8. The Virtual Fiscal Period

We measure business success by unit of time. Earnings and cash flow, for example, are a business’s most important measures of success and they can be expressed meaningfully only as amounts per quarter, month, year, or some other unit of time. Business is an activity and its failure or success can only be measured by the rate of activity through a period in time.

The activity of a business expands and contracts from year to year, quarter to quarter, and even day to day, however, the critical financial measures of a company’s activities is currently only available on a quarterly basis. This schedule of measurement does not allow the company to gain insight about the effects of sales and marketing campaigns, for example, which occurred during certain weeks of that quarter. Determining which weeks were the best during the quarter, or which days of the week brought the best revenues, or how much better revenues were during a particular campaign, are all critical pieces of business information that are typically not available to a company. Financial reporting is limited to a fixed fiscal period and the only unit of time that can be report on is the company’s official fiscal period (typically a three month quarter).

Almost important as the rigidity of measurable time unit is the delay in reporting. While decision-makers are desperate for information, they must often wait months for a report on the company’s earnings and cash flow to help guide them in allocating resources.

This critical limitation of financial reporting by time unit is simply not necessary and is a product of a reporting technique that is five-hundred years old and was designed to assist the manual bookkeeper who worked with quill and parchment and without the assistance of even a slide-rule. In today’s computer age, earnings can be speedometer on an executive’s dashboard that is providing him with a real-time view on the activity of the business and the changes that they are causing.

A company’s dependence upon a rigid quarterly report is based upon the use of database known as the general ledger that performs the simple algorithm of sorting transactions so that an ancient bookkeeper can manually perform addition upon the transactions that affect each account. This sorting can be done in seconds with the modern computer and the general ledger can now be a simple algorithm that provides, upon demand, the same information as the stored database (see the previous post where this algorithm is referred to as a Virtual General Ledger).

As a process, rather than a stored database, the virtual general ledger can produce earnings and cash flow statements for any day, month, year, or other period of time that the user is interested in (he can produce fiscal periods from deep in the past as well as to the current moment). In other words, the virtual general ledger provides the business executive with a perfectly accurate virtual fiscal period.

See Banking the Past.

4. Virtual Balances

The smallest operations can now afford financial control programs that
account for their finances with greater speed and sophistication that even the
largest corporations could have achieved through their production hierarchies a
few decades ago.

James Dale Davidson and Lord William Rees-Mogg

Financial sums are most essentially the finished product of an arithmetic process. For example, the balance of a particular account is really the result of adding all of the deposits (debits) and subtracting all of the withdrawals (credits). It is just a matter of addition and subtraction, an operation that humans do laboriously and erratically but which is done effortlessly and flawlessly my machines.

The same can be said for the other monetary amounts that we use to determine the value of a business and its success or failure. Income is the sum of all of the revenues and expenses that occur to a business during a given period of time; the term “assets” is the sum of all of the resources available to the company; and the term “retained earnings” is the owner’s book value based upon the simple sum of the company’s assets and liabilities (liabilities are actually subtracted from the company’s assets). Financial data is basically the finished product of some very simple arithmetic operations.

The importance of this observation lies in the disparity between the computer’s ability to perform millions of arithmetic operations perfectly each second while humans must struggle to do the same in many months of effort with a paper and pencil. Because of computer’s computational power, the value of the finished product of the arithmetic approaches zero. If you can perform a million operations effortlessly and in virtually no time, you can perform those same operations again and again at no cost, making the value of sums as free as air. The sums of the operations become valueless while the value of the input data to those operations (the amounts of simple financial transactions) increases in value (since they can be reused effortlessly in many different combinations to produce unique new sums).

In the twenty-first century, only the simple data that summarizes the simple atomic financial transactions needs to be stored in the computer. The sums and balances that affect our financial markets will be produced upon demand by machines that are imbued with the intelligence of how those sums and balances can be produced from the rawest of data.