Much has been written about how finance organizations can become strategic partners with the businesses they support. While purported experts point to a variety of frameworks, scorecards and key performance indicators, etc. as the keys to bridging the gap between finance and business, these trite ‘solutions’ have done little to make finance the strategic business partner it seeks to be. Worse yet, pursuing these ideas has put finance organizations on a treadmill where they expend energy and resources (e.g., money and time) ultimately to get nowhere while the issue persists. So if you are still looking for a silver bullet or quick fix to this seemingly incurable problem, stop reading now.

Given the time, money and effort spent, you may be a bit demoralized and even speculating that the finance-business chasm cannot be crossed. Paradoxically, the link between finance and the business has been under finance’s proverbial nose for some time – resource allocation. A serious concerted effort to optimize an organization’s resource allocation ultimately enables finance to develop the bridge between finance and strategy. This discipline known as corporate portfolio management works to actively manage the company’s resource allocation as a portfolio of discretionary investments. All companies allocate their resources – very few optimize their resource allocation. Finance is uniquely positioned to enable this because they sit at the nexus of information and data required to undertake a corporate portfolio management effort. (Note: Corporate portfolio management is often referred to by different terms so as a point of reference, terms such as IT portfolio management, enterprise portfolio management, product portfolio management, project portfolio management, resource allocation and investment optimization are similar. In fact, these all are slices or subsets of corporate portfolio management.)

From Resource Allocation to Strategy

First, it is worth understanding the tie between resource allocation and strategy – they are the same. Where you allocate your resources is your strategy. PowerPoint presentations, speeches by senior leadership, strategy bullets nicely framed on a wall, etc. are all interesting and potentially useful, but they are not your organization’s strategy. For instance, if your stated corporate strategy is to have the most engaged and loyal customers (this sounds good, right?), but you allocate all your investment dollars to acquiring new customers, your strategy is actually around customer acquisition. This is a very simple example but clearly demonstrates the dichotomy that can and often exists between a stated and real strategy.

A great article entitled “How Managers’ Everyday Decisions Create – or Destroy – Your Company’s Strategy” that recently appeared in the Harvard Business Review (February 2007) nicely articulated the connection between resource allocation and strategy and also pointed to the need for a corporate portfolio management discipline. “How business really gets done has little connection to the strategy developed at corporate headquarters. Rather, strategy is crafted, step by step, as managers at all levels of a company – be it a small firm or a large multinational – commit resources to policies, programs, people and facilities. Because this is true, senior management might consider focusing less attention on thinking through the company’s formal strategy and more attention on the processes by which the company allocates resources.”

The upshot of this is that if finance can enable the process to enable better resource allocation (which is strategy), they will have succeeded in becoming a de facto strategic partner to the business.

The Two Levers of Corporate Portfolio Management

So now the question turns to how to build a corporate portfolio management discipline and ensure its success. A successful corporate portfolio management effort is predicated on two dimensions.

1. Modern Portfolio Theory (aka the process) – This is what people generally think of when they think of corporate portfolio management. It is comprised of:

* Investment valuation – This includes defining what an investment is. It is worthwhile to take an expansive definition of what comprises an investment because this is not just capital expenditures (capex), but also should include operating expenses (opex). In general, 25-40% of an organization’s expenses are discretionary and hence are investments. Investment valuation also requires consistency of valuation methodology which necessitates using driver-based models to create projections and also looking at past NPVs and ROIs to consider strategy and other qualitative aspects that drive investment ‘value’.

* Portfolio allocation – This requires determining investment areas/themes and the associated allocations. Basically, what are my strategic priorities for investment and how much will go to each area? For example, 25% in customer acquisition, 20% in IT, 55% in customer retention. The allocation should also consider the risk profile of investments, e.g., 60% in low risk, 30% in medium risk and 10% in high risk.

* Portfolio optimization – This requires selecting the best investments to support the portfolio allocation and periodically rebalancing the portfolio to ensure consistency with desired portfolio allocations. The aim is to maximize strategic and financial return per unit of risk.

