ThinkFlood Blog

Today I spent a couple of hours compiling and cleaning up financial statements in preparation for talks with investors. Whenever I do this, all I can think about is how glad I am that I did not pursue a career as a financial analyst or an accountant.

So, it’s probably pretty obvious that I have some bias against jobs in finance. It’s not that I distrust people in finance, or that I think finance and accounting are useless. On the contrary, there is certainly a place for them as management tools in business. However, I think the problem is that finance is so abstract that we tend to separate it from the fundamentals of business.

In some ways, finance and academics are similar. Both are necessary for an informed picture of the world — they help us develop the critical thinking and language we need to understand and to communicate important concepts. However, if pursued without a regular and solid grounding in real world experience, they can create false pictures and lead us into some sticky traps.

I think this separation from reality is what has happened in the current financial meltdown. For example, one of the basic goals in finance is to reduce risk. We have many vehicles to do so — we share risk through insurance, we minimize the impact of risk through hedges, we evaluate risk by marking assets to market, and so forth. However, one dimensional risk management does not make a good financial instrument. There are other factors, such as transparency. It seems to me that credit default swaps and collateralized debt obligations played up the risk management idea, but completely ignored the importance of transparency. As a result, we no longer know who owns what, whether terms are negotiable, or what the “real” value of the assets are. Throwing money at the problem reduces leverage — and therefore mitigates certain kinds of risk — but it does not provide any greater transparency, and so other types of risk linger.

I don’t say these things to point blame or to criticize well-meaning actions already taken. Rather, I point out the difficulty in constructing things like financial models and forecasts. Yes, we can analyze this or that historical trend and come up with some estimates. But in the end we don’t really know. At best, finance is a guide that helps us determine what to look out for — we cannot afford to depend on it as a primary means of creating wealth, because so much of it is speculative.

This attitude has dictated many of my practices in business. First, I prefer to work in a company that provides an actual product. Sure, there is a room for services, but ultimately I feel that products have a more sure foundation — they are real creations, not just virtual reshuffling. Second, I do not see much point in playing games with payables and lines of credit. These things have their place, but if used too extensively they create race conditions which can make a business insolvent. They also create internal conflict between debtors and creditors — I much prefer equity ownership, which aligns investor and company interests. Finally, I like to get out into an operation to see what is going on. Numbers are useful, and I enjoy looking at things in different ways. But unless I can tie those numerical conclusions back to real-world observations, I refuse to accept those conclusions as fact.