Why Is Business Finance Hard To Understand – Part III

We left off the last part talking about business owners and managers needing to focus on the three core business finance objectives and tie them back to the overall objectives of the organization.

Before getting into a deeper discussion about each of three core business finance objectives, lets briefly return to the initial discussion that business finance is hard to understand.

Yes, it is hard to understand finance as much of it tends to be based on some pretty heavy and involved math, conditions, and principles.

Yes, finance is an essential part of society and commerce.

No, it is not important to become a finance expert.

But to become an effective business manager and own or run a successful business, then you have to be able to put finance and finance providers to work for in a manner in which you know what’s really going on.

That’s where the following three core business finance objectives come in:

– Secure Capital
– Manage Cash Flow
– Cash Out

And if you haven’t already guessed, these objectives are the entire focus of this blog and all future posts.

All finance related functions and activities can be listed under one or more of these three objectives or categories.

This is effectively a point of interface between the managers and owners of a business and the various finance personnel or professionals they have to work with.

The focus here is develop a “common set of finance objectives” that both finance and non-finance trained individuals can understand and work towards together.

Lets look at each on of the core business finance objectives in more detail.

Secure Capital.  Virtually any business, at some time, will require some amount of capital to operate.  There can be rare exceptions, but indeed they would be rare.  An organization that has clear goals will have to further expand goals into strategies and tasks that are assigned dates in a time line and costs to complete.  The collective value required from all costs is capital it needs to secure.

This objective is an offshoot of budgeting and accountants, connects to banking and bankers, investors, and so on.

Manage Cash Flow.  Every activity, action, or decision of a  business has two things assigned to it:  time and cost.  When is going to happen, when did it happen, when will it be completed.  What will it cost, what has it cost so far, what is it expected to cost, and so on.

Cash flow is the life blood of any business.  Without a positive cash flow over time, there basically is no business.  So everything that happens, past present, and future is summarized into cash flow management, providing a dashboard of results to whoever is driving the business bus.

Finance functions like taxation, foreign exchange, accounts payable, accounts receivable, purchasing and inventory, capital expenditures and so on, all impact cash flow.  Summarizing all these activities into cash flow management reporting and providing organizational goals and objectives for overall financial performance provide the basis for all these activities to be managed and measured… without being a business finance expert.

The key is to provide end goal direction in terms that everyone can understand.  The finance people seldom understand the intricacies of marketing, sales, and operations no better than non finance people understand finance.

The same is even more true with outside advisers like accountants and bankers and tax specialists who actually tend to know very very little about the inner workings of their clients’ organizations.

But these outside advisers can still provide tremendous value to a business if they are properly directed via the three core business finance objectives.  Without this direction, many business managers and owners simply leave the decision making up to the advisers which in many cases is dangerous to deadly.

The last core business finance objective, “Cash Out”, may sound simple and straight forward, but its importance can’t be overstated.

We’ve all heard how you need to work with the end in mind.  Its all about working towards a longer term goal or objective, right?  Well I use the term “Cash Out”  to signify the ultimate end of the business.

People are in business, primarily, to develop a cash flow, build assets, and build enterprise value for some day in the future when the business will be sold or transitioned to others for an optimal price.

The “cash out” objective is like the rudder on the ship, where when the end game changes for whatever reason, the entire enterprise needs to be shifted to accommodate the change in final destination.  Because the long run of business is ever changing, and truly organic in nature, short term linear courses are plotted to operate in the short term (otherwise you couldn’t operate at all) and as time goes by and more information is known, or impactful things come to light, or trends develop, or whatever that can influence what you do and how you do it in the market place.

Then a course correction is made.

The course correction is about making the adjustments required to continue on a path to optimal enterprise value that will someday be completely financially realized in some sort of exit.  It is inevitable.

As companies grow and fragment into different operating centers, each may take on a life of its own and work towards different ends.  But the most successful companies that consider the synergies among the pieces, will further wind up all these outcomes into one master exit plan to further guide the ship or perhaps fleet.

The point here is to always have a clear picture of where you’re headed and how you plan to get there.  Over time, you will refine the picture and continually bring unclear things into focus.  This provides the basis for all experts and functions, finance and others, to line up their efforts towards helping the enterprise achieve its goals.

The coordination of organizational activities across functional lines is nothing new.  I’ve just gone a bit further and simplified the collective process into the three business finance objectives:

Secure Capital
Manage Cash Flow
Cash Out

While much of the coordination and optimal use of business finance practices evolved out of big company structures and thinking, the principles apply to small and medium sized businesses as well.

Regardless of size, you need to have a strong handle on these three core objectives and by doing so, you can make sure business finance is working for you and likely providing you with a competitive advantage over those who either view this as too much work or are giving themselves a headache trying to understand everything about business finance (and we now know that would be a very poor use of time)

More to come in the next installments

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