Strategic Thought Transformation - The IIPM Think Tank

transactions (including capital inflows
and outflows), while OCWF
only includes operational wealth
flows. The most analytical aspect
of this part is that the aggregate of
the past period’s OCWF is increased
with a pre-decided rate of return
and is called the Past Augmented
Wealth Status (PAWS). PAWS is thus
the past period’s operational wealth
gain or loss, whose value has been
increased (that is, augmented) by
the Augment Interest Rate (AIR) to
represent its true value as in the
current period. Thus if Rs.100 was
earned in operational wealth in the
last period, its true current value
for correct comparison with current
figures would be Rs.120 in case AIR
is 20% (100 + 20%). AIR has been
explained later on in the discourse
on DWACC.
Part B (CLAWS: CLuster
Augmented Wealth Status):
This part displays the actual operational
wealth gain or loss in the
current period after analyzing the
performances of the current period.
CLAWS thus displays the summation
of actual current Operational
Cluster Wealth Flows during the
current period. Interestingly, due
to the premise of dividends being
an operational expense, payment
of dividends would reduce CLAWS,
but have to be necessarily made according
to the promised schedules in
the Wealth Time Frontier annexures.
Positive CLAWS most often add to
the WTF Tally of the MetaSBU and
negative CLAWS generally reduce
the WTF Tally.
Part C (FEET: Future Endeavours
Expected Target):
The third part is the most important
part of the Wealth Digress Body
and displays the present value of
expected future operational flows
of wealth that would be achieved
in a definite number of future periods,
after considering environmental
changes and forecasting using advanced
tools. It should be realized
very clearly that FEET displays the
Time value of money (Paws, Claws, Feet)
In Wealth Digress Body
A wealth infl ow of Rs.100 today is not equal to a wealth infl ow of Rs.100 say
in the next year. The amount of Rs.100 that we might receive after one year is
actually equal to a lesser amount today; ‘how much lesser’ is found out by discounting
the next year’s amount of Rs.100 with an interest rate that is equal to the
required rate of return. If we use 10% as the discounting rate, then the amount
of Rs.100 that we receive after one year is today actually equal only to Rs.100
divided by 110%. That is, equal to Rs.90.90 of today. In other words, if we had
Rs.90.90 today and if we were to invest this amount in an activity (or say, bank
deposits) that could get us 10% returns, then this amount of Rs.90.90 would have
become Rs.100 after one year. If we discount tomorrow’s Rs.100 with a lesser
interest rate (say 5%), then the same amount is equivalent today to an amount of
Rs.100 divided by 105%; that is, Rs.95.23. In other words, lower the discounting
rate, higher the present value of future wealth fl ows; higher the discounting rate,
lower the present value of future wealth fl ows. This is the concept of time value
of money with respect to the Wealth Digress Body
expected (most probable) and most
realistic future target that can be
Standard periods of
forecasting range
from 4 to 6 years;
beyond which
interest rates ensure
that present values
fall
achieved by the management, given
the strategies, competencies & environment
that the MetaSBU is endowed
with. FEET is not the vision, rather
the target that should be achieved for
giving profitable returns. The figure
of future operational wealth flows is
forecast utilizing technically efficient
methodologies mentioned throughout
(dynamic game theories, quantitative
algorithm building measures, factor
analysis models, market research exercises
etc). This is not a figure that
should be just management’s perception
of business competitiveness and
expected future sales. The question
of how many periods in the future to
consider totally depends on the industry
dynamics. Shareholders would
not be ready to wait for 15 years to
see their present value dreams come
true. Standard periods of forecasting
for modern corporations actually range
from four to six years; beyond which
the discounting interest rates anyway
ensure that present values fall down
dramatically. The forecasting aspect is
further described in one of the paragraphs
below. However, this takes care
that calculations are attempted not
just based on handful of factors, but
in some cases hundreds of importance
units of data (including industry life
50 STRATEGIC INNOVATORS
An IIPM Intelligence Unit Publication