The bottom line is . . .

- Chellamuthu Kuppusamy

What do you think is the objective of companies across the globe? Is it customer service, employee satisfaction, social responsibility? May be yes - may be no. Yes, because they are the means to achieve the primary objective and no, because they are the objectives on their own. Well, what could be the primary objective, if not only objective?

Let me borrow a line from Wikipedia to answer this question: “Businesses are formed to earn profit that will increase the wealth of its owners and grow the business itself” Every action and transaction (and of course inaction) has a financial implication. Ultimately everything boils down and sums up to greenback.

Balance sheet and Operating Margin are believed to be the touchstones – perhaps millstones if not managed properly - of any organization. Trial balance, inventory turnover, top line, bottom line, ROI, sequential growth etc are some of the commonly used terms in our daily life. The extent to which these buzzwords are fathomed is subject to debate. Therefore, we make a small attempt here to give a brief introduction to those terms and Financial Accounting concepts.

Firstly, every transaction and activity that has a financial implication is recorded. Such transactions are entered in two accounts at a time. This practice, known as ‘Double-entry bookkeeping system’, requires a debit entry in one of the accounts and a corresponding credit entry in another account.

For instance, an employee buys raw material with cash. This transaction needs to be recorded in two accounts, namely, cash and raw material accounts. In the cash account you make credit entry and a debit entry in the raw material accounts. This sounds good, but how do we determine what to debit and credit? How do we ensure we don’t debit an account that should indeed be credited? This is where golden rules of accounting come in handy.

Golden Rules of accounting:

• 'Personal Account': Debit the Receiver & Credit the Giver
• 'Real Account': Debit what comes in, Credit what goes out
• 'Nominal Account': Debit all expenses / losses, credit all Incomes / Gains

Personal accounts are accounts maintained for individuals and organization with whom the company does business with

Real accounts are for real things that can either be seen, felt and touched – an exception being goodwill. In other words these represent assets.

Nominal account represents expenses, losses, incomes and gains.

In our case, cash as well as raw material accounts are real accounts. When the company buys raw material by paying cash, cash goes out and raw material comes in and hence they are credited and debited respectively.

As all transactions are equally recorded on debit and credit sides, sum of all debit sides values and credit side values of all the account put together would be equal at any given point in time. Such an exercise is known as Trial Balance which serves as a tool to detect errors, which can result in the totals not being equal.

With accounting entries are maintained for each and every transaction, they are used to arrive at the Final Accounts which comprises of P&L (Profit and Loss) account and Balance sheet at the end of the accounting period, which is normally a quarter.

Balance sheet is a snapshot of company’s assets and liabilities at the end of the period. P&L, on the other hand, is the summary of profit or loss the company has made for the entire period. You might have read items sounding like ‘assets stand at Rs 2,000 crore on 31-03-2009 and profit for the FY 08-09 was Rs 120 crores’. First one reflects balance sheet position on a given day and the latter draws reference from P&L statement for entire financial year.

While preparing Final Accounts at the end of accounting period, all account values should either be transferred to the balance sheet or to the P&L statement. Account that represent assets (such as inventories, investments, receivables etc) and liabilities (such as payables, owner’s equity, earning & surplus - liability from company’s point of view to its owners/share holder) – are transferred to balance sheet.

All others accounts, which can be classified under expenses, losses, incomes and gains, are transferred to P&L statement. Sales volume or revenue or gross profit comes at the top. Expenses, interest and tax are deducted from this to arrive at the net profit or earnings. Revenue, which appears on the top, is referred as top-line and the net profit, which appears at the bottom, is referred as bottom-line.

Lesser the expenses more the profitability or the ability to convert top-line into bottom-line is. Operating Margin is the ratio of the bottom-line (normally it is the operating income excluding other incomes/expenses and tax) to the top-line. A company reporting 30 % OPM saves Rs 30 as a profit by doing business for Rs 100 after meeting an expense of Rs 70.

Operating margin directly affects the profit. After all, it is the bottom-line that finally matters in business.

(Book) Prabhakaran - The Story of his struggle for Eelam

He is - perhaps was - a designated terrorist for some and an uncompromising freedom fighter for some. For the rest he was somewhere in between. Yes, I am talking about V. Prabhakaran, leader of the LTTE.

