Esa Tihila, CEO of Basware
Traditionally, companies have had a long-term view with five-year and three-year business plans. Accounting practices are focused on three-month quarterly periods and decisions are made based on historic data and trends. However, the current pace of change has brought with it aggressive competition and technology innovation which have enabled UK organisations to take a much more short-term view of their businesses. This comes with benefits like agility; the capacity 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.
Confidence and 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 needed to do this, in part, stems from how robust the network of buyers and suppliers is. Visibility of what’s going on inside businesses is critical to understanding 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 a network of buyers and suppliers. Then, regardless of what happens in the market, businesses can be confident that they have the financial stability to be able to handle short-term actions and reactions, but the structure and visibility to plan for tomorrow.
Uncertainty is a significant contributor to low confidence. Psychologically speaking, if you don’t know or understand what’s in front of you, it’s very hard to commit to it. If a tendency for short term approaches stems from a lack of confidence, the solution must be to boost ‘certainty’.
How to achieve certainty? In the specific instance of business commerce, having visibility of all financial processes is a huge first step. See what’s going on, analyse the impact of it and make decisions appropriately. When this is backed up by reliable financing tools that can assist in balancing and stabilising cashflow at times of uncertainty, can provide businesses with confidence in their ability to achieve financial success.
Once businesses have confidence and can stabilise their financial situation, they can start to invest in their own processes. Meaning they can become more flexible and agile in dealing with commercial transactions, and in turn get a healthy return from working your capital within the supply chain. For instance, by securing more early payment discounts by looking at future cashflow and identifying capital that can be parted with before the scheduled payment date. The benefit is that while organisations are parting with cash, they retain more working capital in the long run.
Every business that can reel in control of its own processes, costs and decision making can find the financial supply chain is an area of opportunity. A strong cashflow is not just a sign of stability, but also the bedrock for capitalising on these opportunities. There are some short-term gains out there that shouldn’t be ignored – they allow for agility and investment. But they should not be taken outside of the longer term picture. Forecasting more than a month or two down the line can nail down the financial security of UK businesses for years to come.