By Bryan Lapidus, FP&A
FP&A’s role is to help deploy company capital to its most useful state through the planning and forecasting process, investment analysis and business partnering. In doing so, we often talk about the need to balance the requirements of capital sources (investors), managers and customers, and how FP&A needs to be aware of how these expectations will differ by company. A recent Wall Street Journal article brings this into focus by comparing Amazon and General Electric, noting their differing approach to capital and shareholders.
Amazon’s Reinvestment Approach
“Since Jeff Bezos founded Amazon in 1994, he has put expansion and innovation ahead of profit,” the article notes. This means he reinvested nearly all working capital back into growth projects and produced little net income. The article continues, “Asked by an analyst in April whether Alexa, a voice-activated assistant, was boosting sales, the company’s finance chief, Brian Olsavsky, responded: ‘The monetization, as you might call it, is… not our primary issue right now. It’s about building great products and delighting customers.’”
Amazon has rewarded investors with a steady march towards a trillion dollar market valuation. The company has internalized and acted upon Bezos’ strategy of reinvestment and risk-taking by entering far ranging businesses, and exiting when they do not work out and, in the process, turned corporate finance valuation on its head.
The typical methodology of valuing a company is to aggregate the present value of future cash flows, either dividends or profits; however, when all the cash flows are reinvested, there is nothing to aggregate! The result is that Amazon has seemingly limitless capital to invest—make money, invest that money for growth, repeat. Without capital constraints, it can invest in drones that fly off its own fleet of trucks, robots, grocery stores, phones, readers and anything else it dreams up.
General Electric’s Capital Approach
GE is managed in a very different manner. The 125-year-old conglomerate has reinvented itself many times and is a force in key industries. Former CEO Jack Welch famously said that if GE could not be number one or two in its segments, GE would exit. This creates a high hurdle to entering new businesses, and also creates a vastly different risk profile for the company. If you are not the biggest or best, there is no need to engage.
Per the WSJ article, on GE’s recent conference call, the company “meticulously lays out profit growth by product and business segment, the sources of margin improvement, cost savings anticipate from specific restructuring moves—even how five uncollected aviation accounts were affecting profit.” GE’s investors have different expectations than Amazon shareholders—they want capital to accrue to shareholders and to be returned to shareholders. From 2012 to 2016, GE spent $79 billion on dividends and buybacks, versus $50 billion on capital expenditures.
What can FP&A learn from these completely opposite corporate strategies?
Just this: FP&A must recognize its corporate growth strategy and help manage it appropriately. FP&A must play its role in aligning the expectations of capital (investors, those with voting control), company (management hired by the board), and customers (those who provide the revenue). By starting with the company’s strategy for growth, we distill that into the budget, metrics and decision support services, and seed that throughout the organization. FP&A needs to be clear on how we accomplish that in our organization, and not assume that it is the same across all companies!
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