Challenge assumptions
A surprisingly high proportion of companies are still implicitly building their budgets and investment plans on the assumption that they will return rapidly to top-of-the-cycle performance. Many CFOs will need to challenge such optimistic assumptions by asking a few uncomfortable questions.
What's 'normal' performance?
Many executives still have unrealistic expectations about future growth and margins. In general, non-financial corporations performed very strongly heading into 2008, having enjoyed much higher profits and return on capital in 2006 and 2007 than at any time in the past 40 years. Return on equity, for example, reached 18 per cent in 2007, compared with its 40-year average of 13 per cent.
Projecting what will be normal performance after the end of the present downturn requires careful consideration of an industry's cyclicality and microeconomics.
CFOs will need to supplement recent averages with an analysis of the structural changes likely to persist beyond the recession. Growth in demand for many natural resources, for instance, could well be structural, and supply capacity is short in the medium term.
All this implies that investments in natural resources might be sound. Other industries, such as finance, may be undergoing long-run structural shifts, possibly returning to the levels of profitability and industry scale that prevailed 10 years ago.
Image: Protesters demonstrate outside a Citibank branch in Hong Kong. | Photograph: Bobby Yip/Reuters
Also read: Mumbai, Delhi among world's 10 costliest cities
Powered by 
| Live updates on money.rediff.com |
|
Advertisement
