I have met a number of people this week while networking, sparking interesting conversations. When asked what I do the word “finance” usually features even though I help people develop skills in other areas – like negotiation, communication and sales – where finance is not top of the list.
One conversation especially got me thinking. While the topic of our conversation was not about money or finance, the subtext was. When talking to my friends and Fellows at the Professional Speaking Association for example, the word professional means while we talk about lots of stuff (you can imagine…) it is the word professional that is the undercurrent to everything, because we speak for money.
But do not confuse subtext for importance, or priority. Money or finance is not the only thing to talk about, nor even is it the most important thing.
Finance is, I suggest, two things – an outcome and an enabler.
Many focus on the outcome – usually profit – and often as being the only reason for business.
Finance also enables people to be paid, investment to be made, things to be purchased – all of which should contribute to the business outcome but also contribute to the rest of society too.
There is much discussion about Purpose at the moment, and Mariana Mazzucato’s excellent book “The Value of Everything – Making and Taking in the Global Economy” shows how the primacy of shareholder value may be a suspect concept.
And please – whatever organisation you are engaged with- do not call yourself “not for profit”. Focus on what you ARE for and find a way to have more money coming in than going out. Finance will help you achieve what you are for, and properly managed will help you sleep at night too.
Buzzwords of the Week –Internal Rate of Return (IRR)
Definition – a metric used in capital budgeting to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.
Alternate View – the above definition is pretty opaque unless you are in finance. If you are investing, you want to make money (Return) despite the fact is takes time to come in and may not turn up at all.
So, you want a Rate of Return to account for the waiting and the risk.
This is Internal when it applies to one specific project or item of capital expenditure (like buying a new machine), as distinct form the overall Return when profit across the whole business is calculated.
I hope that makes it a bit easier – I spend longer on this when training it, and some case studies make it come alive. This is just a quick thought…