The story of his prolonged resistance and fierce confrontation with the Sri Lanka armed forces, nonetheless, ought to be studied, rather historically. Similarly, Indian involvement in the ethinic conflict and its consequences warrant a special mention.

I have made a sincere attempt to view these things objectively and retrospectively through the book 'Prabhakaran - The Story of his struggle for Eelam', in English. Though this is the English version of his biography 'Prabhakaran - A life' (பிரபாகரன் - ஒரு வாழ்க்கை) authored by me in Tamil, English version contains more information relevant to non-Tamil speaking people in India and international community.

It can be ordered online.

The economy will be in shambles throughout 2009!!

This is what Warren Buffet had to say in his annual letter to shareholders.

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Our decrease in net worth during 2008 was $11.5 billion, which reduced the per-share book value of both our Class A and Class B stock by 9.6%. Over the last 44 years (that is, since present management took over) book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.

The table on the preceding page, recording both the 44-year performance of Berkshire’s book value and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.

As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”

By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.

Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.

Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.

Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 211/2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.

Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.

Take a look again at the 44-year table on page 2. In 75% of those years, the S&P stocks recorded a gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.

In good years and bad, Charlie and I simply focus on four goals:
(1) maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;
(2) widening the “moats” around our operating businesses that give them durable competitive advantages;
(3) acquiring and developing new and varied streams of earnings;
(4) expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results.

Book on Prabakaran

Click here to order online

Most people approach Prabakaran and his widely known LTTE on emotional ground. Either they blindly support or they blindly oppose. Both there approaches fail to paint complete picture about him. His organization was started with a rusted revolver, but now Prabakaran is running a government. He possesses police force, judicial system, army, navy and air force ... everything that a nation ought to has.

Before arriving into any judgment about Prabakaran and his outfit, it becomes imperative to understand the history of Sri Lanka's ethnic conflict. What was the beginning point the endless war between Sinhalese and Tamils? What started it and why? How long this fire is going to be on? Can the self determination question of Tamils could be resolved only at war front? What are the innocent civilians caught in the the crossfire going to see a dawn? Is Tamil Eelam the only solution? Can Prabakaran win that for his men? Or is everything is going to end at his demise?

LTTE is a banned organization in India. Prabakaran is a main accused in Rajiv Gandhi's murder. Many countries in the world have banned the tigers. Sri Lankan government does not show any signs of putting an end to the war as it believes tigers can be completely destroyed. What is in store for the rebels? What is going to be its future?

The book on Prabakaran tries to examine these questions.

Putting your money where your word leads other...

Just came across this paragraph from fortnightly investment magazine 'Capital market' .. It is not only impressive but thought provoking as well.

"Many research analysts do not invest in equities, but preach to investors on what to buy, hold or sell. As per the present regulation, a research analyst needs to disclose his holding in the company that he is commenting. It would be far better to make it mandatory for the analyst to invest a certain pre-defined sum in the recommended stocks for the period mentioned in the research report. This would definitely improve the sense of responsibility and accountability in the research community. It would also provide on-the-job training to analysts and make them aware of the risks involved in equity investment. Remember those who actually invest are shrewder than those who simply preach"

Indo-US nuclear deal.. - A look back

- Chellamuthu Kuppusamy

That was something unprecedented in the history of Indian democracy. We had never seen such a sensational 'display of money' on the parliamentary floor. Trust me those were some of the tragic cum hilarious scenes we witnessed during the recent 'no confidence motion' and it could match any nail biting one day cricket game. You know what I am coming to. Yes, it is about the widely debated Indo-US 'civil' nuclear deal.

The Unites States Congress which is the House of Representatives (akin to Lok Sabha) and the Senate which is the upper house have given their blessing to this historic deal on September 28th and October 1st respectively. There was a sense of vindication, according to the Indian ambassador to the US Ronen Sen.

What makes this deal so special and time critical? Does India really surrender its national interest and sovereignty with this deal? A little recap from the history would help answer these questions.

The United States has the reputation of being the only nation in the history of mankind to deploy nuclear weapon and massacre more than 200 thousand people in August 1945. That eventually brought the World War II to an end.

