How do you value protecting the downside?

Mitigating risk is always seen as a good thing, but how do you value that mitigation? There is no way with traditional cash flow methods to understand how valuable protecting the downside can be to your business. With Exponential Business methods, you are able to value downside mitigation scenarios by adjusting the probability curve to better understand how much the mitigation could be worth to your company. 

One of the biggest reasons that "upgrades" and investments in infrastructure (e.g., IT) fail to achieve ROI is that traditional value creation methods do not know how to account for these investments, other than as negative cash flow. The benefits are typically accounted for in increments of time or productivity, making the business case dependent upon half an hour here or there. The business case is generally done as a matter of course to push the project through and never re-visited.

This methodology misses the forest for the trees. Every one of your competitors is working to make your downside risk a reality, and without your investments, they may win.  By reducing the probability of their success (and your risk), the business case for your infrastructure investment or upgrade of business processes can be put on a solid basis.

The curse of discounted free cash flow...

Ostensibly, discounted free cash flow is the best measurement of a company's value. Strategists, corporate finance professionals, bankers, investors and others use it as one measure of value, and within a corporation, it is a make-or-break metric for a project to get the green light. It is one of the pillars of managerial decision-making today.

Unfortunately, depending on discounted free cash flow is like depending on that hot new golf club you trialled at the range - it works great on the few shots that you're able to try on the range, but when you buy them and you are on the course, your game hasn't changed. You've gone all-in on something that got you a few nice shots here and there, but didn't holistically change your game.

Think about it: discounted free cash flow is usually associated with a specific project that gets you a one-time bump in cash flow for an investment now. This way of utilizing free cash flow assumes that you have amazing projects galore, which is never the case in reality. You need to think holistically about how you are going to reinvest your cash flow and change your game, and ensure you have a platform for reinvestment, not just focusing on the hot new club du jour.  This leads to more stable cash flow, greater opportunity to reinvest that cash flow, and greater returns to shareholders. Utilizing discounted free cash flow gets you none of these benefits. 

We need to change the way we think about making decisions and creating value.  Thats why I wrote "The Exponential Business".

Exponential Business

Make better decisions, faster to grow your business to its potential: introducing The Exponential Business.

Utilize the same techniques that ushered in the information age and the hedge fund industry (and supposedly used by Warren Buffett) to bring your business to the next level by focusing on what matters and leaving the noise behind.