Today we had a full day of finance and accounting. The weather outside was excellent but apart from a 10 minutes’ walk to the park, I did not see much of it.
The main message of the professor was that it is all about cash. The tendency to focus too much on profit without looking for cash is understandable, but cannot be a basis for decision-making. What you need to look at is discounted future cash flows. Discounted because you want to calculate the net present value of current investment decisions and future cash flows. Future, because the value of a decision depends on what it can bring in the future. I believe Sloterdijk has called this futurism.
But at the end, the professor had to confirm a lot of things is to be decided, and therefore arbitrary. You need to calculate the time value of future cash flows and you need to decide on a cost of capital. You can choose the cost of capital. The professor regrets that many companies do not publish the cost of capital that companies use to decide on their capital expenditure. I should have send him the link to my recent blog on hrchitects.net on the emotional side of business.
What I liked is that he regrets that if we need to focus on value (future cash flows being the best estimate of value) we need to think long term, whilst when performance of companies is evaluated, we look at short term. Indeed that’s true and t hat’s also common sense. And it’s the lack of common sense that has created some corporate collapses (like Enron) and a severe financial crisis.
I was talking to a British colleague and we agreed that it shoud be better to choose an investment that might have a lower net present value but that might fit better to other aspects like purpose, ethics, … Maximizing the shareholder value seems to be too reductionist for a complex entity like a company.
The good thing was to have a refresh of the fundamental ideas of finance and accounting. And this was brought in a brilliant manner.
I am also happy there is skype. It helps keeping in touch with the home base.