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The zombie economy and the CFOs

CFOs must prepare their organisations to live in a world dominated by powerful forces of half-dead, half-alive zombies.

Lauent Leloup
Lauent Leloup
Banks, governments, consumers and companies are all entities that appear to be recovering, but are actually only half-alive. CFOs have at least two years before they can start thinking about business as usual - and even then it will not be the same business as usual, according to PA Consulting Group's book 'The zombie economy : leadership in times of uncertainly'.

In the zombie economy, the banks are too weak to support lending, government finances are too stretched to support expansionary policies, consumer wealth is too depleted to allow them to consume and companies are saddled with debt they cannot service. All will have a dramatic effect right across the corporate landscape.

CFOs must act now to secure the stability and success of their organisation in the zombie world. They need to prepare for the twin danger of illiquidity and irrelevance.
- Illiquidity - despite highly profitable current trading, banks nurse huge losses on their balance sheets and cannot provide the support that businesses need for growth - or even for survival. In this environment, capital ceases to be a commodity and becomes a powerful competitive weapon.
- Irrelevance - businesses whose products and services are aligned to the changed needs of consumers and business customers will thrive; those still focused on last year's customers will struggle badly. The CFO must ensure their organisation has the financial freedom to be responsive to the changing zombie world.

How CFOs can position their organisation to be a winner in the zombie economy

There are four key areas of priority the CFO must address in the zombie world for preparing for recovery :

1) Secure liquidity. In the zombie economy cash is king. The top priority for any organisation has to be reducing corporate costs, save money and improve cash flow. The CFO must drive this awareness through to the core of the business.

2) Manage sourcing. The CFO should be preparing for recovery and restructuring your business by driving the sourcing strategy which defines how corporate services are structured to optimise in-house shared service versus outsourced options. This will ensure the business strategy is delivered with the maximum returns at an acceptable risk.

3) Audit the portfolio. The CFO must be restructuring your business to identify any baggage within their organisation and stop pouring capital into these parts of the business. Even in good times, it is inadvisable to allow good parts of a business to cross-subsidise poor ones, rather than reducing corporate costs. In bad times it can be fatal, Managers must fix the baggage or sell it. This will allow them to exploit by the opportunities which will emerge from the upturn.

4) Focus on information management. While the world moves at zombie pace, risk will move faster. Given the volatility and uncertainty of the economic environment, effective business intelligence is more important than ever in preparing for recovery. It helps a lot if you know where your business is, what your markets are doing, what your customers think. When restructuring your business, financial leaders need to put in place the analysis and information to run the business where downside is prevalent to enable reducing corporate costs.

Commenting on the zombie economy, ways of preparing for recovery, restructuring your business and reducing corporate costs, finance specialist at PA Consulting Group, Simon Tennant says : "The zombies will have a profound effect on the corporate landscape of every sector. Most businesses have much to do in the zombie world. Leaders should return to the basics of good business and preparing for recovery - focusing on reducing corporate costs, restructuring your business and analysing the business portfolios and fixing or disposing of any poor performing parts of the business.

"Acting now in preparing for recovery and restructuring your business will free capital for investment in value adding customer propositions. In the zombie environment, capital ceases to be a commodity and becomes a powerful competitive weapon. Those who act now in reducing corporate costs to seize the opportunities will win."

About The zombie economy : leadership in times of uncertainty
The zombie economy: leadership in times of uncertainty is written by Mark Thomas, head of strategy and marketing at PA Consulting Group, with contributions from PA sector and function specialists. The book is based on a detailed analysis of the 2009 half-year results for over 600 US and UK companies, using data drawn from the Bloomberg database.

Who are the zombies ?
We use the term 'zombie' because these individuals and institutions do not cease to exist, but they do become unable to perform the functions that we expect of them in supporting growth of the economy: zombie banks cannot lend as we need; zombie governments whose finances are stretched, zombie consumers cannot consume and zombie companies who are saddled with debt that they cannot comfortably service.

The book identifies winners and losers and the likely impact on industry restructuring, sector by sector. This analysis is based on two critical factors - the liquidity factor and intrinsic value. The liquidity factor is a compound index made up of a weighted average of: Acid-test ratio; Dividend cover; Gearing; Interest cover; with the greatest weight on interest cover. Intrinsic value is estimated using a simplified (and slightly conservative) form of the discounted cash-flow model assuming: long-run ROE equal to the average of the last 5 years' ROE for each company; long-run growth rate in line with economic growth at 3 per cent nominal; cost of equity at 10 per cent.

To request a copy of " The zombie economy : leadership in times of uncertainty " :

Laurent Leloup

Jeudi 11 Février 2010

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