Systems; Corporate Finance: Integrating Finance into Strategy

TRIMILLENNIUM MANAGEMENT : CORPORATE FINANCE
Integrating Finance into Strategy

By R.Seshasayee

The change-and the consequent challenges-ahead for corporate India will be shaped by multiple forces acting in unison. Their aggregate effect is too complex for accurate prediction. There is a general consensus that today, at the start of a New Millennium, the management of business enterprises in India is on the threshold of a major transformation. Look at the changes in the business environment: the globalisation of businesses, the emergence of common currencies, the integration of financial markets, and the infotech revolution. Together, all of them create a seamless global village. Suddenly, we find that the efficiency bar has been raised to international standards.

These developments have pushed managements into an equally unconventional response mode, which includes the disaggregation of processes, the mapping of the value chain beyond the confines of legal entities called companies, the adoption of flexible organisational structures, and the creation of networked virtual organisations.

The reforms process that India began in the last decade of the previous century had one beneficial side-effect: it altered the (financial) market's perception of companies and their strategies. Suddenly, the markets seemed to acquire the capability to recognise and reward the performance of a company. Thus, in this millennium, the markets will value and reward company initiatives that enhance shareholder value, and punish inefficiencies ruthlessly. The changing role of financial management in this millennium will be most visible in 5 areas: corporate value integration, the creation of the virtual corporation, real-time reporting, treasury and risk management, and catalysing change.

CORPORATE VALUE INTEGRATION. The historical value of tangible assets presented in the financial books of a company will no longer represent the full value of the enterprise. Rather, the worth of an enterprise will be determined by the robustness of its business model, its corporate and brand-equity, the level of customer loyalty it has been able to engender, the strength of its marketing network, and the quality of its human resources. An inclusion of these values in the company's financial reports will keep the shareholder informed of the true worth of the business in which he has invested; this will also help the market to assess the future of the business. It should be the endeavour of the finance function to develop appropriate tools for the valuation of these intangible assets and make these valuations part of the reporting of business operations. That apart, reporting practices need to be transparent and consistent with internationally-accepted norms.

CREATING THE VIRTUAL CORPORATION. Artificial legal entities, in the form of companies, have traditionally been created with a view to facilitate capital formation and give the business a distinct identity. However, the creation of such separate legal entities themselves, is often, a barrier to the search for value. Occasionally, these barriers break value chains, thus negating the company's ability to leverage presence across all nodes of the chain. This leads to an inflation of actual costs, depriving the company's products and processes of their competitive edge.

In order to survive the onslaught of fierce competition, it is imperative to assess the potential and efficiency levels of each sub-process and develop a concerted approach that can maximise value-addition and maintain profitability. This calls for the development of accounting models with the flexibility to analyse and improve performance in each sub-process of the value chain.

ORGANISATIONAL IMPERATIVES. Being lean and nimble-footed demands an organisation that can create a discipline of continuous flexibility . This will allow it the liberty to experiment with various permutations and combinations of process and management structures before arriving at the best fit to maximise value. Such structures could be within the organisation or they could be based on combinations of functions from more than one organisation, cutting across entity-barriers. The search for a best fit is a continuous process, and identification of the best structure will be possible only if flexible accounting structures are available to aid the process.

REAL TIME REPORTING. Current regulations stipulate that companies report to shareholders on their performance on a quarterly basis. However, the time-lag between performance and reporting results in imperfect information reaching the stockmarket and contributes to the widely observed phenomenon of price-volatility. This millennium, there will be pressure on organisations to bridge this time-lag and move towards monthly reporting, and finally, real-time reporting. Networking within the organisation and with external constituents will facilitate such a move. Developments of such far-reaching significance will lead to the dismantling of accounting set-ups within the organisations. In such a scenario, the transactions conducted across the organisation will get captured in their entirety on a real-time basis with the accounting role being taken over by the system itself.

TREASURY & RISK MANAGEMENT. The integration of the financial markets is expected to add enormous depth to markets and open exciting opportunities for the selection of funding and capital raising options. The growing maturity of financial markets and the development of innovative financial products, particularly derivatives-representing expectation differentials-will call for specialised skills in risk management. And the thrust on international trade, and the creation of networked organisation will call for the installation of a global treasury management system. Leveraging the strengths of the enterprise-both tangible and intangible-will emerge as the critical factor in exercising fund-raising options. While closely-knit financial markets will facilitate tapping all classes of investors for debt and equity options, it is likely that wholesale lenders will be preferred to cut transaction costs. However, markets will be highly sensitive to credit rating with the cost of lending directly linked to the inherent risks.

CATALYSING CHANGE. Change is both wonderful and painful. While some changes do take place in the normal course of events, many have to be forced into even dynamic organisations. The finance function, as the repository of organisational data, will have to analyse and moot change proposals which are essential to prepare the organisation for the future. Such activities include: the identification of low value-adding processes and reengineering them; relating the perspectives of each function to corporate goals and developing measures to align actions to the targets; and the development of ideas on how an effective, integrated strategy can be created. These, I believe, will keep finance managers busy in this century.

R.Seshasayee is the CEO of Ashok Leyland

Issue Contents Write to us Subscriptions Syndication