Postwar era saw the world dividing into two camps, needless to mention American camp & Soviet camp. Mutual suspicion, secret nuclear programs and arm race was inevitable. Need for checking the proliferation of nuclear arms was felt and Nuclear Non-Proliferation Treaty (NPT or NNPT) was born thanks to the efforts from Ireland and Finland. That was in 1968.

NPT recognized the United States, the United Kingdom, France, Russia, and China as nuclear weapon states (NWS) while the others were identified as non nuclear weapon states (NNWS). All the nations recognized by the UN signed NPT except India, Pakistan and Israel. For India, NPT did not prevent proliferation but actually classified the counties as ‘nuclear haves’ and ‘nuclear not haves’ as it only prevents ‘not have’ nations developing atomic armory after 1968.

Being a non-signatory of NPT, there was no restriction on India for conducting nuclear test. It perhaps carried out a test in 1974 to be coded as ‘Smiling Buddha’ which provoked serious reactions around the globe. Nuclear fuel supplying countries formed Nuclear Suppliers Group (NSG) that subsequently decided not to assist India in the civil nuclear energy space.

There were 34 long years before this ban could relax. Indo-US deal enables India to access outside civil nuclear technologies and fuel, while still being a non-signatory of NPT. This is the best things that could happen to India.

World’s largest democracy only has to assure that it would not mix its civil and military nuclear establishments, and let IAEA supervise its civilian atomic power station. An estimated 14 out of the existing 22 reactors are to be used for civil and the rest for military purpose.

Following the foot prints of the U.S, France has inked an agreement to sell nuclear technology and reactors to India. What France plans to sell to India is the large 1,600 MW reactor, indeed, the largest of kind in commercial operations in the world, says the Hindu Business Line.

We have an installed capacity of 145,587.97 MW, primarily sourced from coal fired thermal power. France, on the other hand, generates 78.8 % of its electricity from nuclear power. We are at 2.9%. A long way to go indeed! We are far from uninterrupted power supply.

1930 around the corner?

- Chellamuthu Kuppusamy

When Christopher Columbus landed in North America he would not have foreseen a financial institution to be established by his future fellow immigrants from western Europe, let alone that institution sending tremor to the financial market across the globe. Yes, I am talking about Lehman Brothers.

Henry Lehman was just 23-year-old when immigrated to the United States from Germany in 1844. He choose to settle down in the southern state of Alabama. Two of his brothers Emanuel & Mayer too took separate ships to the American shore and three of them formed Lehman Brothers in 1850. They took cotton trade as their primary business in which they excelled. In the next few years the center of cotton trade shifted from the south to New York City, which of course was - as it is today - the center of trading & commission business.

Civil war erupted 1982 and Lehman brothers financed Alabama state's reconstruction program. That was the beginning and the end came a couple of days ago. In the meantime they have grew, grew continually. They underwrote securities - initial public offers in particular - and did almost everything in the financial market. It did merger with American express and then de-merged again in 1994.

Subprime crisis that surfaced late last year forced Lehman Brothers to close down subprime division 'BNC Mortgage' and sending around 1,200 people home. On September 13 it decided to take bankruptcy protection. Its valuation based on September 15 stock price stood at $130 million. It's reported revenue for 2007 was 454 times more than this.

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Sixth months ago Bear Stearns, the fifth largest bank, was on the prink of bankruptcy. JP Morgan Chase bought it out for dirt cheap $2 per share. That was not alone. Just recently Fannie Mae and Freddie Mac were bailed out by the US government. Now even before this 'broke' news from America's fourth largest investment bank Lehman could sink in, even more troubling stories come out. American International Group (AIG), the largest insurance firm in the US, would become next Lehman unless it gets around $70 - $80 billion. Luckily FED has come forward to perform rescue act. Likewise Merrill Lynch & Co was luck enough to find a buyer in Bank of America.

The US economy has been the driving force of the global economy, whether we like it or not. Any trouble in the US is not a standalone subject in the current world where everything is interconnected and eventually nothing is insulted in the great financial eco-system.

Already some analysts are talking about 'another' great repression of 1930 that we have only studied in history books. But we are unlikely to see 'another' great depression, but a greater or lesser depression, because the world economy now is interconnected while it was insulated back in 1930.