A sentence that usually sets off alarm bells for CFO’s is “It’s strategic”. This is usually code for a decision that seems to make no economic sense, but is so important to the business, the company “has to” do it anyway. Examples of this include, but are not limited to (1) an acquisition that the numbers don’t really justify, (2) launching a new product line that’s not correlated with the current one, (3) geographic expansion to a far corner of the world, (4) overpaying for a certain employee, and (5) going all-in on a particular trade show exhibit or booth construction.
Mainly, I have 2 issues with this approach.
First of all, most things that management teams call “strategic” are actually tactical. M&A is a tactic. It should get you into a market segment, a geography, a product category, and be tied to a broader strategy. In theory, your company will have done a build/buy/partner analysis against that strategy and decided that M&A is the tactic that best gets you there. Even in build stage companies, where deals are often opportunistic buys of smaller or faltering competitors, it’s only a tactic. If you’re chasing a deal because it’s “strategic”, something has gone awry already.
Second and maybe more importantly, a major decision that cannot be grounded in numbers of any kind is almost certainly going to go badly. For example: an acquisition that is dilutive on its face should get to being accretive because it helps you raise prices, lower costs, increase sales volume, cut G&A, something that has an economic return. This return should be based an assumption that an investor can see clearly and question, including seeing the sensitivity analysis around it. After all, it is their capital or stock you are proposing to use.
If an acquisition does none of these ‘strategic’ things, and is still dilutive except with heroic assumptions, it doesn’t make sense. Full stop.
Trade shows are trickier. I shiver a bit when I hear that a particularly splashy trade show presence for a build-stage company is necessary because I know from experience that nine times out of 10, it leads to heartache and lost ROI. I shiver even more when I hear that it’s for “brand building”. Brand building is a very expensive game. And, if we’re spending a lot to build our brand at a trade-show, I would advocate that this needs to be part of a broader strategy including customer service, how we package and deliver our products, fit and finish, you name it. You can’t overspend at CES and make these other things go away.
As CFO, you have to keep your eye on what matters. In my experience, something that is truly strategic will show up in the numbers.
The Build Stage CFO 