Insights NewsletterUncategorized

The Downside of Precision, the Hulk Inside Life Sciences and Thinking Cash, Cash, Cash

By September 24, 2019 December 20th, 2019 No Comments

Three takeaways from 2019 H1 peer group meetings selected by NeuGroup founder Joseph Neu.

Here are three insights that stood that stood out to me from our first half meetings:

Sometimes precision works against you. Too much precision can muddle the early stages of assessing risk. When pursuing the first steps, risk professionals may want to look past their desire to employ precise information and start instead with ballpark estimates

  • “As you get more precise, the culture of some companies or groups within companies will tend to get into debates about whether a precise risk measurement is right or wrong,” said a member of the Internal Auditors’ Peer Group at a recent meeting. “To avoid going in that direction, we try to simplify.” The PDF is here.

Why it matters: The spectrum of risks continues to grow in scope and potential impact. When tackling enterprise risk management or internal audit, therefore, it’s critical not to get too hung up on detailed quantification. It might suffice to ask, “Is this a material risk to the survival of the company, or not,” for example.

Binary reality: life sciences companies swing from the Hulk to Bruce Banner. Treasurers grapple with capital allocation issues as cash flows wax and wane with drug approvals, expiring patents and other ups and downs. There’s nothing like dramatic stock price moves to illustrate the feast or famine nature of revenue and cash flow at life sciences companies that live or die by the success or failure of clinical trials for drugs or devices. 

  • To kick off a discussion on how this binary reality affects financial strategy, one member of the Life Sciences Treasurers’ Peer Group showed his peers a chart of his company’s stock dropping fast from the upper left to the lower right. 
  • The firsthand account of this company’s binary bind sparked a wide-ranging discussion about the challenges of capital allocation and structure at companies that one day resemble the Incredible Hulk (successful drugs coming out of the pipeline, fast growth, high margins) and then revert to being a not-so-incredible Bruce Banner (drugs going off patent, sluggish pipelines, flat revenues)—and back again. PDF is here.

Why it matters: Expected values, including VaR and even NPV may not fully capture binary events. If you are on the wrong side of the option tree, you can be totally off course, so it’s best to understand potential binary outcomes in financial planning and analysis.

Broaden scope to think cash, “end to end.” Treasury organizations can drive home the idea of the entire organization thinking about cash. A member shared his treasury organization and the plan to scale it with the growth of the company while containing cost increases. The underlying structure—one that encompasses a broad treasury and finance organization (TFO)—will support this objective in many tangible and intangible ways. 

  • Consolidating all the company’s functions that touch cash and forecast and manage exposures under the treasurer, including FP&A and credit and collections, makes for a large group, but it bolsters the treasurer’s strategic influence at a leadership level. From our Tech20 meeting. PDF is here.

Why it matters: Rescoping finance as a growth company, before turf grows to protect, can make the finance function exponentially more scalable and effective. Doing this around cash also is transformative. 

Members will find the full meeting summaries on their communities. Enjoy!

Christina Popik

Author Christina Popik

More posts by Christina Popik

Leave a Reply