A Finance Realization

I used to think that finance was all about money, until I asked my professor

(Drucker, 1984) what the most important thing was that I could learn about

finance. His response would stay with me for years to come. It is about money's

functionality,but don't loose sight of the bigger picture. He ended our

discussion stating that the value of finance was not in its current applications,

but rather in its transformational possibilities, which included better predictive approaches, risk management and economic decision-making. So, I spent the next thirty-five years in this endeavor.  I developed a deeper appreciation of how finance influences decisions, supports corporate functions and processes, creates wealth, and helps companies to innovate and serve markets. Today finance is continuing to change the way we look at assets, derivatives, liquidity, risk, as well  as wealth generation.

 

Finance has something for everyone. This is not your parent's finance of 40-years ago. Personal and Corporate Finance have already gone through major changes in its applications and understanding of risk management. Progress is being made on all fronts from cryptocurrencies to Financial Engineering. Curiously, it is not clear to me why so many books on finance, as well as instructors, struggle with a simple clear and concise definition of Finance. In its definition is the beauty, power and potential for building companies and creating wealth. Finance is not just for financial and accounting management, or corporate executives. It is not just for sophisticated investors. Rather, finance has something relevant for every employee, department manager, corporate executive, and BoD member, as well as investor.

 

Let's start with the requirement that every corporate executive should be clear on: how and where finance impacts every single one of the company's operations. This means every operation, from customer service to new product development, from sales to marketing, and from administration to manufacturing.  Know that management cannot gain the required insights finance offers by just reading financial statements or budget analytics to effectively lead the company.  Engineering a financial solution using just analytics from financial statements is pretty useless and often misleading.  But take heart.....There is a path that provides direction and clarity.  Finance provides that path. The power in finance can be seen in its straight forward definition and understanding of what finance is all about. Simply stated, Finance is all about making good economic business decisions that increase the value of "assets", (including human assets).  It is not about any particular asset (i.e., stocks, bonds, currencies etc.), type of derivative, set of analysis, or application (i.e., AIRR, XNPV, VaR, DCF etc.); but rather the synthesis of the impact they have on decision making.

 

While theorists  debate the origins and definitions of finance, they risk overlooking the power, profound impact and reach it has on competitively positioning companies to better serve their markets. Additionally, executives sadly miss the positive motivating aspects that finance can have on the entire company-behavior and -culture. It has been my experience that employees want to contribute to the corporate wealth creation. But many do not know how to associate their efforts with the company's financial well-being.  Most employees lack the guidance and metrics to take the existing assets they are given, then reapply them to a higher value; thus creating wealth for the company.

 

Enter Finance

Finance can help provide a quantitative foundation and starting-point for the company’s valuation of departments, projects, assets, and markets. Yes, even markets. It can even create a new high-powered employee cultural that is driven to innovate. Note that innovation and entrepreneurism are different sides of the same coin. Drucker (1986) noted that an innovation is the exclusive tool of the entrepreneur. The innovation is the tool and or process by which the value of an asset is increased. Take a moment to let that settle in.  Jean Baptiste Say (1830) defined an entrepreneur as someone who redeploys assets to a higher value.  Many of us Silicon Valley workers defined an entrepreneur as someone that start businesses and takes risks.  Wow, were we shallow.  Anyone can be an entrepreneur capable of creating social, technical, process, economic, scientific and or corporate innovations that generate wealth. (side note: many of the greatest innovations have been economic, process,  or social in nature, not technical). What the world should have concluded leaving the 20th Century is that companies in competitive markets that do not innovate are going out of business. 

 

Many of my colleagues struggle to crisply define Finance. Some choose to define the word in quantitative terms and its applications; others think of finance in terms of economic behaviors.  Finance is much more than the 67 (plus) different applications associated with it (e.g., accounting and financial statements, cash management, stocks, investing, bonds, annuities, funds, hedges, options, Greeks, risk management, derivatives etc.). Mobile devices offer even more financial applications. Even 'corporate finance' and 'personal finance' are too narrow to grasp the power of finance. Finance has the power to fundamentally transform a company's culture and market share trajectory.  With its broad potential, it is conceivable why so many finance books, lecturers, and researchers struggle to define the term: finance. Rather than define Finance in terms of its applications, let’s take a step back to see the big picture. With a broader perspective, we can more effectively and strategically define Finance as a tool and process for making good economic (business) decisions.

 

Good economic business decisions start with understanding your Company's internal strengths and external market opportunities. Companies build wealth by exploiting market opportunities with their strengths.  Companies truly have only two mandates: (1) service a market (better than your competition), and (2) innovate (to deliver more value than your competition). Finance provides us a quantitative road map with qualitative context.  The Finance-Marketing combination provides a company the means to innovative, create, and deliver competitive products and services, as well as position it within its markets. It is incumbent upon financial management to provide this level of expertise to their company.

 

Marketing and Finance

The purpose of marketing is to develop, service, and grow market share (i.e., a customer base). There are few companies that have no customers.  Finance management should make it clear how each  marketing function can benefit directly from financial tools and processes to meet this purpose. These contributions offer better Product Marketing, Pricing Strategies, (Can help focus) Marketing Research, to more innovative Distribution Channels strategies and can even suggest more economically effective Marketing Communications strategies and channels. The finance-marketing combination can help to set more relevant value creating marketing objectives (...not goals) and profitable strategies. The combination can even assist with the implementation of budget and organization, together with (financially) motivating metrics.

 

Management and the Practice of Finance

Management is both a process and a practice (Drucker

1971). Management has the singular directive of

maximizing the value of a company's assets. This

includes tangible and intangible assets,

as well as human and social assets. Companies

need to challenge its financial management to

provide these insights and benefits.  Many of the management

books from the 1950s to early 2000s focused

on efficiency, entrepreneurship, and leadership

within the corporation, rather than the mandate of asset maximization. Most of the books were

excellent reads; however, they overlooked the enabling power of Finance. Finance provides adaptive strategies, organization structures, cost controls, and motivating performance metrics.