There are many potential benefits to be gained from encouraging innovation. But there are also risks, and CFOs are well positioned to understand the financial and other factors that go into a risk-benefit analysis.
“From a practical perspective, there’s often a high start-up cost when you’re investing in a future revenue stream” says Domenico Magisano, a partner with the law firm Lerners LLP in Toronto. “If that revenue stream doesn’t materialize or that innovative concept does not go according to plan, it can create both operational and financial problems. If the company has invested in ‘bet the farm’ changes to its business model, it could result in financial distress for the company, or worse yet, its financial demise.
“From an insolvency perspective, it really becomes a question of ‘what happens to our cash flows? What happens to our business? What happens to our relationships with our bankers or our customers or stakeholders if this does not work?’ ”
While the CFO will look at situations such as how potential revenue streams from a new, innovative endeavour might fit into a best-case scenario, they must also be prepared for, and have an exit strategy to deal with a worst-case scenario. Particularly with respect to technology, there are times when businesses bet a lot of money on something new that ultimately does not work as anticipated, or needs more research and development to get to the finish line.
The CFO needs to consider definitive answers to questions like the degree to which they need to put other parts of their business at risk. Or how they can insulate profitable parts of the business from the new start-up, which could provide a strong revenue stream if it works out, but also potentially drag the company down if it doesn’t, says Mr. Magisano.
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