* Performance measurement – A key element of successful corporate portfolio management is capturing actual investment results to enable promise vs. performance. Doing this ultimately lets an organization improve ongoing investment valuation based on actual results and allows it to rebalance the portfolio based on performance achieved.

Most people with a finance background will recognize the above tenets of portfolio theory. The problem with most of the discussion of corporate portfolio management is that it assumes that people behave according to a theoretical/rational construct. While various experts like to offer platitudes saying things like, “Just manage your company’s investments like you manage your own investments,” they fail to realize that many individuals may not even manage their own personal portfolios as they should. They may know what they should do but emotions, intuition, and other external influences take them off this rational path. What often leads us astray in our personal portfolio is what leads us astray in an organizational setting – behavior. The challenge in an organization is magnified by the fact that it is hundreds or thousands of people whose behavior that needs to be considered. And so this is the second fundamental lever of corporate portfolio management – organizational behavior.

2. Organizational Behavior – In order to optimize one’s corporate portfolio, the behavioral elements must be understood with:

o A data-driven mindset – Organizations often make decibel- or intuition-led decisions and corporate portfolio management, like 6-Sigma, requires data and analytical decision making.

o Silos removed – Corporate portfolio management success requires people thinking about what is best for the organization and not just what is best for “my world” – silos and organizational dynasties need to be broken down.

o Incentive alignment – People should be motivated by similar short- and long-term incentives.

o Accountability & transparency – There should be a willingness to share information and effectively create a marketplace for investments.

Moving organizational behavior is the larger challenge and this takes time to change. At American Express, we have actively worked on changing organizational behavior and have made significant inroads over time, but it has not happened overnight. We have conducted cross unit investment reviews, sponsored an internal corporate portfolio management conference and even created a resource allocation simulation to visibly demonstrate the benefit of corporate portfolio management.

One of the great things about being a professional investor is the opportunity one has to apply his or her long-term experience to the investment environment that is unfolding (or coming unglued) in the present. If nothing else, most successful investors develop a consistent strategy that allows them to take advantage of short-term changes and the opportunities that they create in a somewhat unemotional manner. You can always tell a “newbie” by a “let’s see how you do for a year” comment, or a “what’s hot” question.

Wall Street would like us to ignore the fact that the stock market is a cyclical beast that changes direction periodically, and almost never at the turn of a calendar quarter or year— cycles vary in length, breadth, and direction. Inevitably, less experienced investors get caught with their portfolio egos unprepared for market realities.

Similarly, Wall Street would like investors to look at income securities (bonds, CEFs, preferred stocks, etc.) with the same analytical eye that they use for equities. They too are expected to grow in market value forever, even though it’s the income that the investor is after. High total returns mean missed profit taking opportunities more often than they signal increased income.

So as much as the wizards would like us to believe (a) that up arrows are always good and down arrows always bad, and (b) that they can get you safely hedged (protected) against the bad stuff with all forms of creative portfolio care products; its just never going to work that way.

Cycles are a good thing. They cleanse the markets of both fear and greed residue, and (all appendages crossed please) this time, perhaps, they’ll point out that both multi-level derivatives and congressional tinkering don’t ever produce the intended results.

Unfortunately, investors in general are a lot like teenagers. They know everything immediately; expect instant gratification; take unnecessary risks; fall in love too easily; ignore all voices of experience; prefer the easy approach; and feel that the lessons of the past just can’t possibly apply to what’s going on now. Duh, dude!

That said, what can Joe the plumber do to protect his 401(k), IRA, or personal investment portfolio from the Bernies, Nancys, and Harrys that are waiting in ambush? How does he protect himself from unregulated scams, and Wall Street toxins now, and into the future?

Well, it requires a slightly more mature mindset than the new media allows most investors the patience to develop, and an appreciation of the miracle drugs that have saved the lives of comatose portfolios victimized by the correction viruses of the past.

