Tag Archives: liquidity

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

PwC Global CEOs Survey results released at the World Economic Forum: 60% of CEOs said they expect recovery in their national economies only in second half of 2010 or later

Overall, the survey found that 81% of CEOs worldwide are confident of their prospects for the next 12 months, while only 18% said they remained pessimistic. The results compare with 64% who said they were confident a year ago and 35% who were pessimistic; 31% of CEOs said they were now “very confident” of their short term prospects, up 10% from last year, a low point in CEO confidence since PwC began its tracking.

The survey revealed striking differences in confidence levels – and by extension the impact of the global recession – among CEOs in emerging economies and those in developed nations. In North America and Western Europe, for example, about 80% of CEOs said they were confident of growth in the next year. That compared with 91% in Latin America and in China/Hong Kong, and 97% in India.
Looking at the longer term, the results were more even. Overall, more than 90% of CEOs expressed confidence in growth over the next three years. Those results, coming at the start of a new decade, were about on par with confidence levels of CEOs in PwC’s 2000 survey. But 10 years ago the economic split was very different, with 42% of North American CEOs extremely optimistic – twice as many as in Asia.
For the future, a total of 60% of CEOs said they expect recovery in their national economies only in second half of 2010 or later, while 13% said recovery was already underway, and 21% said it would set in during the first half of this year. Return to growth was fastest in China, where 67% of CEOs said recovery had begun in 2009. However, nearly 65% of CEOs in the US and more than 70% in Western Europe said the turnaround would not begin until the half of 2010.

Other key findings of the 13th Annual PwC Global CEO Survey:

Fears for the future
Protracted global recession remains the biggest overall concern of CEOs around the world (65%), followed closely by fear of over-regulation (60%). More CEOs are “extremely concerned” about over-regulation (27%) than any other threat to business growth. Other high-ranking potential business threats included instability in capital markets, and exchange rate volatility. At the other end of the spectrum, concerns over terrorism and infrastructure were cited by less than a third of CEOs globally as threats to growth.

Love-hate relationship with regulators
CEOs were very clear about the threat of over-regulation. Over 65% of CEOs disagreed with the notion that governments have reduced the overall regulatory burden. They also opposed government ownership in the private sector even in the worst of times – nearly half agreed that government ownership helps to stabilise an industry during a crisis. CEOs from two sectors that received considerable government support during the crisis – automakers and banks – were amongst the most appreciative of government ownership in troubled times.

At the same time, CEOs were optimistic about governments’ efforts to address systemic risks such as another economic crisis – 65% of CEOs agreed that regulatory cooperation will help successfully mitigate systemic risks.

Combating the effects of recession
To combat recession, nearly 90% of all CEOs said their companies had initiated cost-cutting measures in the past 12 months, led by those in the US, Western Europe and the UK. And nearly 80% overall said they would seek cost cuts over the next three years.

Public trust and consumer behaviour
Over one in four CEOs believe their industry’s reputation has been tarnished by the downturn. However, 61% of CEOs in the banking and capital markets sector said there has been a fall in trust in their industry.

Nearly half of CEOs are concerned that the recession caused a permanent shift in consumer behaviour. Most say that consumers will place greater importance on a company’s social reputation (64%), spend less and save more (63%), or be more active in product development (60%).

Risk management
Risk management took on greater importance among CEOs as a result of the recession; 41% of CEOs plan to make major changes to their company’s approach to managing risk, and another 43% report plans to make some change to their processes.

Boards of Directors are becoming more engaged in key aspects of management; such as assessing strategic risk, monitoring financial health, and overseeing company strategy.

Climate change
More than 60% of CEOs said their companies are preparing for the impact of climate change initiatives and believe those efforts will improve their company’s reputation. The recession had little impact on the green momentum; 61% of companies with climate change initiatives saw no effect of the recession on their strategies and 17% raised such investments last year.

The full survey report plus supporting graphics which can be downloaded are available at: www.pwc.com/ceosurvey

A year after the global economic system nearly collapsed (I)

BBC launched a series of TV programmes offering an account of what happened to create the greatest financial crisis for eighty years.

