Rapid changes in the marketplace will only accelerate in the next
century, and many family businesses are not prepared for the sophisticated
financial challenges they will face. The globalization of markets, the
increasing liquidity needs of shareholders, and the continued growth of
communications technologies are but three of the massive shifts requiring
family business owners to sharpen their financial acumen.
Such changes call first for professionalizing your financial
management. Second, they make it essential to manage your cost of capital,
both debt and equity, more efficiently.
Many family businesses continue to confuse the function of a controller
or accounting manager with that of a chief financial officer. True CFOs
fill multiple roles for family firms. They serve as your financial
strategist; they're familiar with the many sources of capital available;
they map out ways to maximize shareholder value; and they manage your
capital structure. Ideally, today's CFO also has global capital market
experience and perspective. Perhaps most important, because a CFO is at
the fulcrum of business and family activity, he or she can often function
as a peacekeeper, skillfully managing the desires of family members for
liquidity and a return on their investment with the growth-capital needs
of the business.
It's time for family firms to truly entrust financial management to
executives who are qualified by training and experience to manage these
tasks, yet also have a sensitivity to and understanding of family
One duty of an empowered CFO is to manage the cost of capital for the
business. Managing the cost of debt requires broad access to borrowing
sources by a professional skilled at tapping into diverse global capital
markets. It will be up to the CFO to maintain relationships with multiple
global borrowing sources, so that the family business can rapidly take
advantage of growth opportunities, both domestic and foreign, and avoid
pitfalls when the business climate is less rosy.
Managing the cost of equity is equally critical for family businesses
entering the 21st century. Equity is the most expensive form of capital,
and hence the comparative costs of various sources must be accurately
assessed in order to avoid an excessive burden on the business. The
company's leaders should be aware that shares owned by family
members-often referred to as patient equity capital-have a cost. Like any
other investor, family shareholders expect a return on their capital,
which they will measure in the form of current returns (dividends) plus
the future appreciation in value of their stock.
Amid alluring reports of gains from Internet stocks and day-trading,
next-generation shareholders are more inclined than their elders to
evaluate their investment in a dispassionate manner-"What has my family
business investment done for me lately?" Management ignores these
expectations at its peril.