What if: (1) In the 30’s, you had purchased shares in from 20 to 40 prominent, dividend paying, NYSE companies, or even in October ’87, or ’97. Now, if you had sold all those issues that gained 10%, and reinvested 70% of the profits keeping a diversified portfolio of similar stocks, hitting “replay” religiously, how much more market value would you have today?

What if: (2) At the same start date, 30% of your portfolio was placed in high quality income securities, and 30% of the income produced (and the remainder of that produced by equity profits) was reinvested similarly, how much more income would you have today than you do now?

If you combined the two analyses, how much more working capital would be in your wallet? You would be amazed at the results of this research; it would lead you to these portfolio life saving, and KISS-principle preserving, conclusions:

One: Every market up cycle produces profit-taking opportunities, and all reasonable profits should be realized— in spite of the taxes. Two: Every market down cycle produces buying opportunities, and buying activities of three kinds must be continued throughout the downturn.

Three: Compound income growth is a wonderful thing, so find investment vehicles that can be added to routinely and, if spend you must, always spend less than you make. Four: Unhappily, nearly all of your past decision-making has been back—wards.

Just as the process described above is significantly more difficult to implement with mutual funds and other products, so too is the three-pronged strategy for dealing with market opportunities.

Reinvest portfolio generated income in three ways, and leisurely according to your planned, working-capital-calculated, asset allocation. Good judgment and an awareness of overall industry conditions are always required:

One: Add new equity positions, in new industries if possible, and keep initial positions smaller than usual. Never buy a stock that does not meet all Working Capital Model (WCM) selection criteria, and never stray more than 5% from your overall portfolio asset allocation guidelines.

These acquisitions should be monitored closely for quick turnover, at net/net profits of from seven to ten percent, depending on the amount of smart cash (WCM again) in your portfolio.

Two: Add new income positions when yields are unusually or artificially high, and watch for quick profits in this area as well. When yields are normal or lower than normal, diversify into new areas. For better results, do more “ones” than “twos” if possible.

Three: Add to positions in stocks that have maintained their quality rating and dividend while falling 30% or more from your cost basis. If the addition doesn’t produce a significant change in cost per share, return to “one” or “two”.

What will you do to differentiate your financial organization in a time of stagnant economic stimulus?

Outsourcing is still growing, and historically, back-office information technology functions have taken a front seat in most outsourcing initiatives. However, in the coming years, chief financial officers and chief information officers will work collaboratively in spending significant time and effort to continue aggressively cutting costs and strategically streamlining front-office functions.

This phenomenon occurs because technology is a key driver in the financial services industry. As a result, larger organizations have been bullied into retaining and growing large IT staffs to accommodate their need for specialized systems with innovative attributes and functionality. Successful small to mid-sized firms have relied on outsourcing vendors to help create an environment and staff with the right mix of experience and talent to accomplish what larger organizations have permanent staff in place to achieve.

As your institution migrates to a more strategic financial model, a strategic consulting firm can help you fill gaps and make adjustments to your financial road map that should address these questions:

How should we engage IT through the process? What amount of interaction and input will we need from that part of our organization?
How will our financial service organizations remain confident that they can control risk and remain in control of the business when moving to an outsourced model?
How will we know whether a vendor can conform to our regulatory requirements?
How will our organization continuously improve cost and efficiency after transition to a service provider?

When outsourcing your financial functions, there becomes the ability to hand over things such as risk, compliance and management. In today’s competitive economy, outsourcing should not only be used to reduce cost, but should be used to achieve strategic initiatives. Do not just hand over control of your company; create a line of attack using leading practice methodology and a service provider that will differentiate your institution from the leading competitors. Think strategy!

The average investor’s thinking needs to change. We need to teach ourselves to invest in the stock market using common sense, not emotion. I treat my investment activities like a business. If a trade is not working out as I had planned, I close it out and move on to the next one.

My real estate investor clients have told me that the profit is made at the purchase of a property, not on the resale. Can that be applied to the stock market? Sure, my clients do that very thing.

