No company can afford a flawed understanding of customer profitability, least of all in a recession when the margin for error (as well as profit) is whisper-thin. The flip side is that improvements in this area can be a very effective way of bolstering the bottom line — and companies can often make those improvements with only a modest initial investment.

Skittish investors will not be surprised to learn that the bottom line of a company's income statement fails to tell the whole story. New research by Jan Barton, an associate professor of accounting at Emory University’s Goizueta Business School, suggests that subtotals near the center of the income statement, such as operating income, have a much stronger association with contemporaneous stock returns than do the top-line and bottom-line numbers. In a paper entitled, “Which Performance Measure Attributes Do Investors around the World Value the Most—and Why?” slated for publication in The Accounting Review in May, Barton and co-authors Grace Pownall, professor of accounting and associate dean of the doctoral program at Goizueta, and Bowe Hansen of the University of New Hampshire, argue that no one single performance measure can serve as a Rosetta Stone for investors as they shop for stocks around the world. Still, Barton says, the research suggests that helpful metrics tend to be those that quickly and directly reflect information about a firm’s future cash flow.

An entrepreneur's guide to offering trade credit, crafting a credit application, and evaluating a customer's credit-worthiness.

In 2008, market events showed that some of the protection provided by diversification is lost when correlation among asset classes changes rapidly. Now, the question is: Are traditional diversification concepts no longer applicable due to some systemic change? Or is there still a simple, repeatable approach to diversification that can lead to significant protection against loss of principle?

Many factors could be contributing to recent volatile market behavior, for example, globalization, investor fear, government policies, and alternative investments. This article explores a methodology that attempts to address these factors.

Strategies to improve working capital deficiencies and unearth excess cash from corporate balance sheets.

Executives need to embrace transparency if they want to help investors make investment decisions. But what should be disclosed?

Differing beliefs lead to price drift: The standard view of how stock prices move—that investors act rationally on information and that markets are efficient—does not account for price drift. Snehal Banerjee explains that price drift may occur because investors agree to disagree about the average valuation of an asset.

Cost performance may be a useful measure for companies that want to trim spending as effectively as possible.

In today’s economic climate, high-performance businesses will increasingly set themselves apart by their ability to quickly make smart decisions. Accenture believes that rolling forecasting is not the solution for many companies, and has created a framework for a more pragmatic alternative—event-driven dynamic planning.

Fixed costs turn growth into profit. But they can also turn declines into big losses. Variabilization—transforming your fixed costs into variable ones—offers an attractive alternative. A variabilized cost structure is responsive, adapting rapidly to both increases and decreases in demand. Many companies are doing more than variabilize their own costs, they are developing and offering “variabilization solutions” to their customers. This trend suggests that the basis of competition will shift from scale to agility, orchestration, and risk management.

While option-pricing models are a superior valuation tool - the purpose to which the theory is generally put - real options can provide a systematic framework that will also serve as a strategic tool, and that it is in this strategic application that the real power of real options lies.

It is just such a framework that this article seeks to provide. We begin by developing the parallels between financial options and real options. We go on to demonstrate the power of real-option valuation as compared with traditional NPV analysis. A real option confers certain reactive flexibilities on its holder - essentially, the option to invest, wait, or divest in response to new information. Its sensitivity to the value of these possibilities is what makes a real option a better valuation tool than NPV .

However, we believe insufficient attention has been paid to the way in which the determinants of option value identify proactive flexibilities - the flexibility to take action in ways that will enhance the value of an option once acquired. Accordingly, we show how the real-options framework helps you identify and prioritize the key levers you can pull to increase the option payoff.

Sometimes costs don't need to be cut so much as captured, quantified, and reconsidered.

Much has been written about famed U.S. investor and Berkshire Hathaway CEO Warren Buffett's investment style and successes. Preeminent among these writings are the oft-cited Berkshire Hathaway shareholder letters, written by the "Oracle of Omaha" himself. These informative letters have been the basis for a multitude of books. But even with an abundance of available information on "how to invest like Warren Buffett," it is apparent that something is lacking—how does Buffett determine an acceptable price for companies of interest? This article provides an example of the process Buffett is reported to go though to determine the intrinsic value of a publicly traded company.

