Carl Fransman is one of the more active MBA Solvay alumni. His drive and commitment are behind the Alumni Newsletter and he is also sharing his knowledge in the Business Voice seminars. If you are an alumnus and would like to publish in the blog, contact MBA Solvay and we will arrange for your participation.Over the couple of the last quarters I’ve come to deal with several companies where a strict “no cash out” rule has been enforced. While cash-flow rightly rules during credit-crunch times, these non-discriminatory decisions should raise some eyebrows. All too often do we see that during upbeat times no expenses seem barred whereas during tougher times the rule is simply inverted.
I believe management is slightly more complex than that. Investments should always serve a purpose and, when they do, they should lead to competitive advantage, which in turn should lead to a better position in the market. Therefore, I’m very surprised to find that even very cash-laden enterprises seem – let’s put this lightly – reluctant to even consider investments.
Queries to find out why this is the case typically lead to either one of the following answers: “this is a decision made at the top” or “this is dictated by the market”. Dictated by the market? What sort of investor turns down an investment with a positive ROI? And decision made at the top? Either these companies are headed by people who turn down opportunities because of what they read in the papers or the people at the intermediate stages are incapable (or even willing) of making a serious case with top management to justify the proposed investment.
Luckily, there are exceptions. If the corporate world mimics the natural world- then in the race of survival of the fittest- these are the companies I chose to bet on to emerge on top of the food chain. Not only are they more likely to catch a lucky strike (how can you win at the lottery if you don’t play?), but also they show that no matter what, they keep looking for ways to outperform. And that’s what true managementship is about: evaluating, sensing and, above all, taking action.
Let’s take an small example: a company running above industry-standard level could chose to invest in a cost-saving project. This would cost them roughly €3 million and would lead to an inventory reduction of roughly €70 million, whilst maintaining service levels this is important as during the downturn, most companies just burned off inventory to then find themselves in a situation where they could no longer serve their customers!). Now, it would be too easy to say they would save €67 million! No, eventually, the inventory would get sold. Therefore, if that company had a WACC of 8%, they’d still be saving €5,36 million – and that’s without considering other benefits than the capital expense. That’s still a positive ROI within one year!
If this weren’t spectacular enough, let’s now go back to the argument that “the markets” want the company to maintain it’s cash flow. Well, an expense of €3 million would lead to a non-expense of €70 million! Who wouldn’t wish to be the CEO able to announce the news that internal efforts have lead to this result? Not only would you be pleasing the investors but the freed up cash should allow you to make other strategic decisions in times when most competitors are standing still.
The best of it all is that the above-mentioned example is real! There is real potential in many businesses and with these sorts of return, many possible financing scenarios can be thought of.
So, if MBA should stand for something, it should really be Management By Acting!
It was great to spend the morning with Chiara talking to possible...