Who would have thought this would be the year terms like “tax inversion” and “strategic finance” became cocktail-party conversation? Thanks to proposed restructurings by Walgreens and Burger King, that’s just what’s happening. People are talking. And they are realizing the importance of financial strategy and its application. In this case, the trade-offs were clear and interesting — cost savings versus local presence. Walgreens leaned towards local presence and Burger King towards lower cost structure.
These two companies provide a great example of how finance is more than applied accounting and how critical it is to consider its impact throughout the organization — from strategic initiatives to operating decisions. This dovetails with what we see in our markets. Strategic Finance and Business Acumen are two of our fastest growing product lines, not because we are accounting geniuses, but because we teach it through complex, realistic business simulations. Though our clients appreciate the review of financial terminology, most of our time is spent evaluating the financial and strategic trade-offs they face in key business decisions and discussing the behavioral impact of financial metrics.
I understand that discussing financial metrics may sound only slightly better than an afternoon at the dentist, but it can be fascinating stuff. At a recent program for division managers of a multibillion dollar manufacturing conglomerate, the CFO joined us for lunch. Conversation quickly turned to a new corporate directive to reduce customer payment terms in order to reduce Accounts Receivable and increase cash flow. Yawn if you must. But these $100-million-and-larger division managers didn’t find this boring at all. They were very concerned about the impact on their revenue and business performance and unilaterally considered this an unfavorable development for their business.
After lunch, we continued the discussion. In order to illustrate the other side, we pulled out the company’s latest financial statements and calculated the savings to the corporation of reducing its DSO* by just one day. Even at today’s low cost of capital, the savings were astounding. Stunned silence was followed by a strong change of heart on the need to reduce Accounts Receivable. By the end of the day, when asked to commit to one action to increase financial performance in their divisions, 35% of the division managers identified creative ways to reduce their Receivables.
Maybe this isn’t the stuff of a Jason Bourne movie, but it has a real impact in day-to-day business performance and shouldn’t be overlooked. If your company isn’t exploring finance as a strategic lever, you could be limiting your performance.
*DSO = days sales outstanding – a ratio which shows how many equivalent days of sales are included in the current outstanding customer payments.
