Financial Management for Innovation

By: Caspar van Rijnbach

Seldom spoken about, the capacity to capture, allocate, control and utilize financial resources is fundamental to innovation. Without strong financial management, innovation might come to a dead stop, might never happen or might just cost much more than it should. In this blog Caspar van Rijnbach asks the questions to take into consideration when managing finances for your innovation portfolio.

Innovation is not only about having the BIG IDEA, but also making sure the company has the capacity to implement it. Financial resources are crucial to this. A global study undertaken by Ernst & Young in 2010 indicates lack of financial resources as one of the big obstacles to innovation. Lack of time is another big concern, but having the right financial resources you might be able to diminish this problem, since people can be hired.

Innovation is a risky business and has specific characteristics that have implications for finances. More uncertainty about return on investment and about the level of investments required, especially in the early stages of innovation, makes it more difficult to convince management to invest in new ideas. Innovation almost always seems to be starving for innovation.

On the other hand, your company might have plenty of investments, but all the money comes from internal funding. Nowadays many more options are available. Almost all countries have fiscal benefits for innovation and public funding with low interest rates or special conditions (which might even mean not paying back the funding). Many companies already take advantage of this, but in very limited ways. Very few though, take advantage of the opportunities to use private investment funds or venture capital. And even fewer see partnerships as a way of funding. One should start looking at funding for innovation in a broader perspective.

Finding new financial resources is only part of the game; one needs to make sure to capture the right funding for the right projects and have the right financial mix for your innovation portfolio. Therefore, I would like to ask you the following questions:

• Are you aware of all the financial opportunities for funding of innovation, including public funding, fiscal benefits, venture capital and private funds?
• Is your financial innovation strategy aligned with your corporate financial strategy (debt exposure, restrictions to financial risk, etc.)?
• Do you evaluate your innovation portfolio from a financial perspective, and allocate resources taking into consideration corporate objectives and financial risks?
• Do you allocate your financial resources based on good practices for innovation investments, defining which type of funding to use for which stage of the innovation process and the level of risk, amongst others?
• Do you have processes, controls and governance in place that manages innovation expenditures and help you declare your innovation investments to public or private authorities?
• Do you take intellectual property questions in consideration when taking on funding?
• Do you have any auditing process in place that makes sure that all of the above is done in coherence with company policies?

I am a great admirer of all the beautiful ideas that people come up with, however one needs resources to implement them. So why not increase innovation opportunities by finding the right and abundant resources, making sure you optimize the use of them.

So, what have you been doing lately to improve your financial capacities for innovation?

By Caspar van Rijnbach