L-account i.e. income statement and cash statement.

For more, see my free downloadable paper ‘Jacobs Matrix Surpasses Mobley Matrix™’ http://ssrn.com/abstract=1011362

The world isn’t stable. Not only owners but also vendors as well as any other stakeholders, literally anyone can go into and out of business at any time, the value of money decreases (general inflation) and with reference to the entity approach, specific prices also change most of the time. The problem area is immense and is seemingly a deterrent. Difficult? On the contrary. It has been made difficult by cutting the whole to pieces and because of that business economics (traditional accounting) does not offer any solutions. Re my book Business Economic VI Groundbreaking ISBN 9781086355635 at www.amazon.com and here the content of the book is given: https://www.youtube.com/watch?v=cdtCIFKwpNI

It is simple. Presupposition is: it should be soluble, because after all, it is a down to earth money counting problem. Anyone can understand what it is all about by just counting money.

On the basis of basic data concerning tax rate, standard gearing, standard cost of capital, and other necessary starting data, one can quite easily determine the extra value of a company (additional Shareholder Value) and equivalently NPV (Net Present Value) of a particular investment as well as resulting P/L-accounts and NVAs, balance sheets and statements of source and use of funds. All can be done in a very easy way.

Jan Jacobs

Jan Jacobs

Independent Researcher Business Economics
Jan Jacobs, Independent Researcher Business Economics and author of The Profit Formula®: The Way to Easy Profit Measurement. I have more than 20 years of experience as a lecturer in Business Economics in higher day education and also in evening education for adults at SWOT (Stichting Wetenschappelijke Opleidingen Twente). As a subject teacher, I have always been critical of what was in many Business Economics textbooks. I am the author of The Profit Formula®: The Way to Easy Profit Measurement. Jan Jacobs is an opinion columnist for the CEOWORLD magazine. Follow him on Amazon.