DuPont analysis

Donaldson Brown, at DuPont · 1912

Break return on equity into margin, asset turnover and leverage, so the number says where it came from.

Its place in the frameworkBusiness Core›Finance

What it does

The same return can be produced by a high margin on few sales, a thin margin on many, or borrowed money — and those are three entirely different businesses with three different risks. Decomposition turns a headline ratio into a diagnosis, and it is one of the oldest management tools still in daily use.

Reach for it when: When a return figure is being compared across periods or against a competitor and the comparison is doing no work.
Where it stops: It works on reported accounting numbers, with everything that implies about timing, policy and judgement. It explains the arithmetic, not the business.

Developed at E. I. du Pont de Nemours from 1912; see Alfred D. Chandler, Strategy and Structure, MIT Press, 1962.

Why it sits at Finance

Where the money is, where it is going, and whether there will be enough. Finance is the object that constrains every other one, usually silently.

A model is only useful when you reach for it at the right moment. This one answers a question that arises here — so it is filed here, and nowhere else. These are the working areas it serves:

BudgetingBudgeting practice, and the long-standing critique that annual budgets encode last year’s assumptions unless deliberately rebuilt.
ForecastingRolling forecast practice, developed partly in response to the annual budget’s tendency to be obsolete on publication.
Cash flowWorking capital management: the cash conversion cycle, and the standard finding that growth increases the gap between paying and being paid.
Financial reportingStatutory reporting requirements alongside management accounting’s different purpose: one is for compliance, the other for decisions.

All of Finance

What it touches elsewhere

Nothing in a business is decided on its own. A conclusion reached with this model at Finance lands in these other cores, whether or not anyone follows it there.

Goal CoreResourcing decisions are made here; unfunded goals are goals in name only.
Business CoreMonetisation produces the revenue this object then has to manage.
Data CoreFinancial measures are the most reported and the most often confused with performance.
Time CoreRunway is a date, and it constrains every other date in the plan.

Filed at the same place

These answer questions that arise at Finance too. Where they disagree with this one, the disagreement is the useful part.

Break-even and cost–volume–profit analysisHow much has to be sold before the fixed costs are covered, and what each sale after that is worth.
Unit economicsWhat it costs to win one customer, set against what that customer is worth over the whole relationship.

Elsewhere in Business Core

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