During the holiday weekend some one wrote and asked me what I mean by "sophisticated finance", which I have never precisely defined in this blog. After 260 posts, here goes.
When I came back to the U.S. in 1999, I had just spent ten years building a company in Indonesia from $40 million in annual revenue to $1 billion. At every opportunity during those ten years I took the opportunity to reduce or eliminate risks in the company because the environment of Indonesia included significant political, social and economic risks. Not as bad as some African countries, but a place of dramatic and significant risks. To manage or reduce these risks I became an accomplished derivatives trader/manager in currencies, interest rates, equities and off balance sheet vehicles. Derivatives were an important tool, but I only used them to hedge risk and rarely speculated. At one point I thought that all finance would be based on derivatives and the last ten years may have proven me correct.
In Indonesia we ran the most sophisticated IT operations in the country, as evidenced in part by the fact that the top IT people were always getting job offers. We constantly upgraded IT largely to better manage the company's largest asset--merchandise inventory. Outside Japan, we were the first retailer in Asia to use computerized inventory management (80,000 SKUs), link all our store communications via satellite and to poll POS (point-of-sale) information daily. Building this IT infrastructure was where my interest in IT really grew and I began to understand its importance.
The third critical element in Indonesia was a constant strategic review process. We constantly tracked our customers through a variety of information sources, including what was probably the first use of market research in that dictatorship. As the customers income and social aspirations changed significantly over a ten year period, we reacted both tactically and strategically. Good strategy requires that you constantly be close to and informed about the customer.
Sophisticated finance is an integrated approach to thinking about strategic planning, IT and finance. Financing (and risk management) without good strategic planning is like building a shopping center without a set of blueprints. An in depth understanding of IT is required because modern business operations can not be understood properly without detailed knowledge of the IT infrastructure. (Of course, to implement sophisticated finance, a company needs reliable and timely accounting, good controls and access to capital.)
Another way to think about sophisticated finance is to think about what is critically important to a business--knowledge of the customer, access to capital to pursue the plan and the use of IT as a competitive advantage. Bring these three things together in your business and you are beginning to use sophisticated finance.
