What can corporate CFOs and their teams learn from investors? In business schools, you study corporate finance and learn how to decide which projects to invest in by using net present value (NPV) and related techniques. While investors know how to perform NPV calculations, they also look at the competition the firm faces. Investors know that a successful firm is usually a market leader with a strong value proposition and a dominant position in the industry. When you analyze investment projects the same way investors do, you should be able to achieve superior results.
NPV analysis assumes that a CFO can forecast cash flows, which can determine the profitability of a project. However, highly successful projects will draw in competitors that will eventually reduce profit margins unless the firm has a sustainable advantage. Investors know and CFOs should recognize that long-term profitability depends on factors like the market structure, barriers to entry, good management, and a good corporate culture. Firms with shortcomings in the development of younger managers or firms that face excessive barriers to exit will be less likely to produce high cash flows and therefore their projects will be less successful than expected.
When you analyze corporate projects the way investors do, you will be able to make decisions in a fuller context. You can look beyond the cash flow numbers and examine the factors that will make a difference in a way that will make your corporation grow. If your company is in a rapidly growing area like technology you face another challenge. As new markets develop, you must decide regularly whether to remain in your existing business or direct your firm toward a new market.
How can you go beyond the traditional corporate finance methods to find the right projects to add value to your company? In the Accenture Academy course Leveraging Market Structure for Corporate Success you will explore how to go beyond textbook NPV analysis and discover how to analyze a corporate division’s products the way an investor does.