late Lou Mobley was a member of the fifteen-man task force that developed
IBM’s first computer.
He created and ran the leadership development operation that
forged IBM’s leaders. He created and directed IBM’s Executive School at Sand’s Point: every IBM CEO after Tom Watson, Jr. and before John Akers took the course from Lou Mobley. After retiring early from IBM, Lou consulted to dozens of clients, focusing his powerful business acumen on solving the problems of entrepreneurs, government, not-for-profits, and large corporations. (From the jacket of Beyond IBM, Lou’s
book with Kate McKeown, published in 1989)
Lou’s career at IBM included heading the teams
that coined the term ‘data processing’ and
creating the internal university for every employee in
the company. After leaving in 1970, he conducted a national study of the values
shift in the previous decade that he used to help re-design
the College Boards (SATs), and to create an interactive values exploration
game called Value Options, an amazing marketplace for learning , that could
be played by up to 2500 people.
Lou, who trained as an
engineer, was a renaissance man and philosopher who loved math and
science. He proposed a universal field theory, building on Einstein’s field equations, and he proposed a comprehensive theory of the four paradigm’s of society in the next century. He especially loved matrices, or what Ben Franklin called ‘magic squares’,
as a method for simplifying complexity. He used a matrix for his revolutionary
discovery of the unifying mathematics of accounting, which, through
his lobbying efforts, gave us what clarity of cash reporting is required
today by the Financial Accounting and Standards board (FASB).
(Select thumbnail for larger image)
IBM’s executives used Lou’s financial matrix and the chart
on the right to guide IBM’s cashflow and ROA between the years
of 1957 and 1977.
This ROA (Return On Assets) graph
(right) demonstrates the effectiveness of Lou’s training
in financial performance. During the time of his training
IBM’s upper management using what is now the Financial
Scoreboard and Financial Dashboard,
the company experienced unparalleled returns that propelled
the company to become one of the most successful businesses
of all time.
History of the Mobley Matrix
(as told by Louis B. Mobley)
I developed the Mobley Matrix over a twenty-seven year period starting in 1956. That was the year IBM started its Executive School to develop their own executives by means of a one-week live-in intensive program at Sands Point, Long Island, outside New York City. When Middle Managers moved into the executive ranks of IBM’s domestic and foreign organization, they were all scheduled for the Executive School.
The program was quite successful and is still in operation. But the unit on finance was the most difficult to teach. Professors from the business schools were helpful, but their accounting language and focus upon company problems tended to distract the executive students away from a clear understanding of finance.
The development and use of computers to play management
games was the most helpful teaching aid that was developed and used,
but the financial relationships were in the program of the computer
and were no more visible to the student than the mysterious financial
data seen in real life.
When I became director of the IBM Executive School in 1959, I was challenged to find a way to make finance teachable. My first task was to really understand it myself.
At every opportunity, I asked questions. Fortunately, I could hire the “experts” to come in as resource leaders in the school. I had my list of questions to ask them. Slowly I began to understand. One myth after another had to be washed from my mind.
The most serious myth I held was reading cash into the Income Statement. Since those figures had dollar marks beside them, I thought Sales were dollars that flowed into the company during the period shown by the Income Statement; not so. Sales measured the orders or billings, not the collections. I learned that Cost of Goods Sold was not what was spent to acquire Inventory during the period depicted by the Income Statement; it was an allocation of prior cash outlays for Inventory charged to the current period corresponding to the Sales for the current period.
Depreciation was the toughest of all. The accountants explained depreciation as a non-cash charge to income, which is an internal generation of cash. “What kind of double-talk is that?” I asked. Much later, I discovered that depreciation, like Cost of Goods Sold, is merely an allocation of a prior cash outlay for plant or equipment to the current income period. I discovered that a cash outlay for a fixed asset must be charged as a cost of doing business in each of a series of years of useful life of the asset. This annual charge is called depreciation.
To my amazement, cash outlays for things like organization expense, research and development, and even marketing expense could sometimes be “capitalized,” that is, put on the Balance Sheet, and charged against income in future accounting periods by an entry on the Income Statement called amortization.
I finally realized that the Income Statement had no cash in it. It was a measure of commitments requiring future cash inflows and outlays, or amortizations of previous cash outlays. Net Income (which nets out all these commitments and amortization), I learned, was the non-cash measure of company performance, and that many of the non-cash items on the Income Statement are related to cash outlays in other periods of time (past and future) and are not accurate measures of current value with inflation.
The professors I brought in from the business schools to lead strategy cases were the most helpful. Strategy cases were very instructive. They typically have many pages of verbal information about the company, but only one page of financial data. Typically, this financial data showed historical Income Statements and Balance Sheets. Most students skipped over this page. The company could be making big profits, but were out of cash. How could that be, I wondered. How could we know what was going on cash-wise if there is no cash in the Income Statement? One professor explained it simply:
If a company’s Accounts Receivable increases by a thousand dollars, then it sold a thousand dollars more than it collected. Merely subtract a thousand dollars from the Sales Income figure and you know collections. Do the same for any other Balance Sheet account.
This was an “a-ha” experience to me. Now, I knew how to connect Income Statements to Balance Sheets. The Cash Statement was the connecting link!
The relationship became clear. Starting Balance Sheet, plus or minus Income data, plus or minus Cash data equals ending Balance Sheet. It remained only for me to insert the whole Income Statement and the whole Cash Statement between the two Balance Sheets. The matrix was born.
By using the matrix, I found that finances could finally be taught to non-financial executives so they could communicate well with financial executives. It was a useful tool for salesmen to size up prospective companies. IBM executives named it “The Mobley Matrix.”
When I retired from IBM in 1970, I created a matrix for my own company, Mobley and Associates. Each quarter since that time I created my Cash Statement as I reconciled by Bank Statement, entered the Income data, and then calculated the next Balance Sheet.
My small business clients frequently use the matrix for their own accounting by first entering cash summaries, by account, to develop a Cash Statement for the period. They then apply the usual procedures to develop the Income Statement for the same period, and then use both these to carry forward the Balance Sheet to the next period. Their accountants love the precision furnished by the businessman, and communications between parties is simplified because the matrix cuts through the prevailing myth and ignorance about these crucial measures and relationships.
I have found that my non-profit clients, and even individuals who keep income and expense records, as well as Balance Sheets, are surprised to learn they also have an Income Statement to the extent that they have accruals and amortizations of a non-cash nature. While profit organizations like business firms are finding it necessary to move to cash flow figures, associations, churches, schools and other non-profit organizations should learn to use the Income Statement (profit and loss statement).
All organizations need both the Cash Statement and the Income (Non-Cash) Statement to evaluate their performance. The Balance Sheet glues the two together at specified intervals to show the end result of both the cash dimension and the non-cash dimension of all transactions. Perhaps the greatest value to be derived by publishing the financial data of any organization (profit or non-profit) in this matrix format is the prospect that financial reports will begin to be read and understood.