How to Map Macro Variables to a Company's Numbers

The map is built from the company outward, never from the variable inward. The business's own lines for what it sells, buys and owes are written down; one macro variable, or the word none, goes against every line; each channel is sized as a share of a named base; the measured shares are held apart from the judged pass-through; the channels are then ranked by their effect on operating profit. Starting from the variable finds a channel whether or not one exists.

A map is a sheet of paper with lines on the left and variables on the right, and the whole difficulty is which of those two columns is filled in first. Fill the left column first and the right column can come back empty. A line either has a macro variable reaching it or it does not. Fill the right column first and the left column will always find something to hold. A channel can be described in a sentence long before anybody measures it. The seven steps below exist to force the first order. Each one is a physical action with an output, and none of them asks for an explanation of how anything works.

In what order is a company mapped to macro variables?

The sequence runs to seven steps and finishes on one sheet. Step one lists the company's own lines. Step two names the variable touching each line, or writes the word none. Step three sizes each surviving channel as a share of a named base. Step four splits what was measured from what was judged. Step five applies the same one per cent move to every channel. Step six puts the channels in order of that figure. Step seven records the conditions under which the map would stop holding. Every step consumes only what the step before it produced, and step one is allowed no macro input at all. The order is the method. Nothing in the list calls for a decision about whether a number is good or bad. Each step requires one entry, recorded and passed along to the step after it.

A small tailoring shop does the same thing without calling it anything. Before the owner can say whether the cloth price in the news matters, somebody has to write out what the shop takes in from stitching charges, what it pays for cloth, what the machines cost to run, what the rent comes to and what is still owed on the loan for the new overlock machine. Only when that list exists can a cloth price be laid against it, and only then can it turn out that cloth is a tenth of what the shop spends rather than the thing the shop is about. Written the other way round, the cloth price arrives first and the shop gets rearranged around it.

What does step one write down, and why does it name no macro variable?

Step one writes out the company's own lines and stops. Revenue split into where it comes from, operating costs split into their largest components, and whatever is owed. Nothing about the outside world is allowed onto the sheet yet. The reason for the ban is arithmetic rather than discipline: a list written before any variable is named cannot have been shaped by that variable, so when the variable arrives it either finds a line or it does not. A list written after the variable is named has already been arranged to receive it.

The invented business used here sits inside the invented Republic of Sankhya and is deliberately thin. The business has one revenue total, one operating cost total and one debt. A balance sheet would let a mapper reach for ratios nobody supplied, so there is none. Its operating profitThe gap between what a business takes in and what running it costs, measured before interest and tax come off. Building one up properly is an accounting subject rather than a macro one. is the gap between the two totals, and every effect in this guide is eventually expressed against that gap.

Seven line itemsThe individual rows a business reports, each with its own name and its own amount, rather than a single lumped total., and every one of them is a figure the business itself already holds. Two revenue lines add to Rs 1,000 crore. Three cost lines add to Rs 900 crore. The gap is Rs 100 crore of operating profit, a margin of 10.00 per cent, and interest of Rs 18 crore sits below that gap rather than inside it. Notice how little there is. The thinness is the point: a mapper who cannot find a channel on seven lines does not get to invent an eighth.

How is a channel established before anybody sizes it?

Step two takes the seven lines one at a time and writes a single macro variable against each, or writes the word none. There is no third option and no partial credit. None is the most common correct answer on a real map, and by a wide margin the hardest to write. Writing it feels like failing to find something. It is not. Writing none is the finding.

None does not claim that nothing on earth reaches the line. The word none records something narrower and much more useful: no channel has been established for this line with a share and a base behind it. A wedding caterer works to a quote fixed in writing three months ago. The price on the paper is the price, so that line carries none for those three months, whatever happens to vegetable prices in between. The moment the quote expires the same line may carry a variable. The map records the position as it stands, and says so.

Look at what that map refuses to say. Domestic revenue of Rs 700 crore is the largest number the business has, and the sheet puts nothing against it. Everything else, at Rs 450 crore of wages and rent, is the second largest, and the sheet puts nothing against that either. Together those two lines are Rs 1,150 crore of the Rs 1,900 crore that passes through this business in a year, and the map has established no macro channel on any of it. A map on which every line carries a variable is not a thorough map, it is a map made by somebody who could not bring themselves to write none.

