Resisting the Pull of Short Term Results
Shocking, but true, a recent article by Harvard Business Review indicated that a recent survey of CFOs showed that 78% would ‘give up economic value’ to meet financial targets and smooth earnings for Wall Street. In addition to their more obvious entity value ramifications, Clayton Christensen argues that these actions also hinder innovation. Whether the pressure is from Wall Street or private investors, whether real or perceived, the issue is very real. I’ve felt it. I’ve been on both sides…pressuring for better results and trying to meet external targets or expectations. Regardless of how you assess it, you’ll find that focusing on short-term results is not a sound strategy and leads to a less sustainable company and lower valuations.
The HBR article gives an example of how Boeing began an unhealthy focus on return on net assets that led them to outsource a particularly complicated supply chain as they sought to shed assets from their balance sheet. The result was enormous delays and ballooning costs.
The following are other real examples I’ve observed over the years of short-term thinking getting in the way of long-term health:
- Consumer products companies, that regularly oversell into their channels to achieve growth and neglect to watch “sell through”. This always leads to discounting by the retailer, a cheapening brand, and reduced gross margins
- Companies, in the interest of “growth” that sell into a channel or to a customer that isn’t a fit with the brand, damaging the brand
- Selling discounted product unnecessarily to achieve short-term sales goals. It can be very difficult to bring prices back up later and customers often get trained to wait for deals.
- Not accounting for expenses properly for fear they may bring down your short-term results. This tactic is always exposed in the end and casts doubt across the financials and the ethics of a management team
These tactics can be enticing when faced with external pressures. At some point, the pressure will come. Decide now that building a healthy, and sustainable company is your real goal. The truth of it is, good investors, when presented with information grounded in reality, will frequently support a decision in the long-term best interest of the company. In the end, as so many say, investors bet on the team, not the company. Be a leader…make the decision that is best for all stake-holders, not short-term results.
David Chase, a partner at Advanced CFO Solutions, has experience in small to medium private companies and large public companies as a senior operational and financial leader. With 15 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience. Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $450 million.