What CFOs worry about

You know how generals tend to prepare to fight the last war. It appears that chief financial officers (CFO) worry about a repeat of the most recent disasters but have trouble identifying future risks. The risks that CFOs say will be their greatest concerns over the next five years — financial meltdowns and supply-chain disruptions — are the disasters that have happened in the last few years, according to an article and survey by CFO magazine.

Top risks identified by 168 senior finance executives

  1. Financial exposure (51%)
  2. Supply-chain/logistics disruption (37%)
  3. Legal liability/reputational harm (35%)
  4. Technology failure (33%)
  5. Security breach (23%)

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Multiple responses allowed.
Source: CFO Research Services and Liberty Mutual Insurance Co., June 2010

“The research suggests that many companies would benefit from a more forward-looking approach to managing risk,” the article says Continue reading “What CFOs worry about”

Top concerns of CFOs, 2008

The top external concerns of U.S. CFOs:

  1. Consumer demand
  2. Credit markets & interest rates
  3. Housing-market fallout
  4. Cost of fuel
  5. Cost of nonfuel commodities

Top internal, company-specific concerns:

  1. Cost & availability of labor [nonfinance]
  2. Ability to forecast results
  3. Cost of health care
  4. Supply-chain risk
  5. Data security

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Source: Duke University/CFO magazine survey of 475 U.S. CFOs, May 2008

Related:
June 2007 (previous post) What CFOs worry about
Most companies fail at forecasting earnings
CFOs predict: The top business risks through 2009

In praise of organic growth vs. financial engineering

Research shows that mergers & acquisitions don’t produce the expected financial bonanza. But “organic growth” does.

The Batten Institute, part of the University of Virginia’s Darden School of Business, has released the latest results of a decade-long study of corporate earnings, establishing a correlation between organic growth and outperforming stocks. Using an Organic Growth Index (OGI), Darden professor Ed Hess compiled a list of “Organic Growth All-Stars” for the period 2003-2006. The conclusions:

In addition to consistent growth in underlying earnings, as measured by the OGI, the all-star companies’ share prices have outperformed the S&P 500 by a factor of 10 over the past 10 years.

Actual 10-year returns (1996-2006) for the OGI All-Stars were over 1,368% vs. approximately 130% for the S&P 500 Index and 144% for the Dow Jones Industrial Average.

“These companies have shown that they can grow in good times and bad. It’s not about the economic cycle. It’s about the business model,” Hess says. “Organic growth is growth the old-fashioned way: more customers, more products, better operating efficiencies,” he says. Not financial engineering or manipulation.

Hess identifies four key attributes of strong organic-growth companies:

  • Simple, focused business strategies, implemented by managers who are are “execution champions”;
  • Top management is home-grown and made up of “humble, passionate operators”;
  • A highly-engaged workforce characterized by a strong degree of loyalty and productivity; and
  • A “seamless, self-reinforcing internal growth system”

The study — and the list of 27 All-Stars — is available at this link. For some reason, the all-star list includes a couple of “dollar stores,” a couple of casual restaurant chains, a couple of big-box retailers, and the maker of Spam.

Most companies fail at forecasting earnings

Two out of every three companies are unable to accurately forecast earnings for the next quarter, missing the mark by anywhere from 6% to over 30%, according to a study of 70 multinational companies by The Hackett Group.

We’ve all seen cases where missed earnings projections led to sharp stock declines, CFO firings, or worse. But often companies don’t take the steps necessary to get better at forecasting, Hackett analysts say.

Continue reading “Most companies fail at forecasting earnings”

CFOs predict: The top business risks through 2009

Top five business risks through 2009:

  1. Competition
  2. Pricing and currency
  3. Economy
  4. Supply chain
  5. Property*

* Fire/explosion, mechanical/electrical breakdown, natural disaster

Note: 62% of financial executives expect risk from competition to increase through 2009, while only 4% expect it to decrease.

Top five emerging business risks through 2009:

  1. Change in competition
  2. Government/regulation
  3. Pricing volatility
  4. Variable client demand
  5. Political threat

Note: Terrorism, and pandemic, ranked very low.

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Base: Survey of 500 financial executives in North America and Europe (including CFOs and treasurers) who work for companies with at least US$500 million or more in annual revenue.

Source: “Managing Business Risk Through 2009 and Beyond,” FM Global, a property and casualty insurer, Johnston, R.I., May 2007

Related: What CFOs worry about