I love movies. And if you’re like me, you spent the evening watching the Oscars broadcast marveling at the phenomenal performances, glorious music and designs, and inspiring motion pictures. Once again, I felt like there were so many strong contenders for best screenplay, best feature film, best actor or actress, best . . . best of what? With so many options, I wondered how in the world the Oscar judges narrow down their selections to pick the final winners. Couldn’t they all be winners? Which ones were the “best bet”? And that’s when it struck me—just as in principles of corporate finance, project funding decisions are like the Oscars.Really? You may be wondering how I could possibly extract a principles of corporate finance analogy from watching the Oscars. But bear with me and consider this:

  • How do you make a project funding decision for your firm? How do you select one project above the other, potentially viable opportunities? How do the Oscar judges select the final winner?
  • Ever wonder how to determine the viability of a project? What makes a good movie (or screenplay or performance) great?
  • What exactly do you need to consider in making your analysis? Are there quantifiable inputs (like ticket sales, “buzz” in the blogosphere, and staying power in theatres) as well as more subjective inputs (like quality, passion, or depth)?
  • Will this product (service, lease, agreement) generate enough cash to justify the investment? Will the performance or movie speak to generations long after the award show is over?

If you understand the principles of corporate finance, then you can begin to see that there are indeed overlaps. After all, the key to profitability for any business is knowing how to put money where it will make money. And don’t you think that the Oscar judges (or at least the producers) are considering these factors in their judgments?Principles of Corporate Finance and the Go/No Go DecisionTo take the analogy even further, consider how movie executives approach the go/no go decision when deciding whether to greenlight a proposed movie. These decisions, involving tens or even hundreds of millions of dollars, are critical for the studios’ long-term viability. Sound familiar? Studio executives, like financial managers, must make decisions that will directly affect their bottom line. Indeed, these are the same project funding decisions we must all learn to make. To do so, we must be remember the following principles of corporate finance:

  • Making the right decision on business investments is key to running a profitable business.
  • Understanding the financial side of a project decision is key to making the right investments.
  • Managers routinely analyze financial decisions using approaches that give them the wrong result. Accounting data are useful, but not in project analysis. Using the traditional measures of profitability, payback and other common rules of thumb will often lead to the wrong decision—causing the firm to make bad investments or to miss good ones.

Regardless of the industry you’re in, whether it be financial, manufacturing of widgets, service provider, or movie executive, you have managers who have to make decisions that will directly affect the bottom line as well as your success score card. These managers have to understand the principles of corporate finance. Can they, like the Oscar judges, make the right decision?

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