A tale of two markets

A commercial corporation invests resources in buying, producing and bringing to market products and services, and collects in return new resources that feed a new cycle of production. These resources are, typically, money and other elements that eventually reduce to money. Money is the blood of the company, and it needs to circulate efficiently and in enough supply through all the phases of production and marketing as to ensure the organization’s survival and growth.

We see the corporation as an organization that deals with two outside markets, broadly speaking: the market of things and the market of money.

The market of things supply the corporation with capital goods (land and productive stuff), labor and raw materials that have to be procured at some cost. To this external market will the corporation return to sell its wares, products and services for a price.

Likewise, the market of money is where the corporation will go to procure the money it needs to function. This is the process of equity fund raising and debt financing in its different forms and maturities, which will come at a cost called cost of equity or interest respectively. When the corporation runs a surplus of money (after all economic costs of money are paid or accrued) then it can go back to the market of money to sell it in the form of investments, for a price called investment return.

A corporation then is an integrated system that buys products, services and money in the markets, and internally manages the transformation of these inputs into outputs of similar or different nature to sell back to the markets. The internal organization of the corporation must support this trade and transformation, first avoiding bottlenecks at any point of the processes and then maximizing the flow.

From an organizational point of view, ideally the CEO of the corporation would have just two chief officers with him: the Chief Operating Officer dealing with the markets of things (procurement of inputs, production and sale of end results) and the Chief Financial Officer (procurement of money, internal flow of money, investments). The rest of the organization would then follow from there. Indeed, this is a conceptual framework, and different companies would have different implementations, as well as whatever ancillary and support structure might be needed. Whether CEO, COO and CFO should or could be three separate persons is a different matter.

Here we see then that the role of the CFO is of maximum importance to the wellbeing of the corporation, its long term survival and growth, and for the growth of its owners’ wealth. Unfortunately, in many organizations this role is neglected or relegated to some accounting position, external even. Supposedly, all a CEO has to do is sell-sell-sell. No wonder so many companies fail for lack of adequate money supply, excessive price paid for it, overlooked financial and operating risks and clogs in the mechanism. Some companies even fail for too much success in the products market (too much sales) and lack of money flow to support it. In the more benign cases, carelessness in the financial department means money left on the table that would increase the company’s value and hence the shareholders’ wealth.

Call it Financial Strategy or Strategic Finance, the role of the CFO is to connect the corporation with the markets of money, ensuring that the whole business model is designed and executed consistently with a sound long term financial strategy, and aiding the CEO in his decision making with actionable information about the money health of the economic organism. Finance and Strategy must work together. Strategy without Finance is a business without management; a gamble, not a business.

Hence the role of Algatus Finance is to complement the CEO and CFO with the financial strategies and the strategies based on finance that ensure the optimal flow of money through the production and market processes, avoiding bottlenecks and maximizing shareholders’ returns.

In an economical setting, at the end of the day value is measured with money. Other functions of the organization create value dealing with proxies of it: products and services. We deal directly with the stuff: money.