A change in thinking will shift your focus from hoping for a particular trades increase in value to monitoring the trade during its expected life. I say expected life because that is known prior to entering into the trade. Yes, you will have a definite exit strategy!

You need to learn to train yourself to operate your investing activities like a business, watching the trade through its life cycle. I can assure you that you will feel in control and not at the whim of the stock market.

Did you know that there are stock market investing strategies that allow you significantly more control over the outcome? I know that the stock markets most successful investors do not just hope things go their way. They simply use the tools at their disposal to give them the best chance of success.

Successful investors use strategies that tip the odds in their favor, and they have learned to treat investing as a business. What are these strategies? Well, that is beyond the scope of this article. However, in order to find the success you are looking for you can start by changing the way you think.

Is investing in today’s stock market a frightening thought? Why not consider investing in real estate?

With most of the media focusing on the “great depression” and the “market’s volatility” it’s hard to remember that “all real estate is local.” Falling prices can bring real opportunities and now may be the time for you to consider investing in real estate.

Selecting an investment strategy that works best with your own strengths and goals is key. Have you ever considered any the following real estate investment strategies?

Creative Acquisition: You will need money – or – partner up with someone that has some. Creative Acquisition answers the question: How can I get this deal done? Some people have said that this is the REAL real estate acquisition strategy.

Joint Venture: Build a team. Make sure each team member brings something to the table. Money. Credit. Confidence. Resources. People Skills. It’s all good. This strategy proves the power of leverage.

Lease Option: This strategy combines two elements: (1) a lease which gives the rights to reside in the property and (2) an option to buy that property at a later date. You’d better know what you are doing and your individual state laws when structuring a Lease Option deal!

Master Lease: A good master lease example is if you lease an office building from an owner and then sublease individual units to tenants. The lease between you, the investor, and the property owner is called the Master Lease. You will not necessarily need lots of money or credit, but you’d better be good at negotiating and understanding complex contracts!

Subject To: Using this strategy, an investor purchases a property “subject to” the current owner’s financing staying in place. As some have said, “You get the deed, but you don’t get the debt.” Do you have bad credit? It’s not a problem when using this strategy! This one is my personal favorite.

The objective is to match your strengths and goals to the strategies you decide to use!
Happy Investing!

Judith Dudley

Judith Dudley

President, Alternative Sources, Inc.

There’s a boom going on and it is towards continued investment in second homes. Of late second home purchases have represented a significant percentage of all homes sold in the developed western world. Of particular note are investment strategies in high-demand holiday or vacation areas and high growth investment locations. Investors are now considering their second homes as better investments than stocks, with many purchasers indicating they planned to buy additional properties within two years to grow their portfolio.

Financing for second home investments has become easier in recent years with financial institutions or lenders recognizing the pattern of property speculation and the need for second home loans to support these initiatives.

Landlords and Mortgages

When considering second home loans at a minimum the lender or financial service organization will want to see proof that you’re actually going to generate decent returns or cash flow from your investment. This will be considered to cover at minimum the majority of the costs or outgoings, but often the profits too. Often, the lender will ask for a business plan or statement of income for the property. You shouldn’t count on your bank taking into account your second home’s estimated rental income into consideration without a track record. You as the purchaser/owner may veer towards optimism, where the bank will veer towards pessimism. Even for a property with a long rental history most professional lenders will only consider 75% to 80% of the value for investment. So it is very important that you consider your sources of finance, the type of finance and the value of finance before you search for property.

There are a number of sources of funds for second home loans that may be considered by investors.

Equity release finance is one such source where mortgage property is used as collateral for additional property funds. In this instance the value of a current property that you own or part own is assessed to determine how much capital is available based on the outstanding mortgage and present value. An extension to your mortgage may then be granted to support new investment initiatives. The benefit of this finance is that it is often cheaper to finance when based on the original mortgage rate.

Second Mortgage finance or second mortgages are the way in which homeowners finance second home purchases. These funds may be used for down payments on 2nd homes, or for home improvements or extensions on primary homes. The benefit to this form of finance is that the finance is often associated with the original mortgage for security and subsequently is often cheaper.

