The next quite probable thing

Oct 10, 11:52 pm in Business

What is the next technology innovation that will open up a new field of opportunities for businesses and start-ups to capitalise on? Well, who cares? It is not only a very speculative question but also extremely difficult to get right. The ones who have got it right usually have had an unflawed logic and more importantly a lot of luck or the clout to create at least part of that prosperous future. A more, if not as sexy, approach is probably to look at businesses that will provide services to those next big things. Yes, here come the tents, pans and pots to the gold rushers again.

John Battelle’s book The Search about Google and the search industry just gave me such an idea. In the book Batelle describes a scenario where our search history is analysed and merged with our TV subscriptions (such as TiVO) to allow advertisers to plug downloaded TV shows with highly relevant commercials. The key point that Battelle points out is that this will change the fundamental economics of TV advertisements. It will turn TV into a new sales channel rather than just a marketing channel. Increased conversion ratios could make the economics viable enough for even smaller firms to use TV commercials. In addition to the scenario described by Battelle several other channels that will be more and more based on interactive services and moving pictures and hence suitable for tailored TV like commercials. Video on Demand services replacing DVD/VHS rentals, multimedia mobile phone messages, online games etc. all of these services will in one way or another be viewed by audiences with a known customer profile or even well described individuals driving the validity of Batelle’s proposed new TV commercial economy. The number of conversions should go up.

Provided that the above development starts to happen there will shortly be an increased demand for production of small and specialised moving image commercials. Who’s going to make all of these? The budgets of today’s commercials are starting to build up to small movie budgets. Does today’s production houses have the flexibility, nimbleness and desire to produce small and cost effective commercials? What about a production house working with a skeleton crew, fast cost effective digital production techniques and re-useable media assets to provide professional adverts at a minimum of lead-time? I think this can be a very interesting and lucrative area over the next 10 years.

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Not all roads lead to ROIC

Sep 25, 10:44 pm in Business

One of the most popular continuous business improvement techniques is Working Capital Reduction initiatives. The idea is straight forward – Minimise your capital in places where it is not generating a return. It is not obvious however that this translates into greater shareholder value. The danger is that the released capital is not put to valuable use.

Working Capital is defined as the difference between Current Assets and Current Liabilities. Current Assets consist of Operating Cash, Accounts Receivables, Inventories and Other current assets. Current Liabilities of Accounts Payable, Short term debt and the Current portion of long term debt and Accrued Liabilities.

There are four key strategies for reducing working capital.

  1. Reduce inventories
  2. Improve Order-to-Cash processes to reduce Accounts Receivables
  3. Work with suppliers to obtain more generous payment terms resulting in a slower turn-over of Accounts Payables
  4. Move operating cash to a non current item in the balance sheet. (E.g. pay off debt, invest in new products/markets, pay dividends, buy-back shares etc.)

Whilst all of these, if executed successfully, will result in reduced working capital only Strategy 4 will directly impact the Return on Invested Capital and hence Shareholder Value.

Strategy 1-3, if successful, will result in a reduced requirement of operating cash used to cover the duration between having to pay the company’s stakeholders and getting paid from its customers. The reduced cash requirement will eventually manifest itself as surplus cash. Management must take a conscious decision how to use this extra cash to generate the sought after additional shareholder value. If it’s allowed to just sit there this very tangible benefit will not contribute to an increase in value creation.

Shareholder Value is created from Working Capital Reduction when it results in the difference between required operating cash and operating cash is positive and that surplus cash is used to reduce invested capital or increase the net operating profit less adj. taxes. I.e. the company has more cash on hand than it needs to run its operations and can hence use that cash to reduce dept or equity liabilities or invest in new products or markets to increase net operating profit.

As a value oriented business improver it is not enough to successfully deliver a reduction of working capital we must also ensure that released capital is deployed where it can generate optimum shareholder value. Why not use the released capital as a ticket into the CFO’s office and your next big sell?

Comment [167]