Tag Archives: cash flow

Aristotle and economy

Almost 90% of worldwide executives made cost cuts during 2009, a percentage that is not surprising at all considering the economic downturn. However, according to PwC’s “2010 Global CEOs Survey”, almost 80% of executives realised that they need long term results, not just short term liquidity.

What does this have to do with Aristotle? You may find the answer in the article bellow published in the last issue of “Capital” (Romanian only):

Online: Capital.ro

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How can we make cost cuts stick

54% of the executives surveyed by McKinsey in April indicated that they would take steps to reduce operating costs in the next 12 months, compared with 47% in February. In April, 2/3 of the respondents rated economic conditions in their countries as better than they had been six months previously, and another 2/3 expected further improvement by the end of the first half of 2010 (“Economic Conditions Snapshot, April 2010: McKinsey Global Survey results,” mckinseyquarterly.com, April 2010). Yet any successes companies have at cutting costs during the downturn will erode with time. Many executives expect some proportion of the costs cut during the recent recession to return within 12 to 18 months (“What worked in cost cutting -and what’s next: McKinsey Global Survey results,” mckinseyquarterly.com, January 2010) – and prior research found that only 10% of cost reduction programs show sustained results three years later (Suzanne P. Nimocks, Robert L. Rosiello, and Oliver Wright, “Managing overhead costs,” mckinseyquarterly.com, May 2005).

Why is it then so difficult to make cost cuts stick?

In most cases, it’s because reduction programs don’t address the true drivers of costs or are simply too difficult to maintain over time. Sometimes, managers lack deep enough insight into their own operations to set useful cost reduction targets. In the midst of a crisis, they look for easily available benchmarks, such as what similar companies have accomplished, rather than taking the time to conduct a bottom-up examination of which costs should be cut. In other cases, individual business unit heads try to meet targets with draconian measures that are unrealistic over the long term, such as across-the-board cuts that don’t differentiate between those that add value or destroy it. In still others, managers use inaccurate or incomplete data to track costs, thus missing important opportunities and confounding efforts to ensure accountability.

Some possible solutions:

Focus on how to cut, not just how much

Benchmarks matter. External ones on some measures may be difficult to get, but where they are available – for example, on travel expenses – they can enable managers to compare performance across different units and identify real differences, as well as trade-offs that may not be in line with the organization’s overall strategy. Internal benchmarks are easier to access and provide great insights, especially because managers are more likely to understand and adjust for differences among their company’s organizational units than among different companies represented by external benchmarks.

P&L accounting data is not enough to make lasting decisions

Unfortunately, few companies have the kinds of systems they need to track costs at a fine-grained level – and they face a number of challenges in establishing them. Multiple data systems may make it difficult to aggregate and compare data from different geographies. Inconsistent accounting practices between businesses or time periods may lead to significant distortions. Changes in organizational structure (as a result of acquisitions, divestitures, or even changes in the allocation of overhead costs) may similarly distort tracking.

Clearly link cost management and strategy

Strategy must lead cost-cutting efforts, not vice versa. The goal cannot be merely to meet a bottom-line target. Indeed, among participants in a November 2009 survey, those who worked for companies that took an across-the-board approach to cost cutting in the recent downturn doubt that the cuts are sustainable. Those who predicted that the cuts could be sustained over the next 18 months were more likely to say that their companies chose a targeted approach. (“What worked in cost cutting – and what’s next: McKinsey Global Survey results,” mckinseyquarterly.com, January 2010).

Yet, many companies do not explicitly link cost reduction initiatives to broader strategic plans. As a result, reduction targets are set so that each business unit does “its share” – which starves high-performing units of the resources needed for valuable growth investments while generating only meager improvements at poorly performing units. Moreover, initiatives in one area of a business often have unintended negative consequences for the company as a whole.

Aim at results for 2-3 years not just 12 months

Most companies treat cost management as a one-off exercise driven by the need to manage short-term profit targets. Yet such hasty cost-cutting activity typically goes into reverse once the pressure is removed and rarely results in sustainable changes in cost structure. A better approach is to use the initial cost reduction program as an opportunity to build a competency in cost management rather than in cost reduction.

Economic Conditions Snapshot, August 2009: The economy at large

McKinsey Global Survey Results show that, overall, thinking about financial and other effects of the crisis and their companies’ current position, just over 2/3 of respondents expect their companies to emerge from the crisis stronger. However, when that will happen is much less clear; while executives indicate that the economy as a whole is healthier now than it has been in some time, they don’t expect much further improvement soon.

A comparative analysis shows that respondents’ views on a range of trends affecting businesses and the economy are slightly more optimistic overall than they were in June, and notably more optimistic than they were in March. Similarly, the share of executives saying that their nations’ economies are better off now compared with last September is notably larger than it was six weeks ago. But the share expecting improvement in economic conditions by the end of 2009 has barely changed and more than twice as many executives still expect their nations’ GDPs to fall in 2009 as to rise.

