OPEX, CAF, cash flow, working capital... the jargon of finance can seem obscure to non-financial professionals. Eric Strouk, an expert in corporate finance, explains why managers need to acquire a minimum knowledge of this field if they are to feel at ease with their financial contacts.
Not all managers are experts in corporate finance, far from it. However, they do have regular discussions with specialists, if not their bosses, shareholders or future investors.
A number of problems arise when talking to financiers. The most obvious is the language barrier. Mastering the vocabulary is certainly necessary, but not sufficient. You also need to understand the logic and financial mechanisms involved in order to grasp the whole picture.
Mastering the vocabulary, the starting point for dialogue with financiers
Every discipline has its own language and vocabulary. Finance is no exception. In fact, this field is full of acronyms that are all too often incomprehensible to managers.
It is essential to acquire this language, this culture, these codes. All the more so when it comes to communicating clearly and effectively in an environment with a dual French and Anglo-Saxon culture.
To talk about a company's activity, for example, some people use the expression OPEX (operational expenditure) while others prefer the REX (operating profit), there operating margin or even EBIT (Earnings before interest and tax) to express the same concept.
Depending on the culture of the company, the background of the manager and the habits of the employees, words and expressions may take on different meanings, or even be ambiguous. In this case, it's best to master the correspondence between the two cultures and understand the equivalences and specificities of each.
A constantly changing environment and vocabulary
Contrary to what you might think, the financial environment, its vocabulary and its fundamentals also evolve over time.
For example, less than twenty years ago, a company's financial debts were on average four times CAF (cash flow from operations). Today, there are more like three. Why are ratios that were once regarded as immutable now tainted by a degree of volatility?
The reasons are multiple and profound. But two major causes stand out.
One is linked to a contraction of time as a result of increasingly rapid and ubiquitous means of communication. As a result, bankers are forced to shorten their liquidity ratio thresholds as part of an ongoing analysis of their customers' risk assessment and due to a lack of visibility on the future.
The other cause is societal, in a world increasingly focused on abstract and immaterial approaches. Just look at the growing number of computer software and smartphone applications that are contributing to this change. For example, the automation of accounting records by artificial intelligence (AI) is proving ever more effective.
In fact, since the beginning of the XXIe century, the share of intangible assets (patents, trademarks, operating licences, etc.) continues to grow, to the detriment of tangible fixed assets. And this trend is not about to stop.
Beyond vocabulary, mastering accounting and financial mechanisms
Talking to financiers requires a mastery of both accounting mechanisms and financial principles. Understanding that a debt is also a resource may seem counter-intuitive to beginners.
In what way is a BFR (need in funds) Is negative cash flow considered favourable? Why are depreciation of fixed assets the cause of a decorrelation between Cash and the result? How do you act on this information? These are all questions that every manager should be prepared for, not to say seasoned!
However, the corporate finance (corporate finance) is not simply a matter of adopting a vocabulary or financial logic. Otherwise, the approach would be very simple, even simplistic.
Behind the mechanisms, paradoxes
This discipline conceals paradoxes and logics that need to be appropriated. This is the case of the financial jaws effect which follows a counter-intuitive logic. The scissors effect occurs when two phenomena move in opposite directions, such as an increase and a decrease.
Let's take an example. When the sales (turnover) 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 can deduce that it is better to try to make cash flow the support for 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 need to understand the financial consequences of their actions
What's more, operational staff, who are in contact with the ground, should absolutely understand the repercussions of their actions on all the financial aspects of the business.
Giving customers too long payment terms can be costly. In terms of financial costs, but also because of the consequences for the company's business model.
Is it worth the risk? Does the margin justify this drift? To what extent does this decision influence the DSO (days sales outstanding), the average time taken to pay customers? These are all questions that management controllers would certainly prefer not to have to answer on a daily basis.
Knowing how to analyse a company's financial situation, whether your own or that of a competitor, remains a key skill for any manager to acquire.
A sales manager, for example, will find it difficult to take the decision to slow down or halt sales growth because the company's cash flow is not up to scratch. This can be compared to stopping an army on the march if the logistics don't keep up. In a way, it means limiting yourself in order to maintain the balance of your business and avoid jeopardising it. This is undeniably a sign of mastery or wisdom. But, above all, it requires a sound knowledge of the notions, concepts and logic of corporate finance.
All operational managers, whether or not they work in finance, need to have these basic management skills.
This is a major asset for successful integration into a company, but it is also a personal investment that every manager, field or otherwise, should make in order to build a solid foundation for their career.