How is a share of the cost or revenue base found?

Step three takes each surviving channel and writes it as a percentage, and then writes the base that percentage was taken from immediately beside it. The two are one entry, never two. The same percentage read against two different bases gives two different rupee amounts. So a share without its base is not an approximate answer, it is not an answer at all.

Here that is not a subtle difference. Imported inputs are 40.00 per cent of operating costs, and operating costs are Rs 900 crore, so the line is Rs 360 crore. Read the identical 40.00 per cent against revenue of Rs 1,000 crore instead and the line becomes Rs 400 crore. The gap between the two readings is Rs 40 crore. Set that against the operating profit of Rs 100 crore and the slip is worth 40.00 per cent of the entire profit, produced by nothing more than attaching a correct percentage to the wrong denominator.

So step three produces four entries on this map, each one a share bolted to its base. Export revenue is 30.00 per cent of revenue of Rs 1,000 crore, or Rs 300 crore. Imported inputs are 40.00 per cent of operating costs of Rs 900 crore, or Rs 360 crore. Oil and energy are 10.00 per cent of operating costs of Rs 900 crore, or Rs 90 crore. The debt that reprices is 100.00 per cent of the debt of Rs 200 crore, or the whole of it. Four shares, four bases, four rupee amounts anyone can recompute.

How is pass-through estimated without inventing it?

Step four sorts everything gathered so far into two lists that are never allowed to merge. On one side goes what was measured, meaning what already existed in the business's own records before the mapper arrived. On the other goes what was judged, meaning what somebody decided and could have decided differently. The shares are measured and the pass-through is judged, and the whole value of keeping the lists apart is that it lets a reader disagree with exactly one half of the estimate.

The judged half cannot be avoided. Nobody's ledger contains a figure for how much of an exchange rate move actually reaches the price of an imported input inside a given year. There is nothing to source, so the answer is not to source it. The answer is to state it, label it as a judgement, and let it be argued with. The worked map here sets pass-throughHow much of a move in an outside price actually turns up in the price a business pays or charges. The mechanics of it belong to the individual channels rather than to the mapping order. to 100.00 per cent on both sides and assumes nothing is recovered in the selling price. The assumption is a strong one, stated in a single line, and a reader who thinks it wrong can move that line without touching a single measured share.

What does a one per cent move do to each channel?

Step five puts the same move through every channel and expresses the result the same way. The move is one per cent in the variable itself. The result is a rupee change in operating profit, and then that rupee change as a share of the operating profit it came out of. The unit has to be identical across channels or the ranking that follows is comparing quantities that were never on the same footing. Why the effect is expressed against profit rather than against revenue is a separate matter, and it is dealt with where transmission itself is set out.

Run it on the three channels. A one per cent rise in the exchange rate lifts export revenue by 1.00 per cent of Rs 300 crore, or Rs 3.00 crore, and lifts imported input costs by 1.00 per cent of Rs 360 crore, or Rs 3.60 crore. The bases are different sizes, so the two do not cancel. The net is minus Rs 0.60 crore, and set beside operating profit of Rs 100 crore that comes to minus 0.60 per cent. A one per cent rise in the rupee oil price adds 1.00 per cent of Rs 90 crore, or Rs 0.90 crore of cost, so minus 0.90 per cent of operating profit. A one per cent rise in the borrowing rate lifts interest by 1.00 per cent of Rs 18 crore, or Rs 0.18 crore, so minus 0.18 per cent of operating profit.

The unit matters most on the rate channel. Somebody used to hearing rate moves quoted in basis pointsA hundredth of a percentage point. Fifty basis points is half of one percentage point, and the unit exists so that small rate moves can be stated without decimals piling up. will want to put 50 basis points through this instead. On a rate of 9.00 per cent, 50 basis points is a move of 5.5556 per cent in the rate, so it works out to 5.5556 multiplied by 0.18 per cent, or 1.00 per cent of operating profit, and interest moves from Rs 18 crore up to Rs 19 crore. Both statements are the same arithmetic. Only the one per cent version can be set beside the other two channels.