Editor's Note: you can download a useful illustrated excel spreadsheet as well...

There is no accepted standard for appraising the worth of nonphysical assets like brands, human capital, and managerial expertise. Yet these are the essence of 21st-century business.

More companies are using game theory to aid decision-making. How well does it work in the real world?

Executives, board members, the press, and investors regularly look at total returns to shareholders (TRS) as an important metric of value creation. Yet TRS, like any performance metric, is instructive only when users understand its components. Breaking the metric into four fundamental parts offers a better view.

New research from Arvind Krishnamurthy argues that the rapid adoption of financial innovations—in this case, subprime mortgage-backed securities—set the stage for crisis. His report with coauthor Ricardo J. Caballero found that when popular new financial instruments behave unexpectedly, investors flee the market. The liquidity supply tightens, making it hard for market participants to get the capital they need.

You know what the efficient market hypothesis is, don’t you? It’s a theory that grew out of the University of Chicago’s finance department, and long held sway in academic circles, that the stock market can’t be beaten on any consistent basis because all available information is already built into stock prices. The stock market, in other words, is rational.

In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioral economists, like Richard H. Thaler at the University of Chicago and Robert J. Shiller at Yale, who convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices — meaning that perhaps the market isn’t quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble. Quod erat demonstrandum.

These days, you would be hard-pressed to find anybody, even on the University of Chicago campus, who would claim that the market is perfectly efficient. Yet Jeremy Grantham, a respected market strategist with GMO, an institutional asset management company, who was a critic of the efficient market hypothesis long before such criticism was in vogue, has hardly been mollified by its decline. In his view, it did a lot of damage in its heyday — damage that we’re still dealing with. How much damage? In Mr. Grantham’s view, the efficient market hypothesis is more or less directly responsible for the financial crisis. [Hat tip to FinanceProfessor,com]

Many companies are concerned about their ability to generate the funds needed for growth. But there is one potentially powerful source of cash that is often overlooked: working capital. By fundamentally rethinking and streamlining key processes across the value chain, companies can achieve greater reductions in working capital—as much as 30 to 40 percent—and cost savings of 5 to 10 percent. This increase in working capital productivity can boost cash flow and sharply reduce a company’s dependence on outside funding.

Why return on capital could be the metric that best helps companies achieve higher returns.

Stocks, we have been told again and again through the years, are the best long-term investment. Prices go up and they go down, but give stocks enough time and they deliver returns that trounce those of bonds, real estate, commodities or any other asset class.

Ha! you say. Have you checked your 401(k) balance lately? So can stocks possibly still be the best long-run investment? Somewhat surprisingly, the answer turns out to hinge on what you mean by best and what you mean by long-run. [Hat tip to FinanceProfessor.com]

Pricing software can spot pointless discounts and other profit-killers, but it isn't cheap.

Capital projects quite literally shape our world, with more than $10 trillion spent each year to develop the infrastructure that supports modern life—from bridges to hospitals, ports to gasfields, broadband networks to missile defense systems. Yet, not a great deal has changed over the years in how capital projects are delivered, with some practices dating back to the 1920s. With the increasing demand for capital projects around the globe, and less funding available (in the current financial climate) organizations worldwide are looking for a better way to deliver their portfolios of projects.

The findings outlined in this paper emphasize what we think should change, across all sectors, to raise the productivity and effectiveness of global capital investment.

The A.T. Kearney Assessment of Excellence in Procurement is the most comprehensive global study of supply management best practices. In the May/June issue of Supply Chain Management Review, Editorial Director, Frank Quinn interviewed A.T. Kearney Partner and AEP co-leader Randy Watson. In the interview, Watson highlights the traits of supply management excellence that differentiate leading companies from followers. There are three important factors: a clear mandate from management, an unswerving emphasis on delivering value, and a willingness to invest in people, processes and technology. Drawing on the survey findings, Watson tells how companies can get on track to develop these competencies in their own organizations.

Historical cost accounting is fading as Corporate America marches into a new era.