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1991-10-24
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Economic Value of the Portfolio of Debtors
Finally, a feature commonplace in the investment community migrates to this ì
program. You now have the ability to determine the current value of your ì
Portfolio of Debtors. These economic measures have long been applied to ì
stocks, bonds, and other investments, but are just now being applied to ì
determine the economic value to you of a group of PEOPLE. They give you ì
an economic assessment of all of those economic events that could occur, ì
adjusted for the passage of time as well as minimum/maximum constraints.
Overview of options at this menu:
Option 1 establishes the global default variables for this analysis. ì
Option 2 does the actual Aging Analysis. Options 3 and 4 give you a choice ì
oµá ho≈á yo⌡á wan⌠ thσ record≤ presenteΣ iε ßá report║á eithe≥á sorteΣá b∙ ì
compan∙á namσá oµá Debtor anΣ showinτ thσá curren⌠á Economiπá Value╗á o≥ ì
sorteΣ iε ascendinτ orde≥ oµ thσ curren⌠ Economiπ Value.
Detail on option 1:
In option 1 of the Portfolio of Debtor Menu you define these 4 variables:
Global Variables:
1) 'Plateau' value for the Aging Analysis, in weeks:
2) 'Floor' % value for the Aging Analysis:
3) 'Decay Slope', linear or logarithmic:
4) 'Half-Life' value for the 'Decay Slope', in weeks:
Global Variable 1:
'Plateau' value:
The 'Plateau' value describes the period of time that passes, if any, ì
without any economic loss. If, for example, you are trying to track the ì
economic value of proposals that you submit, your experience might be that ì
for every proposal that you submit 8 weeks may pass before your Debtor will ì
evaluate what you have submitted. If your experience shows that this 8 ì
week period almost always occurs without any economic decay associated with ì
it, then each proposal has an 8 week 'Plateau' value associated with it.
The purpose of the 'Plateau' value is to allow an aging process to occur ì
while reflecting the reality of that market: in many industries, a period ì
of time passes BEFORE any economic decay can be presumed to start. If you ì
attend trade shows, a 4 or 6 week follow up may occur before which the ì
economic utility of those contacts begins to decay.
You tailor the 'Plateau' value for your industry and particular set of ì
circumstances. Once defined, it causes the analysis to extend a 'plateau' ì
for that number of weeks BEFORE starting the decay analysis. You can ì
select any number of weeks to reflect your industry, including the default ì
value of '0'.è
Global Variable 2:
'Floor' value
Thσ 'Floorº valuσ i≤ thσ percentagσ yo⌡ inpu⌠ tha⌠ place≤ ß floo≥ a⌠ thσ ì
bottoφ oµ thσ deca∙ slope« Iµ yo⌡ ente≥ ß 'Floorº value¼ thσ prograφ wil∞ ì
sto≡ thσ deca∙ wheε i⌠ reache≤ tha⌠ level« Thσ purposσ oµ thi≤ i≤ t∩ ì
recognize¼á fo≥á example¼á tha⌠á regardles≤á oµá ho≈á lonτá ßá proposa∞á i≤ ì
outstanding¼á i⌠á ma∙á alway≤ havσ somσ residua∞ valuσ t∩ you«á Iµá yo⌡ ì
definσá thσá 'Floorºá valuσá t∩á bσ 25Ñ fo≥á ßá Debtorá tha⌠á ha≤á aε ì
potentia∞á valuσ oµ $100,000¼á theε thσ deca∙ analysi≤ wil∞ sto≡ wheεá i⌠ ì
reache≤ $25,000«
Notσ tha⌠ valuσ i≤ ALWAY╙ entereΣ a≤ ß percentage¼ no⌠ ß decimal¼ anΣ tha⌠ ì
yo⌡ caε havσ an∙ valuσ froφ ░ t∩ 99.99.
Global Variable 3:
'Decay Slope', linear or logarithmic:
The 'Decay Slope' variable gives you the choice of using a linear decay ì
slope or logarithmic.
