Jan 3

Intelligence Resolutions – THINK FINANCIALLY

When executives in your business talk about the “street’s” expectations, do you tune in or tune out? When the subject of “high finance” enters the intelligence realm, can you talk the language? Do you understand the concepts, the issues, the implications? How well do you factor them into your analyses?

I was recently presenting at a SCIP event and was a bit shocked by the lack of Finance IQ among meeting participants. In my talk I was reviewing the tension caused by high stock price multiples and DCF (Discounted Cash Flow) implied growth rates that various players in a given industry would have to achieve to keep investors happy.

Eyes glazed over. Folks needed me to clarify the definitions of stock multiples and DCF. Then there was some push-back. “Wall Street expectations are so short term.” “That stuff is so unrealistic.” “We need to focus on real game-changers, not ignorant analyst opinions.”

WOW … this is a problem!

While I certainly share some of these opinions and frustrations with the fickle nature of the financial world, Intelligence leaders CANNOT be so cavalier in dismissing them.  The fact is we can never rise above the power and pull of the financial world … even in privately held companies.

The reasons are simple. The financial world and, in particular, stock investors and their analyst community proxies, represent the “voice of the investor”. We must remember that most of our firms run at the pleasure of the investor.

Whether we like it or not, it is their money that builds our plants and offices, funds our inventories, and pays for the big marketing campaigns. Stock prices, despite their apparent fickleness and volatility, represent the market value of our firm’s prospects for success.

This impacts private companies as well. Borrowing costs are impacted by Wall Street’s opinion of the prospects for the publicly traded firms in the space. The availability of capital to expand markets and capacity, both up-stream and down-stream of a particular business, can impact a private company’s goals and results.

And, of course, while we may dislike it intensely, Wall Street’s expectations are the foremost report card for senior executives. Their compensation, reputation, and future prospects are tied directly to the stock price. And SO ARE OUR COMPETITORS!  (And so too are our suppliers and customers!)

This means much short term -and long term- behavior is driven by Wall Street.

So, rather than fight this reality, our final Intelligence Resolution needs to be to learn to think financially … and talk financially!

We need to understand financial markets explicitly and implicitly. We need to factor financial market expectations into our analyses (both backward and forward looking). We need to determine the weight of financial market pressure on direct rivals, as well as other key market players.

And instead of dismissing Wall Street’s “short-termism”, let’s use our knowledge of Wall Street’s ways to help our teams make better short AND long term decisions.

Besides, winning and satisfying fickle investors are the best ways I know to gain the time and space needed to chart successful long range moves.

THIS POST FIRST APPEARED JANUARY 10, 2014

2 Responses to Intelligence Resolutions – THINK FINANCIALLY

  1. […] Think Financially … Good, bad or ugly, the world marks organizational success and failure in financial terms. All the best primary source evidence, analytical sophistication and analyst passion can’t overcome financial market opinion. So let’s not dismiss the Wall Street or Fleet Street point-of-view. Let’s understand it and make it part of our intelligence toolkit. Read more…. […]

  2. […] Think Financially … Good, bad or ugly, the world marks organizational success and failure in financial terms. All the best primary source evidence, analytical sophistication and analyst passion can’t overcome financial market opinion. So let’s not dismiss the Wall Street or Fleet Street point-of-view. Let’s understand it and make it part of our intelligence toolkit. Read more…. […]

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