Victor Preston Foundation

  Profitability and market share are two often discussed performance metrics. Profitability measures a company’s earnings relative to costs. Market share is the percentage of the total customers in the industry who buy from the company. Market share discussions sometimes eclipse profitability discussions. However, profitability should not be ignored. As a simple thought experiment, a company could choose to give away their product for free. Assuming the product meets the needs of customers at a minimally acceptable level, the company is likely to control nearly 100% of the market. However, the company would have zero profit. This is unsustainable. In some instances, focusing on market share may make sense. A large number of customers could be needed for the product to function efficiently, such as with social media platforms. A large market share could also necessary if the company hopes for the product to become the industry standard. A company can be highly profitable wit...

  Thinking about investing in a mutual fund, ETF, or hedge fund? You may have noticed these come with an “expense ratio.” An expense ratio is the percentage of your investment you will pay to the money manager for establishing and modifying the items (stocks, bonds, etc.) in the fund over the course of the year. At specified time points, often the end of the year, the amount of money in the fund is multiplied by the expense ratio. This amount is then deducted from your money to pay the manager. This is the payment for managing your money. There are two factors to consider when evaluating the expense ratio: Factor 1: The expense ratio should be lower the less the manager needs to do. This first factor is obvious. If the fund manager simply rebalances the fund once a quarter, there should be a minimal fee. If fund manager engages in active trading or research, then it may be reasonable to compensate them for the additional effort. Factor 2: The expense ratio should be lower i...

Companies often lower prices to increase demand and total revenue. In many cases, the additional sales can offset the price reduction. This approach is common in highly competitive markets where businesses aim to capture a larger market share or clear inventory. However, price decreases can harm profitability. A price reduction can have a significant impact on the per-unit profit, especially if production costs or overhead expenses remain constant. Profitability will decrease if the price reduction fails to generate sufficient sales volume to cover the lower margins. For example, imagine a company sells a product at $50 per unit with a production cost of $30. The company currently sells 1,000 units per year. Total revenue = Price per unit x Units sold = $50 per unit x 1,000 units = $50,000. Profit per unit = Price per unit – Production cost per unit = $50 - $30 = $20. Total profit = Profit per unit x Number of units sold = $20 per unit x 1,000 units = $20,000. Let’s pretend th...

There are many methods of market segmentation. Segmenting based on demographics (e.g. age) or geography (e.g. people residing in the Northeast USA) is perhaps the most obvious and common method. However, demographics and geography are nonspecific and often yield little useful information. Segmentation based on geography is essentially stating everyone who lives in a particular region has the same needs and wants. Segmentation based on demographics is stating everyone who is 25 to 30 years-old has the same wants and needs. This is likely an over-generalization. One method for more useful segmentation is categorizing segmentation characteristics into one of three categories based on the level of customer (beneficiary) understanding: 1) Observing; 2) Seeing; 3) Knowing. Observing is the least useful category. Seeing is of intermediate usefulness. Knowing is the most useful category. Discovering segmentation characteristics in the Knowing category can provide a competitive advantage throug...

  The Familiarity Matrix is a tool that assists strategic decision making (1). For nonprofits, this tool is particularly useful in evaluating the feasibility of adopting new programs or expanding services. Analyzing initiatives based on their alignment with existing knowledge and capabilities mitigates risks and optimizes resource allocation. The Familiarity Matrix assesses the nonprofit’s knowledge along two dimensions: 1) The Market and 2) The Technology.                                                                                                 Adapted from 1.  As nonprofits move further from the high market familiarity and high product familiarity (lower left quadrant), the initiativ...

  Agile planning is a flexible, iterative approach to project management that helps nonprofits create relevant programs in a cost-effective manner. Agile planning was originally developed for the software industry, but is now widely used across industries. Agile planning emphasizes short cycles of development, continuous feedback, and incremental improvements. This contrasts with the rigid long-term planning some organizations use. Nonprofits can operate efficiently by breaking down large projects into smaller tasks and reviewing progress frequently to examine whether crucial assumptions are supported. By incorporating assumption testing, nonprofits ensure their initiatives are data-driven rather than assumption-based . Developing and testing in this manner allows the nonprofit to determine whether there are serious issues with these crucial hypotheses before expending large amounts of human and financial capital. As a simplified example, a nonprofit would like to launch a day-...

