Things are looking up? Watch out!
After three years of depressed economic prospects, those whose job it is to comment on such things now believe that the European economy is on the way up. Manufacturing companies are more confident about the future. Even banks are hiring again.
All should be good. After three years of belt-tightening, there is a major temptation to relax. Projects that have been put off due to ‘lack of budget’, suddenly become possible again. Corporate treasuries may even be able to replace the person who left six months ago.
Yet now is not the time to change the focus away from tight control. A concentration on working capital as the order book expands is just as valid as it is in leaner times. Too many companies rely on the profits from increased sales to provide the engine of company growth and forget the need to fund these sales before the cash is received. This can mean that the finance function forgets t focus on cost efficient funding structures.
This is bad news for three reasons. It reduces the profitability of the orders in the newly expanded order book. On its own, that should be a big enough reason to maintain efficiency.
Moreover, it will store up trouble that will return when the next recession comes. Every increase in inefficiency now will need to be reversed, probably painfully, the next time the business cycle dips.
But more important than both of these are the risks inherent in business expansion. As companies expand to meet their increased orders, the need to finance the working capital emerges. However much counselling there is from banks, consultants and other advisors, many businesses will get into difficulty as the business environment improves.
Now is not the time to let the hard work of ‘doing more with less’ slip.