Cash flow is underappreciated and often misunderstood. While growth is the most common route to top- and bottom-quartile performance, it is cash that accounts for most of the shareholder return that a company generates over time. Beyond the simple truth that cash flow is king lies a less obvious point: investors do not value equally all dollars returned to shareholders.
In fact, the method of return—share buybacks, dividends, or debt repayment—can have a powerful secondary effect on valuation. Furthermore, well-sourced and well-executed deals can serve up substantial returns.
The factors that make successful acquirers successful are straightforward. They also invest disproportionately in three key areas. First, they craft a proprietary view of the ways that they create value. Valuation multiples are no longer a black box. We respectfully disagree. While multiples move somewhat randomly over short time periods as they incorporate a wide range of information about future profits and risk, they are not random and certainly not uncontrollable.
We have invested more than 20 years in building an analytical tool set that helps companies understand how their shares trade in public markets and which financial KPIs investors take as signals of a healthy or unhealthy business outlook. Our tools reveal the key drivers of valuation, which, in turn, can reveal strategic information about a business. See Exhibit 3. One can point to countless examples. Investors in financial services put a premium on return on tangible equity.
Biotech investors value forward-growth expectations—almost without regard to current profitability. The drivers of valuation provide a rich and refined tool for common managerial tradeoffs, such as driving growth at the expense of margins or reinvesting free cash flow instead of paying down debt. The shape and asymmetry of investment opportunities are far more important than the precision of the calculations behind them. Too often, senior management wastes time and energy trying to get the data inputs for their models precisely right.
What managers should be evaluating is how a proposed investment compares with the next-best use of capital. If the difference in the cost of capital assumptions within reasonable bounds reduces the attractiveness of an investment, it has likely already failed the test.
Even more important, excessive focus on technical precision takes time and effort away from the more meaningful determinants of investment decisions, such as the reliability and asymmetry of the forecast and whether there are any accounting principles at play that decouple reported earnings from cash flow. Management time and attention are much better spent on pressure-testing key assumptions, contrasting different approaches for evaluation such as cash versus accounting metrics , and considering the different competitive scenarios in which the investment could unfold.
It is also one that requires top-level sponsorship and long-term attention. It must be sustained and adapted to changing market conditions. Otherwise, be assured that internal branding traction will be lost.
How can HR justify the added cost of such an aggressive internal branding programme? To be sure, these efforts have to lead to measurable results and tangible savings. On-brand selection processes further result in a higher yield rate in job offers accepted. Moreover, it should be no surprise that people like to work at organizations where there is an attitudinal and cultural fit.
This translates into higher retention — reducing costly turnover — and even lower absenteeism. There are already accepted ways of monetizing these returns and, when added up, they will more than cover the budget required for the programme. This is less about doing new things, than doing things different. Communicating and living the brand through HR also results in higher pride, a greater sense of common purpose and higher motivation levels. Motivated people who fully support the brand and understand their individual role in delivering the right customer experience are also likely to be more productive.
Needless to say, recruiting and developing people 'on brand' will also affect the customer experience - one that typically spans "moments-that-matter" delivered by functional silos. People across the organisation will know how to behave in order to deliver the advertised brand promise, thereby enriching the top line. Ultimately, brands that are created from the inside out are the foundation for a difficult-to-imitate competitive advantage.
No matter. In uncertainty, as everybody knows, there is opportunity. And for Brand Britain to grasp this opportunity, it cannot afford the British habits of self-deprecation and ambivalence. And behave accordingly. I have a 3Bs framework for this: aligning business, brand and behaviour. Maybe if Britain learns from corporate experience, it can avoid becoming a nation of Bregretters.
The British government can help people reconnect with their identity, reframe the values that define the culture, and position Britain's role in Europe and the wider world for a new era.
This behaviour will reflect on Brand Britain. Rather than think of it as a cost, it should be seen as an investment. Ultimately, brands are about identity and emotions. And, without empathy, Brexit may well have the same chilling effect of the separation of the British Isles from continental Europe following the last glacial period. What is the national brand in question anyway?
Rather, it is a house of brands such as Unilever that owns power brands such as Dove, Axe or Lynx , Lipton and Knorr, to name just a few. The brand architecture is complex, but purposeful. Britishness too is a layered identity. And, of course, each comes in different flavours, just like London, the Lake District and Cumbria are all English yet different. Britishness is layered on much older identities of being English, Irish, Scottish and Welsh, which continue to resist a homogenised British identity.
People differ in the degree to which they consider themselves as English versus British, for example, with some rejecting either aspect entirely. And it gets even more complicated when considering the EU: Remainers might add a dollop of Europeanness to their identity, which surely is a concept entirely foreign to the identity of most Brexiteers.
But what is the identity-defining purpose of a nation? A nation is a body of people of a particular territory, united by common heritage, history, culture, or language. And to re define the British brand, one must deep dive into its DNA, values, culture, key moments in history and the iconic people that continued to shape it. The British national identity finds its roots at least as far back as Magna Carta in, still an important symbol of liberty today. Britishness has political and moral foundations, such as tolerance, meritocracy and freedom of expression.
What was the purpose of this union? What led to its expansion to include Wales and Ireland later on? Or the demerger of the Republic of Ireland in ? Purpose and identity are closely linked, and the notion of Britishness was strengthened during the Napoleonic wars, when it was one defined primarily by virtue of not being French or Catholic. A more pragmatic purpose was the growth and wealth creation of the British Empire, one that cemented the union.
