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•Six Greatest Financial Necessities of Business Life 67

Ask yourself

Which ratios are the key ones for your business right now, and how is your last
year and this year performance against them?

Idea 43 – Never mind the profit, feel the cashflow

There once was a computer salesman, we’ll call him George, trying to sell his wares
to a company that sold and fitted tyres and exhausts for all models of car. He got on
well with the managing director and the sales director. With his help they were
starting to see the business benefits of using a computer to take over from a compli-
cated card system, which was how they controlled the stock. This was a long time
ago.

Our salesman felt reasonably confident that the order was his, until he was
mugged by the finance director, not with a physical blunt instrument but rather
with the esoteric blunt instrument of a discounted cashflow.

‘In this company’ announced the finance man, ‘we test all our capital invest-
ment projects against a hurdle rate of return, currently set at 21%.’ The salesman
understood neither the term hurdle rate of return nor how you arrived at the 21%.

The sales director explained the system using words, which first amazed George
and then started to unfold some of the mysteries of how companies make decisions.
‘The managing director and I make all the major decisions in this company,’ he
started, ‘and our gut feel has a reasonably impressive track record. However, with
the onset of shareholder capital and a new finance director we had to put in place
some of the business processes that executives, particularly finance executives, find
so necessary. One of the first was the system for financially evaluating purchases,
particularly capital expenditure.