0:16

So here is the idea behind common sizing, is that we want to be able to

compare a company like Dell to that of IBM, or

a company like Nike to that of Under Armour, right?

In the case of Nike and Under Armour, Nike is a much,

much larger company than Under Armour.

So, ordinarily, we wouldn't be able to compare them,

that is, the revenue of Under Armour is a fraction of that of Nike.

And so, if we were to say,

they've got $8 billion in revenue, it doesn't even compare to Nike.

But what we can do is we can manipulate these financials to show common size.

That is, the revenue as a percentage, cost as a percentage,

depreciation as a percentage, gross margin as a percentage.

And then regardless of what company we are looking at,

whether it's large or small, we can compare the percentages.

Okay, COGS is 12% of this company, but 28% of this company, right?

Depreciation is 3% over here, but 14% over there.

And then what we can do is try to understand,

what are the financial differences of organizations, and how does that

match up with the differences in how they're setting their goals?

How they're trying to complete their goals,

what are their operational strategies?

So, try to find best practices within the financials.

So, is it more profitable to have COGS at one level and

depreciation in another level or research and development at a different level?

So, here's what we're going to do.

There's a spreadsheet here, and there's a tab that's called Common size financials

for Dell, and I've imported, let's say the balance sheet for Dell in this example.

We're going to do the same thing for Nike in a moment, okay?

So when you pull up your tab as we have here, I'll give you a moment to do that.

2:22

You'll notice the tab is called common size balanced Dell, so

here is a listing for Dell's Balance sheet from January 2007,

2008, 2009, and 2010.

Now one of the cells is already completed for you.

That is, I've already common sized it, and let me show you what I've done here.

Okay, for the balance sheet, you're common sizing,

that is, you're trying to establish a benchmark, and

you're doing so in relationship to the total assets.

3:00

So what you do is you calculate everything as a percentage of total assets.

That is cash, securities, loans, raw materials, finished goods, right?

Everything as total assets, not just total current assets, total assets, all right?

And then, this gives you an idea about what is the composition of my assets.

And so here, I'm going to complete this.

I'm going to highlight this cell, and what this cell says is,

take the information in B13 and divide it by the information in B35.

Now, you'll notice there's dollar signs in front of the B and

the dollar signs in front of the 35.

This is code for Excel.

5:02

So here's what any one of these cells says.

Excel C13.

This cell says, of all of my assets, what percentage

of my assets am I holding in cash and cash equivalencies?

31.6%.

This means that in January of 2010, Dell,

as part of its holdings, had 31.6% of all its assets in cash.

Is that a lot?

Is it a little?

We'll see.

But that's what's going on here.

Look at this number, 17.35.

All right, that means that 17.35% of all

of Dell's assets are being held as accounts receivables.

So 25% is receivables at large.

Dell has 3% of its assets, 3.12% of its assets, are in inventories.

So, 72.05% of all of its assets are in total current assets.

6:12

So now I've got what I'm calling common sizing.

You say, what's so common about this?

Well, I can do the same calculation over a number of years.

So, for 09, I'm going to say, hey,

take the information in this cell right here and

divide it by my total assets, which is D35.

6:44

And what I'm going to do is, excuse me, D35.

And what I'm going to do is I'm going to put some little dollar signs around

the D and the 35, so that I'm telling the computer to hold

that cell constant.

Now, when you hit it, the number you come up with is zero.

The reason it comes up with zero is because it's identifying it as an integer

rather than a decimal.

So I'm going to go up here to my tab where I can

allocate what kind of a number it is.

And I'm going to click on Percentage.

7:39

So here's how I view this, and this is why this is common sizing.

Is that I had 31.6% of my total assets being held in cash in 2010.

In 2009, it was 31.52%.

It's really quite similar.

But look down here.

In 09, Dell was carrying 76% of

its total assets as current assets, but

in 10, that dropped down to 72%.

What does that mean?

They've acquired something.

They've acquired some land or some PP&E, some kind of machinery, right.

And so I look down here and in fact, look, so

I've got some machinery here in 2009 that I don't have in 2008.

I've got some total fixed assets that I don't have in 2010.

So what's happening is that I am changing the makeup of my

organization and I can do this using these common sizes.

So what I would like you to do is, try to replicate

these formulas for 2008 and then 2007.

And then what we will do is we will evaluate what all these numbers mean and

how to use those.

So, take a second right now and do this,

try to replicate common size for 2008 and 2007.