In planning for today, don’t lose sight of tomorrow - avoiding short-termism
Monday, 26 Oct 2015
Traditionally, companies have had a long-term view with five-year and three-year plans. Accounting practices are focused on three-month quarterly periods and decisions are made based on historic data and trends.
CEO, Basware Corporation
Yet the pace of change, aggressive competition and technology innovation have enabled businesses to take a much more short-term view. There are benefits to this – agility and the ability to embrace opportunities quickly or change plans at short notice, financial gains and seizing a gap in the market.
Nevertheless, it brings challenges too. Short-termism seems to be increasingly linked to financial markets. It affects stock prices and causes fluctuation in the market, which impacts confidence and causes share price volatility. It’s a self-perpetuating cycle that some have started referring to as ‘Quarterly Capitalism’.
Falling commodity prices are the most recent indicator of concern for the global economy. The drop has caused interest rates to remain low and therefore gives companies little reason to invest. This is always the case when there are far greater returns to be made from backing the stock market, but it’s not just stock and bond markets where short-termism affects how the system operates. We’re seeing it in micro financial systems, such as the cashflow of businesses, the credit agreements that they negotiate with their buyers and suppliers and their approach to making payments for goods and services.
These transactions rely on a different level of confidence – not just in your buyers and suppliers to be able to deliver, but also that your own financial supply chain can establish a stable cashflow.
Cashflow is the make or break of almost every business on the planet. Even the most cash-rich out there have a strong eye on it…and for good reason. Opportunities to affect cashflow are highly prized and companies can take advantage of tools such as early payment discounts or innovative lending solutions to ease cash flow and support investment.
But the confidence you need to do this, in part, stems from how robust the network of buyers and suppliers around you is. You also need visibility of what’s going on inside your own business to understand your AP and AR situations, and how cashflow will pan out over the coming weeks and months.
With all of this in place, it’s possible to create - and even increase - trust and transparency amongst your network of buyers and suppliers. Then, regardless of what happens in the market, you can be confident that you have the financial stability to be able to handle short-term actions and reactions, but the structure and visibility to plan for tomorrow.