They explain how the attitude towards risk has been changed during the last decades, and, above all, how governments stepped back from regulating any of it. Moreover, the programmes capture a glimpse of the boom years before the global crash, with testimonies from key decision makers.

Part of the series may be viewed online at:
http://www.bbc.co.uk/programmes/b00mqmjs

“How do you manage your business?” – European Corporate Performance Management Survey

PricewaterhouseCoopers conducted an extensive research to understand if, and to what extent, Corporate Performance Management (CPM) is implemented in businesses today and how it contributes to a companies’ success. The survey was conducted from September 2008 to April 2009 in 22 European countries. Nearly 400 companies took part and supplied the necessary data to answer the following questions:

  • To what extent are CPM programmes set up across Europe to increase the quality of management information?
  • What does CPM look like in the operational reality of businesses today?
  • What is the current development level of CPM and does this level differ between regions (East and West) and industries?
  • What are the biggest obstacles in implementing CPM programmes?
  • How well do companies rate their ability to ‘operationalise’ strategic goals through CPM initiatives in order to provide greater transparency of profitability?
  • How well do they leverage information technology to enable and realise a better CPM?
  • What are the future trends in CPM?

The high level of interest shown indicates that companies have realised the importance of CPM in improving the quality of business management. From smallscale companies with less than 100 million euros in revenue (22%) to blue chips with recorded revenue of more than 5,000 million euros (18%), CPM is a topic of particular relevance. Significant differences between regions (East and West) and industries are highlighted on the following pages.

The results of the survey reveal that there is still room for improvement and that the perceived quality is sometimes higher than what is actually delivered. To define corporate strategy and cascade it into business unit strategies, companies need an integrated set of processes, guidelines and tools. Participants acknowledge the challenge posed by communicating their strategies on all organisational levels and about 90% have implemented, or plan to implement, related communications tools. Nevertheless, only 33% use strategy maps as a tool to communicate their strategy.

Value-based performance management approaches are not included in the KPI set-up of most of the companies participating. The survey shows that at present only 30% rely on value-orientated KPIs, such as Economic Value Added (EVA), as leading performance indicators. The negligence of value-oriented KPIs can however result in the fact that the needs of company’s key stakeholders are not properly accounted for. Companies have to deal with a wide spectrum of investors with differing interests. Only those offering investors the opportunity to earn adequate returns will survive in the long run. Therefore, managers should see their companies from the angle of their investors. They should focus on the enhancement of value to increase their attractiveness for investors in the competitive business environment of today.

It is remarkable that the importance of cash flow analysis and integrated cash flow planning is often neglected. 22% of the participating companies do not perform cash flow analysis on a regular basis. Cash flows are not static and depend much on changes in market forces, competitors, suppliers and customers. Companies need to measure their “liquidity” on a regular basis and track the generation of cash especially in times when illiquidity becomes the major threat for businesses around the world.

The majority of participating companies spend more than three, and even up to six months a year on planning activities. Best practice companies show that it is possible to spend less than three months’ time on annual planning and budgeting activities.

In terms of organisation, companies identified complex hierarchies, missing responsibilities, undefined escalation rules and delayed delivery of information as major obstacles to improving the quality of business management through CPM. To overcome actual obstacles companies plan different initiatives, and CPM itself is developing further.

The top three trends are:

1) From data collection to data analysis

Companies currently spend too much time on non-value creating activities such as data collection, calculation, reconciliation and structuring. This means that the time available for beneficial decision-making is insufficient. While non-value creating activities currently take up to 59% of time available, companies would like to reduce this to 33%.

2) Further investments in business intelligence (BI)

Companies seem to have perceived the great benefits of BI systems as more and more companies are investing in such technologies. Some are already trying to improve the performance of already implemented BI solutions to further enhance their CPM systems. Expanding BI to focus on strategy in addition to operational aspects is essential for driving business success. The survey results show that more than 50% of the companies which are not using BI are unsatisfied with their data delivery. On the contrary, from all companies which have BI in place more than two-thirds are satisfied with their data delivery.

