Is Balance risk being traded for balance of power?

Some have suggested CFO’s risk energy  is better placed to ensure economic fallout is less severe.I have to agree, many CFO’s have been focused on acquisition growth and leveraged efficiencies sometimes at the expense of fundamentals and the basics of risk management itself. Budgeting and expense management are vital but not the only issues that need to be managed as companies struggle to reduce their balance sheet exposures.

I note Dr Kitbamroong’s comment on my post last week entitled “How is Managing Risk a vital CFO role? ?” He made the point very succinctly saying,

“if  one of the daily activities of the CFOs were to monitor and execute risk management  then economies wouldn’t be so bad”.

Squeezing the orange till the skin breaks syndrome on consolidations may not have been all that smart either, as sell-offs are now all the go to rectify debt ridden balance sheets. With extraordinarily high prices having been paid, often for no more than market share based acquisitions, synergy clean-outs and less focused shared service SLA models have often been initiated to justify them and cut cost,s with many likely to fail to deliver the value now in the downturn. This is taking a huge toll on products, capability and good sense in risk management, as overstretched sales forces struggle to  meet their sales numbers at all costs with commercial awareness taking a back seat. All tbis too as they try to sell into confused, overpowered markets, who have also became more demanding and single minded, to focus on ROI, with often higly detaile,d but vaguely qualified business requirments and short term gain and sometimes very doubtful statements about benefits. And of course we all know the consumer and housing markets in the US and everywhere in developed nations all benefited, until it all come crashing down in late 2008 . As the accesses cause bank failures caused money for homes and consumer credit to dry up, the world’s biggest spenders then simply just stopped buying and the cards all started to fall.

Looking back with benefit of hindsight it is seems it was quite inevitable that problems would occur when overcooked demand drops started to kick in early to mid 2008. The risk issues are now clearly being exposed more and more as cover is sought. And as many “Card Pack” builders have already fallen with more likely to come as their reserves run out.

Exacerbating this, the global economy crunch on the consumer credit society that changed the fundamentals of investment multiplier theories in the cashless credit based societies of developed nation is now a large consideration. Consumers with a life style of living on credit in the comfort the future with pay for it, now have a issue to save cash just to survive with a double whammy that they need to pay off their credit card first.

So a US lead recovery is not so easy to understand especially as the double impact effect hits even more as business closures and more unemployment, now over 7% in the US, kicks in. The knock on effect of the economic malaise now endemic in all world economies, will likely metamorphosis differently as supply chains around the world change hands and traditional economies could be reincarnated elsewhere.

People like the small to medium operators and large CFO’s alike, need to get this point well with the likelihood of a long haul and potential W shaped recovery to come. Or worse even a deep U shape recovery with high likelihood we are still on the down side.

These who jumped on the band wagon in the good times and just took the money and trusted they would have it right before the bubble burst, are now paying the price. Hence restructuring, divestment and sell offs and prop-ups are becoming flavor of the month in key industries to fix balance sheets. CFO’s need to look at these issues very hard and do it quickly and too or risk perishing.

So the life of Riley is over as we know it. The power brokers in good shape are now seizing the opportunities with many waiting for more timely pickings to come.

In July last year I was invited to speak at a seminar where I was asked to deal with ideas on understanding and dealing with the dark shadows we were seeing them. In my research it seemed agility to have good information to react and control risk was a key But it was also apparent to watch what the Chinese were buying and move in those markets. For the providers of 60% of the world manufactured goods, there can be no question now about their intent. The Chinese see the opportunities and are talking them. They are literally grabbing control of markets that have evaporated by the developed nations forced abandonment of their excesses, which in turn has created a plethora of wounded and very cheap cash cows.

This of course is nothing new as China has been buying resources and commodities suppliers over recent years as it has cashed up on importing nations endless credit financed spending sprees for manufactured goods. The point is China is practiced at doing this now and is skilled and eager to ramp up their acquisitor efforts as they see opportunity to become the dominate economic leader controlling the world’s supply chains It may seem trite or na?ve to say this to ouch my point further, but it may be for no other reason to reduce their risk.

One example is a 19% take up in the RTZ sell down this earlier this month. RTZ is one of the world’s largest resource providers and key supplier to China. Another example headline today in the Wall Street Journal says “Chinese Companies Plan Europe Shopping Spree” and expands on their planned 2.3 Billion spend-up to take advantage of tumbling asset values in hard-hit Western economies” The article contributed by Steven Yang and Shen Hong also highlights China’s $25 billion loan to Russian energy companies in exchange for larger supplies of crude oil. These examples also points up the cashed up leverage position of China which pales into insignificance the combined US EU Aussie and other developed nations bailout money.

But even so at the small end it is people who will take risks we also need to rekindle and lead economies back being confidence at local levels.I am still convinced of the early advice I got to follow the money. But to do that we actually need people now with a combination of a sense economic reality, due diligence disciplines and sharp entrepreneurial skills, to be bullish more than ever as the balance of economic forces change in readiness for a potentially quite different recovery over considerable time.

The trick is now how do we get that under control and help keep business out of more trouble without selling off the farm. And to keep the money flow moving that makes it all work.

CFO’s need to look hard at this now to survive, while all this shakes out.

For business operators, CFO’s and investors alike there is clearly no simple or single answer for sure.

3 thoughts on “Is Balance risk being traded for balance of power?

  1. These days as a mostly irrelevant old Prof my opinions are sought after mostly by intellectual winos, who I can find to listen. And sometimes I get a hearing from the street Kids around here, under 10, who I thnk someone told I was an important US-German scientist. What a fake I am eh?, I cannot even speak German even though I do help out at Ofarhnok Uni.

    But I did a bit of reading up on this for you and have done a guest post.

    I wonder if Hillary got a tour of the Emperors palace.

  2. This is saying something especially from me as a confirmed anti-politic. (Derived from the Latin word POLY for many and a TIC being a blood sucking parasite). But Hillary Clinton looked good today on the last leg of her Secretary of State visit Asia trip on Sat Feb 21 being today. She went to Beijing and got away with it even though she would know you cannot beat the Chinese at Chinese checkers.
    What a great diplomatic trick to go to a green power plant first to get AGW on the agenda. Of course it was American technology the made it so clean, so it gave her a win -win and no loss of face.

    So who holds balance of power now, I wonder?. (Excuse the pun).

    By the way I am have a tip about RTZ. BHP Billiton has offered to be a white night to boot Cinalco out of the 19% bidding for the RTZ balance sheet shore up. How about that? Old foes are now mates. And see, sometimes if you just stay in the game even if it looks lost, there may be some bonuses. Gordon I am sure you still have some shares, else why would you write about it?

    Yes I think I will follow the money too.

    Cheers Roland

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