Manager, the essentials for dialogue with financiers

OPEX, CAF, cash flow, working capital… the jargon of finance can seem obscure to non-financiers. 

This article explains the reasons why managers must acquire a minimum of knowledge in this area to feel comfortable with their financial interlocutors.

Mastering vocabulary, the starting point for dialogue with financiers

Every discipline involves a particular language and vocabulary. Those in finance are no exception. Indeed, this field is full of acronyms still too often incomprehensible to managers.

However, it is essential to acquire this language, this culture, these codes. All the more so when it comes to communicating clearly and effectively in an environment that uses a dual culture, French and Anglo-Saxon.

To talk about the activity of the company, for example, some use the expression OPEX (operational expenditure, expenses related to the activity) when others prefer the REX (operating result), the operating margin or the EBIT (Earnings before interest and taxes, the profit before interest and taxes) to express the same concept.

Thus, depending on the culture of the company, the course of the manager and the habits of the employees, the words and expressions can take on different meanings, or even be ambiguous. In this case, it is better to master the correspondence between the two cultures and fully understand the equivalences and specificities of each.

A constantly evolving environment and vocabulary

Contrary to what one might think, the financial environment, its vocabulary and its fundamentals also change over time.

Thus, less than twenty years ago, the financial debts of a company corresponded on average to four times the CAF (self-financing capacity). Today, we are more like three. Why do ratios that were intended to be rather considered immutable now find themselves marred by a certain volatility?

The reasons are many and profound. But two major causes stand out.

One is linked to a contraction of time under the effect of increasingly rapid and ubiquitous means of communication. Consequently, in a permanent analysis of the risk assessment of their clients and due to a lack of visibility on the future, bankers are forced to shorten the thresholds of their liquidity ratios.

The other cause is societal, within a world increasingly oriented towards abstract and immaterial approaches. Just look at the growing number of computer software and smartphone applications that are contributing to this change. Thus, the automation of the recording of accounting documents by artificial intelligence (AI) is always more effective.

Moreover, since the beginning of the 21st century, the share of immaterial fixed assets (patents, trademarks, operating licenses, etc.) has continued to grow to the detriment of material fixed assets. And this trend is not about to stop.

Beyond vocabulary, master accounting and financial mechanisms

Dialogue with financiers involves mastering both accounting mechanisms and financial principles. Understanding that a debt also corresponds to a resource may seem counter-intuitive for neophytes.

How is a negative WCR (working capital requirement) considered favorable in terms of cash flow? Why is the depreciation linked to fixed assets the cause of a decorrelation between cash (cash) and the result? How to act based on this information? So many questions for which any manager should be prepared, not to say seasoned!

However, corporate finance is not limited to the appropriation of a vocabulary or financial logic. Otherwise, the approach would be very simple, even simplistic.

Behind the mechanisms, paradoxes

This discipline conceals paradoxes and logics to be appropriated. This is the case of the financial scissors effect which follows a counter-intuitive logic. We speak of a scissors effect when two phenomena evolve in opposite ways, such as an increase and a decrease.

Let's take an example. When the turnover (CA) increases, the bank overdraft also deteriorates in the same proportion! In fact, cash decreases with the eventual appearance of a bank overdraft. This may seem surprising at first.

From this phenomenon, we deduce that it is better to seek to make cash the support of performance in order to align the two in the same direction.

There is also the case of financial leverage. It consists of increasing financial profitability by going into debt.

Managers must understand the financial consequences of their actions

In addition, the operational staff, in contact with the field, should absolutely understand the repercussions of their actions on all the financial aspects of the company.

Thus, granting too long payment terms to customers can be expensive. In terms of financial costs, but also by its consequences on the economic model of the company.

Is the game worth the candle? Does the margin justify this drift? To what extent does this decision influence the DSO (days sales outstanding), the average customer payment time? So many questions that management controllers would certainly not like to have to answer on a daily basis.

Knowing how to analyze the financial situation of a company, one's own or that of a competitor, remains a key skill to acquire for any manager.

A sales manager, for example, will find it difficult to make the decision to slow down or stop increasing his turnover because the company's cash flow is not there. This can be compared to stopping an army on the move whose logistics do not follow. In a way, this amounts to limiting oneself in order to maintain the balance of one's business and thus avoid putting it in jeopardy. Undeniably, it is to show mastery or wisdom. But above all, this requires a good knowledge of the notions, concepts and logic of corporate finance.

Any operational manager, whether or not he works in the financial field, must have these basic management skills.

This is a major asset for a good integration within a company, but it is also a personal investment for which any manager in the field or other should commit in order to constitute a solid background for his career.