Improving the Budgeting Process

One of the most non-value-added activities within financial management is budgeting. Budgets are prepared to allocate and control how resources will be used in the future. Unfortunately, the future is hard to predict and upper-level management doesn't always communicate with people who prepare budgets. Because of poor communication, budgeting becomes an exercise in futility. Some of the problems associated with budgeting include:

Getting out of the Quantitative World

The world is highly quantitative – it’s all about the metrics and meeting the numbers. Everyone is counting something – number of customer complaints, number of web visits, percentage increase in sales, and the list goes on and on. With so much emphasis on the quantitative side, the qualitative side gets lost and it is the qualitative stuff that is becoming more important. One reason qualitative information gets de-emphasized is that it is difficult to measure. If we can’t measure it, then it gets ignored. This is one of the fallacies with financial reporting; things like talent, leadership and brand recognition are no-where to be found on the financial statement. But these qualitative characteristics are the real drivers of performance and they warrant more attention in today’s quantitatively obsessed world.  

BADIR: A Simple Approach to Analytics

The best companies in the world have embraced data analytics. They know how to capture and analyze data for continuously solving problems and improving the bottom line. Unfortunately, analytics is often lacking for less sophisticated or smaller companies. One way to put analytics into your business is to follow the BADIR Formula:

Recognizing Intellectual Capital

The traditional accounting model with its financial statements is increasingly inadequate in helping us understand what drives value in our business. These value drivers are highly intangible and the accounting model is not setup to measure and report these critical assets. Part of the problem is simple – it’s hard to measure intangible drivers of value. They can include things like:

• Your ability to retain and have loyal customers
• The fact that your workforce is highly motivated and requires minimal supervision
• Having strong leadership that creates the right culture for performance
• Obtaining brand recognition that makes it harder for others to compete against your company
• Turning ideas into real product improvements for continued market leadership
• Leveraging your know-how against the assets of others in a shared economy

Start Measuring Intellectual Capital

Increasingly, businesses need to pay attention to growing the intellectual capital of the business. Hard assets (facilities, vehicles, equipment) lose value over time and may not provide the highest returns for the business. The soft stuff (talent, leadership, patents, innovation, etc.) creates the most value and return.

A good way to frame this challenge is to think in three’s. Start with the three main types of intellectual capital and the corresponding metrics:

Why More Companies Should Consider OpEx over CapEx

The OpEx Approach Provides More Flexibility

Increasingly, businesses need to improve their focus by doing a few things exceptionally well as opposed to owning each and every long term investment. The level of in-house expertise required to support major investments simply does not exist within most companies. Couple this with the fact that we now live in a world driven by intellectual assets and not hard assets.

Humanizing the Financial Mindset

Why finance should take a more human view

Financial Statements, Organizational Charts, Employee Handbooks, and all those traditional things that go into running the business are increasingly unreliable, out-of-date, and ineffective in a world driven by human and intellectual capital. If leaders of organizations are honest about high performance and creating value, then they must pay close attention to the human side of running the business.

The Financial Argument for Great Design

Financially oriented people, such as myself, often focus too much on the numbers. If we can increase the bottom line by cutting cost, we jump all over it. This can lead to some big problems for growing the business. A good example of this is when a business spends money on design.

The Death of EBITDA

IC drives value and not EBITDA

Increasingly deal value is driven by Intellectual Capital. Intellectual Capital includes a wide range of intangibles: Talented Workforce, Ability to Innovate, Leadership, Loyal Customers, or Brand Recognition. These intellectual assets are flipping the traditional EBITDA model on its head. This is evident by acquisitions driven by intellectual capital (IC). Take for example a valuation of $ 10 Billion assigned to SnapShot which has no sales revenues. How can this company be valued at $ 10 Billion with no EBITDA? SnapShot is a social application now used by 9% of all Smart Phone owners. These types of examples are becoming common place. Take for example the acquisitions of highly innovative companies such as FlipKart, Dropbox, Square and WhatsApp. All of these deals were IC driven and not guided by EBITDA.

Can Wall Street Learn Something from Islamic Finance

Islamic Finance injects a moral code into transactions

Increasingly people have lost faith in our financial institutions. We are seeing major fluctuations in currencies and commodity prices (such as a 50% drop in oil in 2014). Additionally, government leaders are unwilling to put serious guidelines in how markets should work for the benefit for all.

We now live in a world where over 60% of all stock trading is done by computers in nano-seconds. We now live in a world where the Federal Reserve engages in something called “quantitative easing” which positively impacts Wall Street more than Main Street.