Finance executives who still cling to lessons learned in MBA programs long ago, failing to grasp the realities of the new economy, may unwittingly expose their corporations to undue risk, says author James S. Sagner. He suggests that recent major accounting scandals and business failures are partly the result of finance’s failure to recognize that the new economy is destroying old-economy constants and to reexamine the way organizations do business.
Sagner challenges a dozen lessons taught to every finance student:
1. Maximizing profit and achieving a high return on equity is the number-one goal of business.
2. Working capital is a store of value and should be managed to attain a high current-asset-to-current-liability relationship.
3. The finance function is a specialized staff responsibility.
4. Companies should “own” critical finance functions.
5. Capital markets allocate funds to creditworthy businesses at reasonable cost to fund operating activities and strategic investments.
6. Banks offer a range of noncredit services to corporate borrowers at reasonable prices as a marketing component of their lending activities.
7. Capital budgeting procedures support strategic planning.
8. Rating agencies provide lenders, creditors and investors with objective evaluations of corporations’ financial positions.
9. Investment bankers provide professional advice to companies on the structure of their balance sheets, how to raise debt and equity, and similar matters.
10. Auditors provide control and prevent fraud.
11. Risk management involves individual functions of insurance, financial engineering and safety programs.
12. CFOs minimize capital costs and maximize returns.
[Business Finance annotation]
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