Ledger
A business has the following setup
Inputs/Capital -> Process -> Outputs/Profit-Loss
Optimizing this equation is the goal of any company. Let us break this down:
- Inputs. Can be people, technology, relationships, etc. Anything that is unique that we can reuse.
- Capital. Every input also takes in capital costs. This includes costs for that people, technology, etc.
- The process includes marketing, sales, value creation, and value delivery. This is function of a company.
- The output of this process from a business standpoint is profit or loss. If a business spends more on its inputs than it gets in outputs it is not a good business.
However, this flywheel concept has different ways of being understood a low margin business or a high margin business have different optimizations. Say you spend 99 on the input and make 100 dollar on the output. You only make 1 dollar. This may seem like a poor return on investment but the time scales also matter. If you spend 99 dollars and make 100 dollars over a one year time frame the 1% return is terrible. If on the other hand you spend 99 and make 100 in a week that is a high return on investment.
Fortress Balance Sheet
We use a cash based accounting system making it easy to track cash flow. Because of this our financial statements become easier to generate and understand. But we have hyperspecific metrics that we track to ensure that we are building a strong business.
| Metric | Goal | Formula |
|---|---|---|
| Revenue Growth | 30% per year | |
| Asset Growth | 30% per year | |
| Free Cash Flow Growth | 100% per year | Free Cash Flow = Net Income + Depreciation and Amortization – Changes in Working Capital – Capital Expenditures |
| ROIC | 30% | ROIC = (Net income – Dividends) / (Debt + Equity) |
| Debt-to-Free Cash Flow | 400% | |
| Debt-to-Asset | 25% | |
| Effective Tax Rate | 12% |