The Linear slope describes those economic events that will decline the same ì
absolute amount each week. If, for example, you determine that business ì
cards you acquire at a trade show become worthless in 10 weeks, then you ì
could say they loose 10% of their economic value each week. If proposals ì
that you submit become worthless after 20 weeks, then you could say they ì
loose 5% of their value each week. If you work for a bank and are using ì
this program to track bad debt collections activity, then you have a clear ì
idea of how each person in the file becomes increasingly less likely to pay ì
given the passage of time.
In addition to the Linear slope, you have another choice: logarithmic. ì
You can think of this method as being a variation of compound interest. ì
Instead of principal and interest being compounded in your bank account, a ì
potential economic event such as closing a sale is being reduced or decayed ì
in the same manner.
Fo≥ yo⌡ mathematicians¼ thσ logarithmiπ deca∙ proces≤ is║ "thσ changσ iε ì
quantit∙á ove≥á an∙á timσá interva∞ ..«á proportiona∞ t∩ thσá sizσá oµá thσ ì
interva∞á anΣ t∩ thσ averagσ valuσ oµ thσ quantit∙ ove≥ tha⌠á interval.ó ì
Thσá logarithmiπ deca∙ proces≤ i≤ computeΣ usinτ L'Hopital'≤á Rule«á ┴ ì
valuσáá decay≤á exponetiall∙á iµá it≤á instantaneou≤á ratσá oµá changσáá i≤ ì
proportiona∞á t∩á it≤á instantaneou≤á value«áá Therσá arσá man∙áá natura∞ ì
processes¼ likσ bacteria∞ growtΦ o≥ radioactivσ decay¼ iε whicΦ quantitie≤ ì
increasσ o≥ decreasσ a⌠ aε "exponentia∞ rate."
Assuming an initial 'Economic Value' of $10,000, no 'Plateau' value, no ì
'Floor', and a 'Half-Life' of 10 weeks:
è Weekly Percentage
Cumulative Decay: $ decline:
Linear Logarithmic Linear Logarithmic
------ ----------- ------ -----------
Week
1 $500 $669 5% 6.7%
2 1000 1294 5 6.24
3 1500 1877 5 5.83
4 2000 2421 5 5.44
5 2500 2928 5 5.08
6 3000 3402 5 4.73
7 3500 3844 5 4.42
8 4000 4256 5 4.13
9 4500 4641 5 3.84
10 5000 5000 5 3.59
11 5500 5334 5 3.35
12 6000 5647 5 3.12
13 6500 5938 5 2.92
14 7000 6210 5 2.72
15 7500 6464 5 2.53
16 8000 6701 5 2.37
17 8500 6922 5 2.21
18 9000 7128 5 2.06
19 9500 7320 5 1.93
20 10000 7500 5 1.79
Observe that the logarithmic decay is accelerated in the beginning but ì
begins to trail off after a while. At 10 weeks (the 'Half-Life'), they ì
both have the same amount of accumulated decay: $5000.
Note also that after 20 weeks, the logarithmic decay is not 100% completed ì
but only 75%. In concept, this decay rate will trail out to infinity. ì
After 30 weeks, for example, the cumulative decay is $8,750.
Global Variable 4:
'Half-Life' value for the 'Decay Slope', in weeks:
Thσ 'Halµ Lifeº i≤ defineΣ a≤ tha⌠ poin⌠ a⌠ whicΦ thσ economiπ valuσ oµ ß ì
contac⌠ o≥ even⌠ ha≤ declineΣ t∩ halµ oµ it≤ origina∞ value« Thi≤ valuσ i≤ ì
highl∙ subjectivσ anΣ reflect≤ you≥ appraisa∞ oµ wheε thσ economiπ statu≤ ì
oµá ßá proposal¼á bid¼á o≥á contac⌠ ha≤ droppeΣ t∩ halµá oµá it≤á origina∞ ì
potentia∞ value.
The 'Half Life' is used by the program with Global Variable 3, the 'Decay ì
Slope', in calculating the weekly decay rate.