Money is also part of the Brexit equation, but the Remainers missed a vital ingredient by ignoring the role that identity played during the vote. And the government is in danger of playing a short game by focusing on the uncertain economics of Brexit without understanding the vital long-term implications of a strong British identity. The Brexiteers certainly knew how to play up historic identity battles with the Continent and the otherness of immigrants to fuel patriotism.
In making its mark in the world, the UK has needed a range of soft skills: persuasiveness, diplomacy, creativity, ingenuity.
These are skills that Brexit Britain should consider rediscovering and using to their maximum potential. Mass immigration to the UK from the Commonwealth after the British Nationality Act , and from all over the world since, has created an eclectic and vibrant expression and experience of cultural life exemplified in London. More than languages are spoken in the capital, which has the largest non-white population of any European city.
In November , a BBC poll of more than a million people identified their greatest Britons of all time. Winston Churchill topped the chart, with engineer Isambard Kingdom Brunel in second place and Princess Diana in third. The list included artists, writers, royalty, scientists, explorers, military giants and, of course, a Beatle.
As the list illustrates, Britain has long been a hotbed of innovation, with major contributions to global culture, literature and the arts. Brits contributed to world-changing inventions in global communications electronic telegraph, telephone, worldwide web , the media photography, television , industry cement, stainless steel, spinning frame, steam engine, electric motor , and even the humble toothbrush. Its education system at all levels is envied and has been copied around the world.
But a brand is not simply a laundry list of all possible ingredients that make up its DNA. The genes of the DNA ingredients need to be boiled down and fit together as a coherent whole.
But to create a compelling brand, the DNA is not enough. One has to consider the voice of the target audiences, whose attitudes and behaviours the brand should ultimately affect. The Red Arrows know who they are, but in order to be a force for stimulating UK economic growth — their new remit of their air shows when travelling the world — they need to understand the goals of their different audience members, and then marry these insights up with what their DNA has to offer.
To do so, you have to look for a universal insight that unites, rather than differentiates these audiences. Unilever has many audiences ranging from their own employees to regulators, communities, investors, customers and consumers.
But they all can relate to their corporate purpose. For whom, in the long-term, should the brand be crafted? What are their goals? In what ways can Britain and Britishness authentically relate to these? While the brand message can be articulated in different ways to different stakeholders, the brand idea must have a consistent and coherent voice. External stakeholders too have different goals: Brexit affects them in different ways. The remaining 27 EU members will certainly feel different about Brexit than non-EU countries, who see new opportunities in a more independent UK.
Starting internally may well be the way to go: finding common ground for a nation divided. London stands apart from most of England, and Northern Ireland and Scotland voted to remain. It is therefore important to not get seduced by the notion of trying to forge a new Britishness around the identity of the Brexiteers. Exit polls and regional voting patterns suggest that they were, on average, older and less educated than the Remainers. Also, as the polling organisation YouGov showed, the brands preferred by voters differed substantially, even when correcting for demographic factors.
This is no value judgement but a call to look at what unites rather than what divides them. Whatever brand idea is created at the overlap of the DNA and audience insight, this is only the design of the brand strategy — one that needs a plan to be successfully executed.
This is not about the big campaign. This is about the thousands of behaviours that add up. Take Southwest airlines.
They are not just cheap, but their brand promise to weary travellers is that it will be a cheerful experience. And their people exhibit true missionary zeal, with constant smiles and creative in-flight announcements. All of its people processes are dedicated to attracting, selecting, developing and rewarding the hardworking "Fun-LUVing Attitude" that is one of its core values.
All this so that its people can deliver fun moments-that-matter. And Southwest is an example not too far-fetched for Brand Britain to learn from. Think of all the touchpoints that a migrant, foreign student, tourist or business traveller has. When Glasgow wanted to improve its image, city leaders worked with taxi drivers.
These moments all matter. And there are usually humans behind them. Because your people are more likely to follow your example than your carefully-crafted words. Similarly, in Brexit Britain, though the Brexiteers insisted they did not want to keep out migrants who worked and paid tax, their message is interpreted bluntly by many who hear it.
But building a strong brand is not just about avoiding missteps or misperceptions. It does so by generating more wealth for shareholders. For example, suppose the company is public. In that case, it is reflected in the dividends distributed and the increase in its stock price. To do so, the company must have a sustainable competitive advantage to generate returns above the average competitor. Customer value creation means offering a valuable product for which the customer is willing to spend more.
It requires companies to add value to what they offer. But, it also requires the company in other aspects such as customer convenience when interacting with salespeople.
Branding is another aspect. Businesses produce goods and services by adding value to the inputs they use. For example, a tire manufacturer converts cheap rubber latex into tires and sells it many times. Creating value allows companies to differentiate their products from those of competitors.
By doing so, they can secure their customers in the long run, allowing the money to continue to flow to them. First , the company makes a profit with it. By adding value, they can charge a price higher than the dollar they pay suppliers. Added value does allow businesses to generate profits. However, adding value alone is not enough.
The benefits of a value creation agenda go beyond markers of success - they also allow business leaders to identify principal opportunities and risks related to the organization's strategy and business model. And they enable organizations to communicate to a variety of external stakeholder, not just shareholders alone, about the company's impact on society. Accountants are well-positioned to lead a value creation agenda.
Taking on this value creation mindset will also reinforce the role of the CFO and finance team as effective business partners within an organization. More information on value creation from across the global accounting profession is available via our resource page: Rethinking Value Creation. Value creation is the key for CFOs and finance functions to become effective partners rather than being perceived as a back-office function.
Adopting a value creation agenda can help organizations evolve their business models in response to the challenges posed by COVID To leave a comment below, login or register with IFAC.
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