CHAPTER 1

An Overview of Financial
Management and the
Financial Environment
In a global beauty contest for companies, the winner is … Apple.
Or at least Apple is the most admired company in the world, according
WWW to Fortune magazine’s annual survey. The others in the global top ten are
Berkshire Hathaway, Toyota, Google, Johnson & Johnson, Procter &
See http://money.cnn.com/
magazines/fortune/ for
Gamble, FedEx, Southwest Airlines, General Electric, and Microsoft. What
updates on the ranking. do these companies have that separates them from the rest of the pack?
According to a survey of executives, directors, and security analysts,
these companies have very high average scores across nine attributes:
(1) innovativeness, (2) quality of management, (3) long-term investment value,
(4) social responsibility, (5) employee talent, (6) quality of products and services,
(7) financial soundness, (8) use of corporate assets, and (9) effectiveness in
doing business globally. After culling weaker companies, the final rankings are
then determined by over 3,700 experts from a wide variety of industries.
What do these companies have in common? First, they have an
incredible focus on using technology to understand their customers, reduce
costs, reduce inventory, and speed up product delivery. Second, they
continually innovate and invest in ways to differentiate their products. Some
are known for game-changing products, such as Apple’s touch screen iPhone
or Toyota’s hybrid Prius. Others continually introduce small improvements,
such as Southwest Airline’s streamlined boarding procedures.
In addition to their acumen with technology and customers, they are
also on the leading edge when it comes to training employees and
providing a workplace in which people can thrive.
In a nutshell, these companies reduce costs by having innovative
production processes, they create value for customers by providing high-
quality products and services, and they create value for employees by
training and fostering an environment that allows employees to utilize all
of their skills and talents.
Do investors benefit from this focus on processes, customers, and
employees? During the most recent 5-year period, these ten companies
posted an average annual stock return of 6.9%, which is not too shabby
when compared with the −4.1% average annual return of the S&P 500.
These superior returns are due to superior cash flow generation. But, as
you will see throughout this book, a company can generate cash flow only
if it also creates value for its customers, employees, and suppliers.
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