It has to do with incentives.
I’ve dedicated STEM to Business to helping scientists and engineers build their business acumen. The more we, as STEM professionals, know about business, the better chance we have to earn promotions, change careers, or start our own companies.
In the past couple of months, I’ve written extensively about corporate finance. Like how much cash Apple and Google have. Or how JPMorgan Chase makes money. Or how low interest rates encourage the most destructive forms of innovation.
Why should scientists and engineers care about corporate finance? Why is that information useful?
Because it speaks to incentives. Specifically, it’s the gateway to understanding why companies do a lot of the things they do.
Think about how you’d help your company find the best technical opportunities. You could use something like the framework below, where you seek opportunities that (a) pose an interesting technical challenge, (b) meet your customer’s needs, and (c) support your company’s story.
Where does corporate finance come in? Primarily in “Supports your company’s story”, the blue circle on the bottom.
Every company tells a story about itself. The story is wide-ranging. Part of it is directed at customers, and is part of a broader marketing effort. Part of it is directed at owners or investors.
Publicly-traded companies deliberately design the stories they tell shareholders. These stories help shareholders understand the business, the decisions that have been made, and the expectations for the future. Stories are crucial for guiding the stock price, and in turn, the value of the company and the compensation of senior leadership.
At the end of the day, the vast majority of owners and investors have one priority: return on investment. Yes, they may have a passion for the business. They may have a history with, and affinity for, the company. They may have a dream for the company to become a long-lasting, institutional player in its chosen market.
Above all, though, they’re guided by return on investment. Company management knows this, and designs stories accordingly. That means the better you understand what stories the company tells, and what metrics (financial and otherwise) appear in those stories, the more significant the contribution you can make.
Take Amazon as an example. Since its inception, Amazon has been telling a story of scale. In other words, Amazon’s claim is, to have the success it expects, it needs to grow. And grow. And grow some more.
Their business model depends on being the largest player in their target markets. They’ve built a business around the advantages of economies of scale.
How does that story tie to corporate finance? They care less about profitability than most companies. They don’t mind taking a loss, quarter after quarter, if it means investing in their own growth.
(As an aside, we say Amazon operates at a loss when their net income is negative. One of the expenses in their income statement is “Technology and content”, which is what they spend on research and development. Even when they take a loss, they make money on the things they sell. But when you add what the spend on R&D on top, you get to negative profit, i.e. a loss.)
If your company is telling a growth story, you want opportunities that will expand your product/service portfolio, or that will help your existing products/services reach more customers. If your company is telling an operational excellence story, you want opportunities that will improve your product/service reliability, or speed your product/service delivery.
When thinking of the things your company could do, you have a universe of interesting technical challenges to choose from. But you want to add a couple of constraints. You want to think about the opportunities that will land well with your customers. And you want to think about the opportunities that reinforce your company’s story.
Corporate finance plays heavily in the story angle. Yes, you’ll see financial implications when it comes to serving customer needs. But the interesting financial angles appear with the story.
The story will tell you, again out of a universe of available financial metrics, which ones are most important. Which ones your stakeholders care most about. Which ones best measure the company’s success.
As you know, success is relative. It depends on expectations. Stories are an important way for a company to manage expectations. The financial nuts and bolts are visible when we try to measure that success.
It’s important for scientists and engineers to learn just a little about corporate finance. You don’t have to go over the top with it like I do. Knowing the basics of corporate finance will help you understand why senior leaders make the decisions they do, and how you can find a way to influence those decisions. With this kind of acumen, the sky is the limit for your career.