Date : 07-08-2015 Platform/Online Media:: Your Story Source
Avoiding The Corporate Black Holes – A Finance Perspective
The Hollywood blockbuster movie Interstellar by master director and story-teller Christopher Nolan is made on abstract and intriguing phenomenon of black holes and wormholes. Google defines black holes formally as “a region of space having a gravitational field so intense that no matter or radiation can escape”. Informally the definition is “a place where money or items apparently disappear without trace”.
Seeing the movie last year has got me into a thinking mode ever since on the concept of black holes; their existence and implication in the corporate scenario. On a day-to-day working any senior Corporate Finance Professional faces a lot of burning issues which are imperative to his/her roles of being a fire-fighter in almost all small and mid-cap organizations. However a very important role for CFO/Controller irrespective the firm size is cost control and if possible its reduction.
Corporate black holes here imply those functions in the organization which are mostly cash suckers by nature, with dichotomous output possibilities wiz: be thrown in another universe with a chance to live a new life in another realm or disappear into oblivion without a true knowledge of what hit you. In this regard identifying the corporate black holes and being vary of being sucked into them before it is too late, would be boon a CFO would love to have in his quiver of strategies. A CFO/Controller’s skill of foresight plays an important role to view a cash black hole from afar thereby determining his/her preparedness to deal with the forth coming insecurity.
However in a strategically growing corporate where the growth prospects and financing the growth are always pitted against each other, a CFO/Controller has to always follow an “On the needle” approach when dealing with expense budgets of the following functions to ensure that an opportunity is also not missed to ‘rake the moolah’ or ‘bell the cat’ as the case may need:
Firstly one needs to ensure that this function is seen separate from the sales function, although in a lot of small & mid-size corporates they are fairly integrated. For an organization, the sales function generates cash and the marketing function generally expends to generate further inflows for sales. It is always presumed that marketing budgets are directly proportional to increase in topline, but this is neither 100% myth nor 100% factual. As Kotler declares, “Marketing is a race without a finishing line”. With technology now being a major player in the ways corporates are marketing themselves and their brands, it is too easy to lose track of cost benefit in the mist of it all. What has always worked for me professionally when dealing with the marketing function is the “horse-reign” strategy. The CFO should allow the horse a loose reign to pace run itself but never should the horse get an impression that it is in control. Each marketing endeavour or campaign should be identified as a long term brand building exercise or short term revenue generation campaign and the degree to which the reigns need to be held should be identified by a CFO/Controller accordingly.
2. Research & Development
In industries like pharmaceuticals, product designing and technology where survival of the fittest is always based on the number of new innovations that they can produce in a fiscal, R&D function amongst organizations occupy a pivotal position strategically as competitiveness requires them to invest a decent percentage of their retained earnings continuously into macro and micro R&D elements. However, the CFO/Controller of such an organization has to carefully evaluate this function’s spend coz the gestation period tends to be spanning from months to ten years even, hence the cost benefit analysis needs to be evaluated hand in hand with the time value of money and opportunity cost of the R&D costs.
3. Information Technology
Corporates today, irrespective of the their nascent industry type that they belong to; are forced to brace the IT boom, be it in terms of hardware and software that are available today to make work more efficient. Where an IT function in every organization has become a must with budgets allocated every annum to keep it smooth and functioning, a CFO/Controller should undertake the cap-ex costs being incurred by the IT department as a new capital budgeting exercise itself with DCF and NPV analysis being undertaken for a measured call. This is necessary for projects where new ERP’s are being implemented; a complete hardware revamp is being done or even where a new sub-system is being developed for efficient functioning any particular function in the organization.
4. Human Resources
For any CFO/Controller the Human Resource function will always be a necessary devil that they have to live and work with and yet ensure that, the function exports profitability against all the areas of its expenditures namely: recruitment, induction, training & staff welfare etc. This is always a tricky proposition for a CFO as a company’s strategic growth definitely depends on the degree of resources input; of which manpower is a key ingredient, but a million dollar question always exists: whether recruit; to support growth or to propel growth? Throughout my professional career, I have averted being sucked into this black hole by undertaking a variance analysis of benchmark manpower numbers against pre-defined revenue ranges vis-à-vis actual warm bodies being paid every month to always be on the top of reasons where my variance eats into my budgeted spend.