ZACH DE GREGORIO, CPA
www.WolvesAndFinance.com
In this video, I am going to walk through two examples that are a little bit more advanced. This video is really about giving you insight into what is possible with Accounting and Corporate Finance.
But before we jump into the example, I want to talk a little bit more about the name. Financial Engineering. This term came about, because somebody decided to combine the words “Finance” and “Engineering” to create Financial Engineering. And the whole idea here is that Finance professionals can design a company the same way an Engineering designs a machine.
Now I bring up the term, because unfortunately, Financial Engineering has developed a negative connotation. Because what most people see, is finance professionals walking into a company somewhere. And what these financial professionals do, is radically restructure the financial statements. So they take the financial statements and flip them around, and turn them inside out, and restructure the company. And when the financial professionals walk out, the stock price doubles. However, nothing about the operations of the company has actually changed. The only thing that is different is these pieces of paper. In fact, these changes on pieces of paper are actually creating a lot of value for everyone involved in the company, and that is what I’m going to explain. I explain an example of restructuring a company. Your accounting is a product. You are selling this accounting product to investors. You need to be as thoughtful with the accounting you are presenting to your investors, as you are with the product you are presenting to your customers. I know that a lot of business owners spend a lot of time thinking about whether their products are meeting their customer’s needs. Well you have to also think whether your accounting is meeting your investor’s needs.
Now there are a couple of warnings to this example. I am not advocating that you split every business apart. Please be aware these examples are not one-size fits all. Every business is different, so you have to be very thoughtful about Financial Engineering. There might be very good reasons to keep the business together rather than split it apart. Second, I make this sound very easy, and this is not easy at all. At the very least, you are going to have to go through your last three years of accounting records and split apart the two businesses. This is not an easy task.
Now you might think to yourself, my company is too small, this doesn’t apply to me. But if you understand financial engineering, you can think 10 years ahead and set up your accounting to get the biggest bang for your buck when your company is large enough.
A massive company restructuring is a dramatic example of Financial Engineering. Let me switch to a more common example. Pricing. Pricing is a very difficult topic. A lot of businesses set their pricing with their gut. However, pricing can be done more effectively by taking a methodical financial engineering approach, and using advanced mathematics and statistics to set your prices. And in fact, this is what most major companies do. You can set up mathematical models. You can use statistics. You can use algorithms programmed into computer software to help you in your pricing decisions.
So these are just two examples of Financial Engineering. More and more, this is what accounting looks like at the highest levels. Financial Engineering is about using all the financial tools and techniques at your disposal, to create the most value in our businesses.
Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.