How are the channels put in order?

Step six sorts the figures from step five by size and writes them out as a list. Sorting is the whole action. The ranked list is the deliverable of the entire sequence. No other output says which variable to watch and, more usefully, which ones to leave alone. How far a sensitivity of this kind can be pushed as a measure in its own right is a separate subject and is not taken any further here.

On this business the order comes out as the rupee oil price at minus 0.90 per cent of operating profit, then the exchange rate at minus 0.60 per cent, then the borrowing rate at minus 0.18 per cent, and then a long silence. The oil channel is five times the rate channel and one and a half times the currency channel. The ranking is worth sitting with. Oil and energy at Rs 90 crore is the smallest of the three cost components on the sheet, a quarter of the size of imported inputs. The oil channel ranks first anyway. The currency channel nets Rs 300 crore of export revenue against Rs 360 crore of imported cost and only the difference reaches profit. The oil line has nothing on the other side of it.

What would change the map once it is written?

Step seven names the conditions under which the sheet stops being true, and writes them beside it. Two or three is enough, and each has to be specific enough that somebody could notice it happening. Nothing on the sheet tells the reader when to look again. So a map with no conditions written under it will be used long after it stopped describing the business.

Three conditions do most of the work here. The first is that a measured share moves: the business shifts a supply contract from an imported input to a domestic one, or wins enough export work to take the export share past 30.00 per cent, and step three has to be re-measured before anything below it stands. The second is that a judged line changes: a fixed price supply contract runs out, so a move that used to reach nothing now reaches the cost line in full, and the pass-through of 100.00 per cent that looked aggressive becomes the correct entry. The third is the one people miss. A line carrying none acquires a variable. Refinance the Rs 200 crore of debt onto a floating rateA borrowing rate that resets periodically against some reference rate, rather than staying at the number agreed on the day the loan was taken. and the debt line stops being inert. Sign a domestic customer who pays in a foreign currency and Rs 700 crore of domestic revenue stops being a wall of nones.

When does the mapping stop?

The mapping stops when all seven outputs exist on the sheet and not before, and it stops there and not after. The lines are written. Every one of them carries a variable or the word none. Every surviving channel carries a share with its base beside it. The measured list and the judged list are separate. Each channel has a figure for a one per cent move, expressed against operating profit. The channels are in order. The conditions are written underneath. Seven filled outputs are a finished map. A finished map contains no view about where any of those variables is going and no view about what the business itself is worth, and adding either is not finishing the map but starting something else.

What is the ranking actually used for?

Somebody who reads macro for a living is drowning in it. There is a release, a print, a revision and a speech most weeks, and each one arrives claiming to matter. The ranked list lets almost all of it be put down unread. The practical use of a map is not the channels it found but the lines it marked none. A line marked none lets a reader ignore most of the news about most of the variables with a reason written down.

Take the three people who would build this map. A lender looking at the Rs 200 crore of debt wants to know how much of the profit that covers the interest can be eaten by things outside the business, and gets the answer that a one per cent move in the largest established channel takes 0.90 per cent of it. An analyst covering the business now knows that a headline about the policy rateThe rate a central bank sets and lends at, which other borrowing rates in the system tend to move with. Which body sets it and how is a separate subject. reaches Rs 18 crore of interest and nothing else on the sheet, so it is the smallest of three things worth watching rather than the biggest. And somebody running the business now knows which supplier conversation is worth having first.

The reason all three of them get a usable answer from such a thin sheet is that operating profit is a residualWhat is left over after one large number is taken away from another, so that small movements in either of the large numbers show up as large movements in what remains.. Rs 1,000 crore in, Rs 900 crore out, Rs 100 crore left. Every one of the effects in the ranking is small against revenue and visible against what is left. A residual is why the ranking is expressed against profit, and why a channel worth less than a percentage point of revenue can still be worth watching.

The Republic of Sankhya and the business mapped above are invented.
Educational material. Not advice on any investment, tax, budget or market position.