NEW: Mr Banker

Don’t measure up? It may be simply a matter of changing the yardstick.

Never mind the costs, feel the add-back!

Regular readers will know that my last instalment provided advice about keeping your banker happy through the provision of accurate and timely (albeit irrelevant) information.

I had canvassed several useful accounting devices that deduct all manner of costs from your calculation of success (listed in order of desperation):

  • Earnings (net profit).
  • Earnings before interest & tax (EBIT).
  • Earnings before interest, tax, depreciation & amortisation (EBITDA).
  • Earnings before interest, tax, depreciation & amortisation, and rent (EBITDAR).
  • Earnings before interest, tax, depreciation & amortisation, research & development (EBITDARD).

Yes, that’s all well and good, you say, but what do you do if even after all of those add-backs you are still unable to report a positive EBITDAR or EBITBARD?

[Some readers might be perplexed why the director of a business in this much trouble wouldn’t just shut the business down and appoint an administrator. There are many reasons, but to provide a common example, this may be a director who is not a sporting hero or television personality and therefore unlikely to be prosecuted by ASIC.

Said director is probably negotiating the sale of the business to a private equity fund that hasn’t bought anything for a week or two and consequently needs to announce a purchase quick-smart to maintain its credibility, and doesn’t care how much its pays because it’s all someone else’s money].

Next on the list is sales (or revenue). Here we pretend that overhead expenses do not exist, and simply report top line growth. This will be impressive because you are pouring buckets of money into advertising and promotion (remember that advertising is an overhead, so you may safely ignore it under this model).

Astute readers will have recognised that none of these devices covered so far offers any assistance to unprofitable companies with negative cashflow and falling market share.

Never fear. Such businesses owe an immense debt of gratitude to my colleagues in the structured finance industry for the invention of this little gem: ARPU.

ARPU stands for Average Revenue Per User. By focusing boldly on average revenue per user ARPU blithely sidesteps any pettifogging questions of breakeven analysis, let alone overheads or cost of sales.

One of the joys of ARPU is that it is so easy to grow. Here are some ideas:

  • Unilaterally announce a significant price increase. Those customers that don’t go elsewhere will pay more, leading to a nice improvement in ARPU.
  • Identify your lower value customers and annoy them (if you are not sure what to do, be guided by big business here; think call centres, junk mail addressed to deceased loved ones, translating your instruction booklets into Chinese and back again using a dictionary). When they go elsewhere, your ARPU will improve – hooray!

Now if that doesn’t do the trick, you might consider a nice lunch at which you hint at a lucrative employment opportunity coming up in, say, 12 months time.

But really, why bother? It’s time to change to a less astute banker.


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