Consulting » Finance function – FDs do it by the book.

Finance function - FDs do it by the book.

Finance directors are renowned for being the meticulous members of the board. But, in the internet age, it may be appropriate to take a totally different approach.

When five frogs on a log teach an elephant to move your cheese, you ?know you’re well into the realm of trendy business books – which is just ?one reason why we’re so attracted to the soberly-titled eCFO: Sustaining ?value in the new corporation. This latest offering from the ?PricewaterhouseCoopers team led by Cedric Read is an excellent sequel to ?their 1997 publication, CFO: Architect of the corporation’s future.

Don’t let the title fool you: despite its insistence on using the American ?”officer” label CFO, rather than our preferred “director” handle, FD, this ?is not a particularly US-centric book. Its outlook is more global than ?American. The British FDs who are quoted extensively include Nick Rose ?from Diageo, Stephen Hodge of Royal Dutch/Shell and John Coombe of ?GlaxoSmithKline, alongside finance chiefs from the likes of Procter & ?Gamble, ABB, Oracle, Nokia and AIG.

The “e” prefix gives an unsubtle clue as to the nature of this sequel.

In fact, it’s remarkable to look back at the original CFO book and to note ?that there is not a single mention of the word “internet” in the index. ?Not one. Other than that, the original has stood the test of time well, ?but as the authors say in the sequel, “What we underestimated was the ?velocity – the speed of change, the speed of globalisation, the speed of ?industry convergence, and most importantly, the speed of technology – as ?evidenced in the explosive growth of the world wide web and e-business.”

But it would be wrong to think that eCFO is a dotcom book: it is aimed at ?all companies that are involved in e-business. It could even be argued ?that the title is a misnomer, since much of the book is relevant to ?aspects of business life that have nothing to do with “e”.

“This book is written for smokestack industry CFOs,” says Read, though he ?defends the use of the “e” prefix. “Every smokestack industry has dotcom ?entities, business units, start-ups in it – and that’s the point. This is ?for traditional companies investing in the internet.”

Chapters on performance measurement metrics, brands and other intangible ?assets, assets and alliances, overhauling your cost base, and a great ?section called “Blowing up the budget” are just as applicable whether the ?business concerned is bricks or clicks.

Read says, though, that there have been important lessons from the ?internet boom-bust over the last couple of years that have helped to ?change the way we think about the management of business. Budgets are a ?good example.

He cites companies such as Shell and Diageo, each of which had their own ?portfolio of internet investments – some originated in-house to meet in-house requirements, others operated as if they are stand-alone ?entities.

Either way, the process of managing these operations has thrown into stark ?contrast the management methods used in the core business.

“It has shown that there are basic flaws in the way in which they manage,” ?Read says. “We say in this book that the annual budget is a waste of ?time.

It gets in the way of running the business. And, of course, the stupidity ?of budgeting was really brought home when traditional companies started ?investing in their internet portfolio. But the lesson can be read back ?into the traditional business as much as into the internet business. What ?budgeting does is anchor people into an annual performance objective.

It stops them developing the business and constrains them around a ?financial model that is frozen in time and is inflexible. It takes too ?long, wastes too much time and becomes an instrument of negotiation. It ?doesn’t encourage people to perform, it only encourages people to perform ?to budget.”

Distressingly, of course, FDs keep on going through the budgeting ?process.

Why? Read says it’s because FDs are “constrained by an annual accounting ?convention which requires us to report annual profits. We advocate three-year rolling projections on what you intend to deliver in terms of ?shareholder value based on cash flow. Have you ever heard an investor ask ?to look at the budget? Investors don’t use budgets, they look at year-on-year performance improvements. That’s where we should be.”

Taking the example of a branded goods company that opts to “meet budget” ?by slashing its advertising spend, Read asks: “What’s that going to do to ?the brand in three years’ time? It’s an intellectual asset.”

Intellectual assets feature prominently in Read’s thinking. “Companies are ?valued not on their accounts, they’re valued on projections of free cash ?flow. But what we’ve got to do is look beneath those cash flows and say, ?what’s driving those cash flows? It’s heightened something we were aware ?of before the dotcom bubble, but something which has really been ?heightened by the dotcom bubble, which is the rise of the intangible ?asset.”

The PwC team has calculated that 80% of corporate value is tied up “in ?assets which are not reported on in the financial statements at all. ?Cadbury Schweppes have got some great brands. Their biggest brand, Dairy ?Milk, is not on their balance sheet at all – the brand they’ve built from ?scratch.

The only brands that are on their balance sheet – which they’re ?depreciating – are brands that they’ve acquired in the last 10 or 15 ?years. What a nonsense!”

Read adds that investors, at least, sophisticated investors, don’t rely on ?the numbers that appear in the accounts. Cash flow projections are the ?thing – and with good reason. “There is a very high correlation between ?the movement of share value and cash flow projection,” he says. And yet, ?the accounting world is still working on earnings and accounting-based ?profits. “GlaxoSmithKline may decide to hold an analysts meeting and tell ?them what’s coming through their drug portfolio,” says Read, “then the ?analysts have to make their own assumptions about what they think it’s ?going to be worth in terms of future cash flow – and that doesn’t seem ?right to me.”

Read insists that most companies are not geared for cash-flow ?projections.

“They’re only geared for traditional accounting convention. Management ?still use the management accounts and statutory accounts as a basic ?measurement vehicle for company performance. Managers are rewarded ?primarily based on those accounting figures. That is changing, but it’s ?still largely true,” he says.

Diageo is an exception to the rule. FD Nick Rose says in one of the book’s ?many detailed case studies: “We weren’t so open to change when we were ?budget-driven; we were always too busy looking over our shoulders, ?watching what had happened in the past. We don’t do that any longer. ?That’s made us a more dynamic organisation. We’re busy creating value now ?- that’s what our shareholders want.”


(372pp, 2001, John Wiley, #19.99)

edited by Cedric Read et al

Readability: ****

Graph simplicity: **

FD “Must read” factor: *****


(300pp, 1997, John Wiley, #19.99)

edited by Cedric Read and Scott Kaufman

Readability: ***

Graph simplicity: ***

FD “Must read” factor: *****

Aside from The Complete Works of David Tweedie, this is probably the one ?book that we have spotted on more FDs’ bookshelves than any other – and ?rightly so. It packs more punch than most business books and is aimed squarely at the ?finance director. Laden with real-life case studies – some American, some ?British – it addresses a wide range of issues, from financial system ?software selection to value-based management, all geared to extracting ?value. The last chapter contains an agenda that will help many FDs develop in ?this changing role. As co-editor Cedric Read told us in December 1997, ?”You have to do the stewardship. But what adds value – what makes you more ?successful than your competitors – is the value-creation agenda.” ?Financial Director, September 1999 SPECIAL OFFER FOR FD READERS Readers of Financial Director can buy copies of eCFO: Sustaining Value in ?the new corporation and CFO: Architect of the corporation’s future at the ?special price of #15.00 each (RRP #19.99) plus #3.00 p&p. Both books can ?be bought together for #24.00 (plus #3.00 p&p) – a saving of #16. Cheques should be made payable to John Wiley & Sons Ltd and sent to John ?Wiley & Sons Ltd, 1 Oldlands Way, Bognor Regis, West Sussex PO22 9SA. For credit card purchases phone 01243 843 294 or e-mail [email protected] Please quote “FD” to qualify for the discount.

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