Abrams explains that the equation is about achieving balance. Ideally, a business should grow profitably — and as fast as possible — without unduly straining cash flow. That, however, is a neat trick, even if a company has the in-house talent to manage the strain that accompanies rapid growth, he adds.
Still, having a formula alone doesn't assure success, reckons management consultant Linda Feinholz. The reason is mainly that executives often balk at making needed operational or organizational changes when a project is focused on growth that is five or ten years in the future — and especially when the decision comes down from on high.
To get managers to buy in to such changes, according to Karen Spaun, CFO of $270 million Meadowbrook Insurance Group in Southfield, Michigan, it's easier for focus on value creation as a team sport. That strategy may have taken root while Spaun was a Division I swimmer for the University of Ohio, but it's a management philosophy that serves her well.
Although Spaun hasn't used Abrams's methodology because she is not familiar with it, she agrees with its premise that management needs to take an active role in monitoring growth goals and adjust business decisions to stay on track. To that end, Spaun uses homegrown budget and forecasting models to figure out how management's actions affect shareholder value.
Her models include balance-sheet totals, return on equity, and cost of capital, which get manipulated with "if/then statements," says the finance chief. For instance, says Spaun, "what would happen to our capital expenditure outlays or return on capital if we expand our fee-based business?"
Spaun's Excel-based models are used by all of Meadowbrook's department managers, who test out growth strategies and tactics before presenting them to the management team. She says the models go a long way to boost communication between operations and the finance department.
Indeed, the mathematics falls short without the human touch, says Abrams: "What matters is that management understands the value consequences of its actions."
Marie Leone's "Capital Ideas" column appears every other Thursday. Contact her at MarieLeone@cfo.com.
Reader Comments» Post a comment