3) Reducing the budget cycle time

The third trend is the increasing interest in innovative budgeting and forecasting approaches, such as Better Budgeting and Beyond Budgeting. Even though Beyond Budgeting is more an academic discussion and not yet a solution for all businesses, more than 20% of the respondents are considering this concept and some of them are already partly applying it.

You may find more about PricewaterhouseCoopers’ understanding of Corporate Performance Management and survey results at: PwC CPM Survey

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.

Economic conditions snapshot: lowering taxes for businesses and consumers – among paths to restore market stability

According to McKinsey’s ”Economic conditions snapshot: March 2009,” 57% of the responders say that because of good management, their companies have been less hurt than most by the crisis. Although that figure probably indicates hope for better results than are entirely plausible, it also indicates a confidence in management that runs counter to many other reports. Indeed, even at companies where executives expect profits to drop in the first half of 2009, 51% say that their companies have been well managed, along with 52% of executives at financial firms.

Among the respondents’ views, there is no ambiguity about whether trust in business has fallen as a result of the crisis: 85% say it has and they blame the decline mostly on financial firms’ misunderstanding of risk. That response holds even among executives at financial firms.

When McKinsey asked respondents which one action would do most to restore market stability, the responses express a clear focus on liquidity, with various ways to achieve it. The paths mentioned by many respondents are lowering taxes for businesses, consumers, or both; increasing consumer confidence and spending; focusing on global responses in regulation, currency management, and confidence building (what one executive calls “sincere cooperation of all nations”); and cogent, long-term leadership, described by another respondent as “pick a plan, stick with it, communicate tactics, be clear.”

About half of the companies that have sought external funding since September have sought it from sources different from those they obtained from earlier. The most common new source, at 47%, is the government, followed by individual large investors, at just over a third. Executives at companies in finance are, not surprising, by far the likeliest to say their companies sought funds from the government.

Respondents also call for government actions of all sorts, as well as the reverse: “Leave the banks and companies alone. Let the bad fail and the good will thrive—this will set our globe back into balance.” Perhaps the most hopeful note comes from an executive who writes, “Have patience. Confidence and risk tolerance will improve naturally, as it is part of human nature.”

The survey garnered 1,630 responses from executives across the range of regions, industries, and functional specialties. For more details see:
http://www.mckinseyquarterly.com/Economic_Conditions_Snapshot_March_2009_McKinsey_Global_Survey_Results_2332

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.

Profit and liquidity management

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The collapse of Northern Rock proves that profitability is no defence against liquidity risk: the company made profits in the quarter before it disappeared. Following a significant fall in market liquidity, Northern Rock was unable to meet its payment obligations.

Only a few voices raised liquidity risk issues until now and, even if the regulators did monitor banks’ liquidity management, they rarely raised serious challenges. During this financial crisis, risks tended to repeatedly transform from one type to another and companies face the challenge of placing greater emphasis on developing an integrated view of risk management across all types of risk.

The new economic perspectives bring significant challenges: while funding can still be found, it is only available for short periods and at high costs. Therefore, this is a good time for any company to perform a liquidity stress test such as the following 3 steps approach:

    1) Identify liquidity risk drivers:

  • erosion in value of liquid assets,
  • additional collateral requirements,
  • evaporation of funding,
  • withdrawal of deposits (if the case);
    2) Design stress scenarios (and probabilities):

  • emerging markets crisis,
  • systemic shock in main centres of business,
  • market risk,
  • operational risk,
  • ratings downgrade,
  • country / industry specific scenarios;
    3) Model stress tests:

  • quantify liquidity outflows in all scenarios for each risk driver,
  • identify cash inflows to mitigate liquidity shortfalls identified,
  • determine net liquidity position under each scenario.

Times of crisis are perfect opportunities to refocus on fundamentals: you can show that you truly understand your businesses and its potential risks with an integrated risk management perspective.