OPEX, CAF, cash flow, working capital… financial jargon can seem obscure to non-financiers. Expert in corporate finance, Eric Strouk explains the reasons why managers must acquire a minimum of knowledge in this area to feel comfortable with their financial contacts.
Not all managers are experts in corporate finance, far from it. However, they sometimes interact regularly with specialists, when it is not their boss, shareholders or future investors.
Several problems arise when talking to financiers. The most obvious: the language barrier. Mastery of vocabulary is, of course, necessary, but not sufficient. It is also necessary to understand the logic and financial mechanisms implemented in order to be able to understand the entire problem.
Mastering the vocabulary, starting point for dialogue with financiers
Any discipline involves a particular language and vocabulary. Those in finance are no exception. Indeed, this area is full of acronyms that are still too often incomprehensible to managers.
However, it is essential to acquire this language, this culture, these codes. Even more so when it comes to communicating clearly and effectively in an environment that uses a dual culture, French and Anglo-Saxon.
To talk about the company's activity, for example, some use the expression OPEX (operational expenditure, expenses linked to the activity) when others prefer the REX (operating result), there operating margin or even EBIT (Earnings before interest and taxes) to express the same notion.
Thus, depending on the company culture, the manager's background and the habits of employees, words and expressions can take on different meanings, or even be ambiguous. In this case, it is better to master the correspondence between the two cultures and to understand the equivalences and specificities of each.
A constantly evolving environment and vocabulary
Contrary to what one might believe, the financial environment, its vocabulary and its fundamentals also evolve over time.
Thus, less than twenty years ago, the financial debts of a company corresponded on average to four times CAF (self-financing capacity). Today, there are more like three. Why do ratios that were intended to be considered immutable today find themselves tainted with a certain volatility?
The reasons are multiple and profound. But two major causes stand out.
One is linked to a contraction of time under the effect of increasingly rapid and omnipresent means of communication. Consequently, in a permanent analysis of their clients' risk assessment and by lack of visibility on the future, bankers are forced to shorten the thresholds of their liquidity ratios.
The other cause is societal, in a world increasingly turned towards abstract and immaterial approaches. Just look at the growing number of computer software and smartphone applications that are participating in this transformation. Thus, the automation of the recording of accounting documents by artificial intelligence (AI) is proving ever more effective.
Moreover, since the beginning of the 21st centurye century, the share of intangible assets (patents, trademarks, operating licenses, etc.) continues to grow to the detriment of material fixed assets. And this trend is not about to stop.
Beyond vocabulary, master accounting and financial mechanisms
Dialogue with financiers implies a mastery of accounting mechanisms as well as financial principles. Understanding that a debt also corresponds to a resource may seem counterintuitive to newbies.
In what way is a BFR (need in funds) Is negative considered favorable in terms of cash flow? Why do the depreciation linked to fixed assets are they at the origin of a decorrelation between cash (treasury) and the result? How to act based on this information? So many questions that every manager should be prepared for, not to say seasoned!
However, the corporate finance (business Finance) does not come down to the appropriation of vocabulary or financial logic. Otherwise, the approach would be very simple, even simplistic.
Behind the mechanisms, paradoxes
This discipline contains paradoxes and logics to be appropriated. This is the case of the financial scissor effect which follows a counterintuitive logic. We speak of a scissors effect when two phenomena evolve in opposite ways, such as an increase and a decrease.
Let's take an example. When the turnover (CA) increases, the bank overdraft also deteriorates in the same proportion! In other words, your cash position is shrinking and, eventually, you'll find yourself in an overdraft situation. This may seem surprising at first.
From this phenomenon, we deduce that it is better to seek to make cash flow the support of performance in order to align the two in the same direction.
We also find the case of financial leverage. It consists of increasing financial profitability by taking on debt.
Managers must understand the financial consequences of their actions
In addition, operational staff, in contact with the field, should absolutely understand the repercussions of their actions on all financial aspects of the company.
Thus, granting customers too long payment terms can be costly. In terms of financial costs, but also by its consequences on the company's economic model.
Is the game worth it? Does the margin justify this drift? To what extent does this decision influence the DSO (days sales outstanding), the average customer payment time? So many questions that management controllers would certainly not like to have to answer on a daily basis.
Knowing how to analyze the financial situation of a company, your own or that of a competitor, remains a key skill to acquire for any manager.
A sales manager will, for example, have difficulty making the decision to slow down or stop the increase in his turnover because the company's cash flow is not there. This can be compared to stopping an army on the move whose logistics are not keeping up. In a way, this amounts to limiting yourself in order to maintain the balance of your business and thus avoid putting it in danger. Undeniably, it is showing mastery or wisdom. But above all, this requires a good knowledge of the notions, concepts and logic of corporate finance.
All operational managers, whether or not they work in the financial field, must have these basic management skills.
This constitutes a major asset for good integration within a company, but it is also a personal investment that any field manager or other should commit to in order to build solid knowledge for their career.
