A Profit and Loss statement is a lag measure. It tells us how good a CEO was in allocating capital (during the preceding 12 months) that influenced items of the P&L.
Traditionally in any accounting period cash generated by a business is
In an age where eCommerce is influencing decline in sales another item of cash allocation needs close scrutiny.
Reinvestment in the business to maintain its long-term competitive position and its unit volume.
The digital world turns this decision upside down.
In a digital world (c) is greater than (b) so more investment in stores to sustain a business debilitates the business.
Let us say a business is today generating $3 of sales for each $1 invested in store assets.
And suppose a CEO decides to allocate an additional $1 to opening more stores, his decision is based on a belief that $1 will give him at least $3 of sales.
If this happens it is OK.
However, every dollar invested in stores without a commensurate investment in ‘digital marketing’ - to acquire customers and create demand - is yielding sales far less than $3.
Rather a better choice would be to:
Hence, I say that digital change requires change in CEO mindset.
Business is to be managed with a Return on capital mindset (i.e. the balance sheet) and not the trading mindset (margins and P&L).