The decision to use equity release investment funds with a mortgage refinance or to apply for a second mortgage for second home loans depends primarily on the needs of your investment and your ability to repay the new loan. If you have a low interest rate and favorable terms on your existing mortgage, you may want to consider a second mortgage for financing the down payment to purchase your investment property.

In the current climate a lot of companies are experiencing critical cash shortages. Business owners need to understand how to finance their enterprise. The Board has the responsibility in this process to make sure that the correct financing strategies are in place, and are well focused and resourced.

The Board should make sure that the financing strategies cover the following 10 questions:

1. Is it the right time to seek financing?

2. Will the required financing be enough to meet the needs of the company?

3. Are the documents to support the financing request completed to high quality professional standards?

4. Does the company have an experienced and competent management team that can deliver against the strategies and plans?

5. Are the right financial instruments being investigated (utilised) and in conformity with all securities laws and regulations?

6. Are the right sources being approached?

7. Have all opportunities to release cash from the balance sheet been explored?

8. Is the optimum capital structure in place to sustain growth and allow for future capital raises, if they are required?

9. Is there an adequate cash management system in place to protect the money lent or invested into the company?

10. Will the company be able to afford the financing being sought?

Many company owners complain about their difficulty in obtaining the financing they want. Their frustration is linked to their doubts that investors are ready to put money in to companies experiencing temporary cash shortage. I do agree that the current economic and financial climate has made it more difficult to get cash, yet I would stress that there is no shortage of available money. In fact, in my experience, there is a shortage of companies who can step up to the mark and demonstrate what investors are looking for. Such companies would have put in place viable strategies; have plans on how to tap into new market opportunities; have the right talented management teams that can seize those opportunities and who can execute the plans well. Even when all of those ingredients are in place, I often observe that company owners are unrealistic about the valuation of their company and refuse to give up sufficient equity to attract the level of investment they require. Put simply – it is better to own a small percentage of a very successful company rather than 100% of a failed one.

Importing and exporting are only some of the duties business owners make to gain better reputation and finances. However, some business owners wish to improve their safety by opting for financial solutions such as import finance strategies. This option offers numerous features, but there are still ways to improve such service. Below are some of the following.

Know import rules and regulations

In order to improve import finance strategies, business owners need to mindful about import rules and regulations of countries. Of course, there are cases when businesses have overseas clients. Therefore, you need to have sufficient knowledge about import rules and regulations. This is important to avoid delays. In addition, having sufficient knowledge about shipping regulations will help make ventures better and more efficient for both buyer and seller.

Opt for the right payment method

The next way business owners need to do in order to improve their import finance strategies is by opting for the right payment method. As of now, business owners can opt for numerous payment options for their import finance solutions such as bills of exchange arrangement, letter of credit and open account. These options can provide the best features that can help make transactions safer and more effective. However, you need to be aware about charges and hidden fees from such options.

Be cautious in choosing the financial institution to work with

Another option that business owners can do to improve their import finance strategies is to be cautious in choosing financial institutions to work with. Of course, there are numerous financial institutions that offer such services. However, not all institutions can provide you the right service that can match your needs. So, it is best for business owners to spend time determining their service to help them assess if they can gain wonderful benefits.

Find alternatives

Finally, it is also best for business owners to find alternatives. Surely, import finance solutions from reliable financial institutions are very effective. Not to mention, this service can secure both buyers and sellers. But, there are still cases when issues can affect such strategy. Therefore, finding alternatives can be a good plan. For instance, you can choose to pay for your orders in advance, but make sure to pay for low value shipments only. Or perhaps, when paying a foreign supplier, you can send payments electronically. And, you can also open an account with suppliers if you are working with them for a long time.

Knowing all these tips can help owners improve their ventures which can help them become better and more profitable.

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All businesses rely on their cash funds to operate. Although most businesses typically depend on a steady cash flow to sustain their venture, unfortunately, importing companies usually do not enjoy such liberties. This is mainly because import companies have long cash flow cycles.

