Primary navigation:

QFINANCE Quick Links
QFINANCE Topics
QFINANCE Reference
Add the QFINANCE search widget to your website

Home > Cash Flow Management Best Practice > Managing 21st Century Finances

Cash Flow Management Best Practice

Managing 21st Century Finances

by Terry Carroll

Executive Summary

  • CFOs have to balance long-term planning with short-termist behavior in the markets.

  • In order to do this, it’s essential to have a good business model, a clear understanding of business risk, sustainable revenues, and proper communication.

  • Failing to manage the financial information systems well can seriously damage your brand. Getting it right will please both short- and long-term investors.

  • Matters have been complicated by the globalization of standards and reinterpretation of company accounts.

  • Tangible value creation remains top of the agenda. When investors are frightened or lose faith, they can destroy value much faster than you can create it.

  • Relationship management is one of the most important new skills to acquire on the road to success.

Introduction

Corporate purpose, for most companies, is to create and sustain long-term stockholder value. However, markets can be driven by fear or euphoria. Stuck in the middle are top managers, especially the CFOs. They have to balance long-term planning with “short-termist” behavior in the markets. How can this be achieved? What are the new metrics for survival and sustainable prosperity?

As some companies have destroyed value, some have begun to question whether stockholder value should be a goal, or rather a consequence of excellence. In both quoted and private companies you need a clear, understandable business model that works; to be able to explain it easily and consistently; to understand strategic business risk and make it work for you; to generate sustainable revenues, income, and cash with rapid and reliable reporting; and no surprises!

Managing Investors’ Expectations

Managing stockholder value is also about managing expectations. The major long-term players (institutions, pension, investment, and insurance funds) are advised by analysts. Short-term investors, traders, and the public are more influenced by news flow and market movements. How can we reconcile these forces? By timely financial information, “no surprises,” always having cash, and finally, having a credible, understandable business model.

Financial Reporting in the Communications Age

Great companies produce rapid, reliable, succinct, simple, usable financial information. Internally, more than three days to report is too long. The Internet or intranets can provide “always-on,” real-time connection for the whole company. Management and financial reporting tools and technology allow fast collection, collation, interpretation, and distribution of results. Now, three factors are converging internal with external reporting: urgency, transparency, and consistency.

Global markets and the pace of change mean that management needs reliable financial feedback, fast. Meanwhile, external reporting periods are shortening. This is spilling into Europe. Information is a global property, especially when it “leaks.” Global brand management demands control of your own destiny. The market wants information as fast as you get it. Too much conversion for external consumption takes time, unsettling management and investor alike. Meanwhile, market regulation requires transparency and “equality” of distribution.

Investors want financial information that is consistent with expectations. The more frequently it is released, the smaller the mismatch. Regular, progressive business and financial news flow, along with rational enhancements to the business model, can lead to outperformance. When there are surprises, markets wonder whether management is competent.

Uneven information flow; profit warnings or their lack; information released to analysts before the market; lack of comment on speculation; all these unsettle investors and regulators, sometimes causing sharp movements in stock prices. News and specialist market services supply corporate information 24 hours a day. Analysts interpret it as fast as it is produced. The changes in Accounting Standards, Sarbanes–Oxley, Basel II, and other complications mean more reliance on expert interpretation. While some have argued about the validity of new standards, industry leaders and others have got on with it to create a sustainable advantage.

Some CFOs may need to wake up to the new paradigm. Others will see it as an opportunity for skilled relationship management, making the financial information systems work for the company as another weapon in the public relations armory. The swift can capitalize on the lethargy of the slow. Brand is everything. Failing this new challenge can seriously damage yours. The right approach will please both short- and long-term investors.

Cash Is King

Investors will demand that companies report quicker. This is a challenge for accounting standards and governance. Historic price/earnings multiples have been replaced by forecast revenues and EBITDA (earnings before interest, tax, depreciation, and amortization) as the currency of decisions. As accounts become almost impenetrable, the metric we all understand is cash. How much cash was generated in the last period; how much remains in the balance sheet; what is the NPV of sustainable future cash flows?

Back to Table of contents

Further reading

Books:

  • Bierman, Harold, Jr. Corporate Financial Strategy and Decision Making to Increase Shareholder Value. New Hope, PA: Frank J. Fabozzi Associates, 1999.
  • Carroll, Terry. The Role of the Finance Director. 3rd ed. Englewood Cliffs, NJ: FT Prentice Hall, 2002.
  • Conger, Jay A., Edward E. Lawler III, and David L. Finegold. Corporate Boards: New Strategies for Adding Value at the Top. San Francisco, CA: Jossey-Bass, 2001.
  • Moore, Geoffrey A. Living on the Fault Line: Managing for Shareholder Value in Any Economy. Revised ed. New York: HarperBusiness, 2002.

Website:

Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share