Setting Priorities For Finance In The “Lost Decade”

Recession and the lost decade

Welcome to 2013, Year 5 of what many economists, including those who compiled Ernst & Young’s latest economic forecast for the Eurozone , are calling the ‘lost decade’ marked by low or no existent growth and high unemployment. With government spending squeezed, everyone expects the private sector to provide the stimulus that will get us back to growth but companies are keeping the lid firmly on their excess cash, which the McKinsey Global Institute say has reached the highest levels for over two decades.

So as we get back behind our desks and down to business, E&Y offers advice on how best to navigate through the coming year  – by being prudent, but also making sure we don’t miss out on the big opportunities:

Ensure a balanced portfolio

During a downturn, the over-cautious mid-level managers who make routine investment decisions tend to shelve risky projects without adequate analysis and review. As a result, attractive projects may not even make it to the proposal stage. At a time when many companies are cash rich this does not make sense and could leave the company bereft of growth opportunities when the good time return. So senior managers need to ensure that the company has a balanced portfolio of investment projects and that there are processes in place to continually review those that are risky but have high potential returns.

Ensure risks are realistically assessed

Given the circumstances managers may add an arbitrary and unnecessary risk premium to the cost of capital of worthwhile investments – ‘just to be on the safe side’. Again this can lead to missed investment opportunities. What E&Y recommend is that risk assumptions should be taken into account in the cash flow projections of the investment using scenario analysis as that would help calculate the risk by the probability of each scenario – rather than just arbitrarily loading the cost of capital.

Dig into the detail 

It is rare that all product sectors and customer segments of a particular market are stagnating and if you look hard and long you will find sub-industry segments that are growing nicely.

Sweat your capital by focusing on continuous improvement

Many companies have done just this during the last five years by investing in automating and unifying core processes in all aspects of their business from manufacturing, through supply chain to core financials and even performance management – improving efficiency and productivity to deliver compelling savings. Today mobility and cloud solutions present new opportunities to reap further benefits.

Drive growth through exports

Don’t be disheartened by reports that economic growth is slowing in many developing markets too. The rapidly rising numbers of consumers in countries such as China, India, Nigeria, Indonesia and Turkey will undoubtedly boost domestic demand for goods and services from around the world. These countries are still growing 4-5 times faster than the US and Europe and should be the focus for exports or expansion.

There are some clear messages for Finance here:

  • Ensure that risk is realistically and appropriately reflected in all business decisions. Be prepared with contingency plans that give a head start if scenarios that at first seemed improbable start to become a reality with backup plans that are monitored and kept up-to-date.
  • Invest in in-memory analytics so that managers have the tools to uncover those hidden growth opportunities
  • Keep on with all the good work involved in automating and unifying core financial processes such as invoicing, receivables, shared services and the like that drive down the cost of finance and free up capital – and ensure that mobility and cloud are part of any new initiatives.

E&Y conclude their executive summary with the following stark warning, “Companies have no time to spare. A “lost decade” has begun in the Eurozone. Now is the time to get in shape for a decade that will be unlike any previously seen”.