Ahead of the Curve Read Free

Excel and he used to run most of the U.S. economy. I looked back at the baron’s problem. It didn’t seem that complicated: a couple of bushels here, a couple there, fertilizer, oxen, plows that undergo some wear and tear, and an exploitative feudal landlord.
    “Ivan,” I volunteered after a few moments. Everyone looked up. “Ivan’s the better farmer.” I quickly explained my calculation.
    “You forgot to depreciate the oxen,” said Jake, an ex-marine.
    I went back to work. “Frederick,” I said a moment later.
    “Did you put the full value of Ivan’s plow under ‘cost of goods sold’?” asked Jake. At this point, I decided to shut up. My entire knowledge of accounting came down to my assigned summer reading. What with having to move from Europe and everything, this reading had been skimpier than I had hoped.
    “Is the baron the equity holder or a lender?” inquired Jon. He had just returned from leading combat teams into terrorized areas of Baghdad. He seemed by far the least anxious in the room. “And does anyone get charged for depleting the land with fertilizer?”
    For the next hour, I scribbled away while the same handful of numbers chattered in my head like garbled code. “Twenty pounds of fertilizer are worth two bushels of wheat, an ox valued at forty bushels with ten years’ worth of work in him works for a year. Ivan still owes Feyador for the plow . . .” The numbers kept shifting beneath me. First Ivan was the better farmer, producing two thirds of a bushel more per acre than Frederick. Then Frederick nudged ahead by five sixths. It was like one of those children’s puzzles where you roll balls around a flat surface trying to get them to stay in holes, and just when you think you have all six in, the first one rolls out again.
    “I’ve done some ratios,” said the blonde. “Net sales over assets shows Frederick is the better farmer.” The others nodded. But the peasants aren’t selling anything, I thought. They are simply turning their goods over to the feudal landlord. So perhaps feudal tribute over assets might be the better ratio. This wasn’t helpful.
    Next up was “The Case of the Unidentified U.S. Industries.” It was our first foray into finance. From the moment I was accepted by Harvard Business School, I had been dreading finance. I was eager to learn about it, but I worried that I would be so far behind the class technically that everything would sail over my head. That first evening did nothing to boost my confidence. We were given a list of twelve industries, from a basic chemical company and a supermarket chain to a major airline and commercial bank, and an unlabeled set of balance sheet percentages and ratios. We were to match the industry to the correct set of numbers.
    I had gotten the gist of ratios during my summer reading. You compared numbers from financial statements to develop insights into the quality of a business. Take inventory. Companies that need to hold inventory are constantly trying to balance the cost of storing inventory with the need to keep up with supply. It’s like any household. You want enough food to feed the family, but you don’t want so much it’s spilling out of your cupboards and going rotten before you get a chance to eat it. But then again, you might want to buy occasionally in bulk, getting things cheaper, rather than running out every day to the overpriced corner store. Or perhaps you’re a real foodie and like to buy fresh food every day. The point is that different households will have different ways of managing inventory. The only crimes are waste and undersupply. To analyze inventory management in a set of financial statements, you might start with the figures for “cost of goods sold” and “inventory.” “Cost of goods sold,” or COGS, is simply the cost to the manufacturer of the goods it has sold in a given period. “Inventory” is the cost to the manufacturer of the goods it is waiting to sell. Divide COGS by