Over-aggregation of data refers to the use of summary statistics that hide the nuances of individual contributors. In the stock market, this sometimes occurs when discussing the performance of index funds or metrics of sector performance. This takes the form of “the S&P gained 1% today” or “the financial sector has under-performed by 10% this year.” These statements can be helpful, but the well-educated investor would dis-aggregate the data and review the individual stocks contributing to these metrics. The over-aggregation of data in the stock market can create challenges for investors, Investors might avoid fundamentally strong companies simply because they are part of a struggling index or sector-based fund. This over-aggregation also presents opportunities for astute investors who are willing to dig deeper into individual company performance. Under-priced stocks can be found in these sectors. The well-educated investor can dis-aggregate the fund or sector to find overlooked c...

  The Price-to-Earnings (P/E) ratio is a fundamental valuation metric. The P/E ratio is calculated by dividing a stock's current price by its earnings per share (EPS). The EPS is typically either the past twelve months or the predicted earnings for the next twelve months. A higher P/E ratio results from: 1. Investors expect strong future growth and are willing to pay a premium to purchase the stock. OR 2. Earnings have fallen or are predicted to fall. A lower P/E ratio results from: 1. Investors expect low growth and are not willing to pay a premium to purchase the stock. OR 2. Earnings have risen or are predicted to rise. The earnings yield , which is the inverse of the P/E ratio, is another useful metric. It is calculated as EPS divided by stock price and expressed as a percentage. Earnings yield helps investors compare stock returns to ot her investments, such as bonds or savings accounts. For example, suppose Company A’s stock is trading at $100 per share with...

  Porter’s Five Forces is a framework typically used to analyze competitive pressures in for-profit business. Porter’s Five Forces can also be valuable for nonprofits in understanding their strategic positioning. By applying Porter’s Five Forces, nonprofits can refine their strategies to secure resources, maximize impact, and ensure long-term sustainability. Force 1 The T hreat of N e w E ntrants: More organizations may mean less available funding and donor contributions. To mitigate this, established nonprofits must build strong brand recognition, demonstrate impact, and cultivate long-term relationships with donors and stakeholders. For example, Nonprofit A is currently the only organization offering financial literacy education in a low income neighborhood. A new nonprofit could emerge to address financial literacy in the same, or nearby, neighborhood. The likelihood will be lower if there are strong barriers to entry, such as a high cost to acquire educators sufficiently t...

  Return on Financial Leverage (ROFL) measures the effect of debt on a company’s Return on Equity (ROE). ROFL is calculated by subtracting Return on Assets (ROA) from Return on Equity (ROE). ROFL = ROE – ROA. In essence, ROFL shows the amount of the Return on Equity that is due to use of debt. Rewriting the above formula illustrates that Return on Equity is the sum of Return on Equity and Return on Financial Leverage: ROE = ROA + ROFL. ROFL examines whether debt is being used to enhance profits efficiently. If a company's return on assets exceeds its cost of debt, leverage increases ROE, benefiting shareholders. However, if the cost of debt is higher than the return on assets, leverage reduces ROE, making the company’s financial position riskier. E xample 1: Consider two firms, A and B. Each have $1 million in assets and generate $100,000 in net income, giving each of them an ROA of 10% (ROA = (Net Income / Assets) x 100% = ($100,000 / $1 million) x 100% = 10%). Firm A...

  Return on Equity (ROE) is a financial metric to evaluate a company's profitability relative to shareholder equity. ROE is calculated by finding the percentage of net income to shareholder equity. ROE = ( Net Income / Shareholder's Equity ) x 100% A higher ROE indicates greater profit from shareholder investment. For example, if a company has assets of $60 million, and liabilities of $10 million, shareholder equity would be $50 million. Assuming a net income of $10 million, its ROE would be ($10M / $50M) × 100% = 20% . This means the company generates 20 cents in profit for every dollar of invested equity. A consistently high ROE may indicate strong management, a competitive advantage, and the ability to reinvest earnings effectively. A high ROE can sometimes be misleading if it results from excessive debt rather than operational efficiency. For instance, if a company has low equity due to high leverage, even a modest net income can result in an inflated ROE. This ca...

In nonprofit accounting, cash from operations and change in net assets are two important and distinct financial metrics. C hange in net assets represents the difference between total revenues and total expenses, including non-cash items such as depreciation, unrealized gains or losses on investments, and in-kind contributions. This metric is reported on the statement of activities. Cash from operations refers to the actual cash inflows and outflows resulting from the nonprofit's core activities, such as donations, grants, program service fees, and operating expenses.. This metric provides insight into the organization's liquidity and ability to fund day-to-day operations. This metric is reported on the statement of cash flows. These two metrics can differ significantly due to accrual-based accounting rules. Example 1: A nonprofit might recognize a $100,000 grant as revenue when awarded (increasing net assets), but if the cash is received in installments, cash from ope...