Businesses in the import industry will therefore need to have and use the right financing strategies in place so that their venture won’t go under. In addition, owners of import businesses shouldn’t be complacent with the financing strategies they have; they should find ways to improve them.

Below are some tips for businesses on improving their finance strategies:

Be mindful and keep track of all relevant rules and regulations of import. To effectively import finance strategies, owners of importing businesses need to be aware of the regulations and rules set by the different countries for import. Being knowledgeable of all applicable rules and regulations of import finance strategies is important to keep things fast. In addition, knowing the key shipping details and rules is crucial because this helps increase understanding of the whole business.

Select the most suitable payment method. Choosing the right payment method is another important step business owners need to improve their import finance strategies. The most common payment methods import business owners can choose from include Letters of Credit or LOC, bills of exchange arrangement, and open account. According to finance experts, these options are considered the best in the import and export industry since they make transactions easier. If you are still in the process of selecting your payment method, make sure that you know the transaction fees and hidden charges before making your final decision.

Choose a good and reliable financial institution to work with. Selecting a trustworthy financing partner is also crucial in improving your finance strategies. Although there are numerous of these institutions today, not all these establishments can fit your business needs. Take the time to do sufficient research on these institutions and check their services so that you can make a choice that can promise the best returns.

Have contingencies in place. Finally, make sure you have substitutes. Various financing institutions offer solutions that can help secure the interests of both the sellers and buyers. However, a few issues may arise that can have a long-lasting impact on your company’s import finance strategies. Because of this, it is important to search for substitutes. For instance, if you choose to pay for your order beforehand, do this only for low value shipments. With long-term business partners, consider opening an account with them. This strategy can help you to be secure and have a more profitable business.

When you need to fill positions within the finance department, it is important that you create a hiring strategy. Finance recruiters will be able to help you fulfill the strategy entirely so that you can focus on other areas of the business. If you are responsible for all aspects of hiring, you will find that the process is going to take considerably longer – and this may not be something that you can afford.

Your hiring strategy needs to consist of such things as:

a sufficient job description
a large pool of candidates to choose from
a list of desirable skills
knowledge of the industry
various ways of listing the job opening
a timeline

Executing the hiring strategy is going to take knowledge of the hiring process, as well as multiple people to help you. You cannot be responsible for creating the job description, creating job opening listings around the area, compiling all of the resumes, and conducting interviews. It simply cannot be done because you have other responsibilities within your organization.

Finance recruiters will be able to streamline the process because it is their business. They are responsible for recruiting finance individuals all the time and therefore they already have a lot of the work done for you. They have a timeline that can be customized for you, they have job descriptions that can be tweaked for your organization, and they most likely have a large pool of candidates that they can already begin pulling from.

By working with professional finance recruiters, you can make short work of hiring a qualified individual for your organization. Regardless of the actual job position that you need to hire for, a recruiter will be able to find you someone quickly so that you can get them started right away.

The longer you leave a job position open, the more strenuous it is going to be for the others within the department. For example, if you need someone in the Accounts Receivable department, everyone else is going to work longer hours and have more on their desks because you are short one person. If you begin to stress all of your employees out for too long, you may be looking for more than just one person because others will get tired of picking up the slack and leave the organization as well.

Finance recruiters will simplify the process, expedite the hiring process, and find you qualified candidates. They are familiar with the skills needed within the finance industry and can tell the difference between someone who has skills and someone who has a polished resume. This will work to your advantage. So that you can feel confident in the person that you ultimately offer the job position two.

You can be as involved in the process as you want to be – and finance recruiters will pick up the slack when needed so that you can meet all of your deadlines and have someone on staff quickly.

Whitaker is one of the nation’s most respected names in professional recruiting. Our national staffing companies provide the highest quality contract and direct-hire staffing solutions for a wide variety of enterprises and organizations in three areas of disciplinary focus – information technology, accounting & finance, and engineering / technical professions. Within these areas of specialization, we provide staffing solutions for key positions that require premium credentials and where demand is high.