Although 37% of the respondents do expect economic conditions to be better at the end of this year than they are now, conditions are so poor that only 20% of all respondents expect an actual economic upturn in 2009, a fall of 8% points in six weeks. Even when stock markets are booming, it seems, executives think there’s still a long way to go.

Managing in a downturn: three key areas of focus that management could consider in managing risk

Managing cash flow is vital to anyone’s business, especially in a downturn: any company needs to be in control of its own cash flow. You may already know that, in a downturn, your stakeholders are looking at your costs like they never have before; this is the best time to be proactive and think strategically about cost.

Here are three key areas of focus that management could consider in managing risk:

1. Understand your own data. Going through 50 pages monthly management accounts does not help you control your business. Reduce the report to an ideal 1 page summary which covers all of the key performance indicators that you have agreed as being significant to your business.
2. Settle clear ownership. Customer services, production, procurement, finance – each believe they have a right to control the cash in their domain. However, you should consider that none of them have a holistic view of your business requirements. Management of cash should clearly be stated as the responsibility of the CFO and/or the board of directors.
3. Communicate effectively with all stakeholders. On the one hand, for example, your staff need to understand that appropriate credit control is an important part of the customer experience, even if the payment is not going to be made to terms. On the other hand, as we all know, banks do not like surprises. If you will be able to predict difficulties in cash collection, you should be able to manage the banks’ expectations as well.

All the above may sound like common sense, but you would be surprised to find out in how many companies this is not a common practice. If you have decided to handle cost more strategically, here are some simple practical tips on how to do it:

  • correctly identify the drivers of cost in your company: ask yourself if there are areas of your company and cost that are destroying value;
  • improve the processes around those areas or simply eliminate the cost.

However, you cannot always take out costs quickly, as major projects may be on roll. If this is the case, you could take a more measured approach:

  • in the first phase, look at your major project spend and ask yourself what can you do differently; have a look at your supplier agreements, some of them will allow you some space to take long term decisions;
  • in the second phase look at your own levels of bureaucracy and simplify procedure to the extend of compliance and operational efficiency;
  • in the third phase, re-analyse your project and look for its competitive strength or even opportunities. The business world is moving and, since the first two phases could take from a few months to years, depending on project extend, you could redefine it in terms of new market opportunities.

Oracle declares first-ever quarterly dividend of 5 cents per share; revenues climbed 2% to $5.5bn, ahead of expectations

Companies’ spending to handle extensively growing business data helped Oracle to actually grow during the economic downturn. Oracle Corporation (NASDAQ: ORCL) announced fiscal 2009 Q3 GAAP earnings per share were $0.26, up 3% compared to last year. Third quarter GAAP total revenues were up 2% to $5.5 billion, while quarterly GAAP net income was down 1% to $1.3 billion. Also, GAAP operating cash flow on a trailing12 month basis was $8.5 billion, up 17%. However, Oracle predicted that the weaker economy and currency effects would leave its revenues from new software licences in the next quarter 17-27% lower than a year before, with overall revenues down 10-14%.

Over the last five years Oracle Corporation consistently outperformed the Dow Jones Industrial Average index. As of last close on March 19 2009, Oracle closed at 17.37, 25.87% above the 52 week low of 13.80 set on March 09, 2009.

Crisis and stakeholder management

Whenever we talk about crisis, liquidity problems, news media reactions and contingency planning, we tend to overlook an essential consideration: the severity of the crisis is not only determined by the problem itself but also by the affected stakeholders and their reactions to what is happening.

When organisations are facing a crisis, such as cash flow problems, you need to deliver quick and effective results. Ideally, such issues should be managed by an experienced person or team (depending on the level of crisis) with a strong track record in managing stakeholder relationships and significant expertise in crisis situations with financial, resource and time constraints.

In the short term, you should focus on stabilising the financial position of the business and obtain both management and stakeholder buy-in. In the longer term, you should rebuild confidence and relationships whilst regaining control, keeping all parties informed every step of the way.

Here are some potential issues you could encounter during crisis:

  • You experience increasing tension with stakeholders;
  • You have or anticipate cash flow problems;
  • You are experiencing increasing working capital levels;
  • You are experiencing share price falls;
  • You are experiencing unexpected business surprises.

As solutions for the problems above, you could consider:

  • Identifying your key stakeholders as some may be more important than others;
  • Involving your key stakeholders in the process;
  • Quickly stabilising the business;
  • Exploring quick win cash generation opportunities;
  • Rebuilding stakeholder confidence in the business;
  • Improving sustainable working capital;
  • Drive robust financial information.

Once your business is back and running there are two groups of people who need to be kept informed of progress: your own employees and your key stakeholders. The most effective way of communicating progress is via regular progress reports. The reports, e-mailed to all relevant parties, should help you rebuild confidence.