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Flawed Scores

Readers write to say that our analysis of cash generation should look beyond operating cash flow; consumers, not regulators, will make firms introduce better quality control in supply chains; and enterprise risk is not a technical project.
CFO Readers, CFO Europe Magazine
February 4, 2008

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I read "Go with the Flow" (October) — based on research that identifies Europe's top cash-generating companies — with interest. But while the article accurately reports the findings of the scorecard, it does not really challenge them. Cash flow from operations divided by sales may not always accurately reflect a company's cash-generating capability because cash flows in financial statements cannot always be linked to sales. In my view, the scorecard research is flawed.

Michel Baise
CFO, Millenniumbcp Fortis Grupo Segurado
Porto Salvo, Portugal

The Authors of the Research Respond:

REL deliberately uses operating cash flow, or cash flow from operations, rather than overall cash flow, which would include cash flow from investing and financing. Looking only at operating cash flow, which takes into account all of the expenses associated with the creation of revenue, allows for a balanced view of how cash is generated from a company's core operations. The Cash Conversion Efficiency metric pinpoints the areas that companies in the study can focus on such as gross margins, selling, general and administrative costs, and working capital management.

Karlo Bustos
Financial Analyst, REL
Atlanta, Georgia

When Did We Lose Control?

While outsourcing is nothing new for developed markets in the West, it's becoming clear that with economic globalisation we have lost control over our products ("Chinese Checking," September). Chinese toy manufacturers have grown over the past 25 years and have been allowed to use their own materials to cut costs even further. Consequently, this makes quality control even more difficult.

Many western companies have on-site employees to monitor quality, but how well are they able to keep up with the ever-changing safety standards of the West? My guess is that the time-lag from admitting that there's a problem to government intervention and policy implementation is too long for the average consumer.

The quickest solution is not going to come from the Chinese government promising stricter enforcement of regulations, increased inspections and more punitive actions against makers of sub-standard goods (although in the long term, this is all critical). The quickest solution will come from consumers, who determine demand.

Sherrie Krabbe
Simi Valley, California

Risk Culture

"Tales of the Unexpected" (November) prompted Aon to draw some parallels with its own recent research — "Enterprise Risk Management: The full picture" — which discovered that the critical factor eluding companies struggling to implement ERM programmes is corporate culture.

Although 64% of companies stated that embedding a risk management culture in their organisation was a key driver of ERM, only one in ten described their programme as "fully integrated into their business."

Why was this? ERM programmes have typically been implemented in haste to meet regulatory or compliance rules. Once the dust has settled, little has actually changed. Risk identification and reporting occurs within a compliance "bubble." Fewer than half of organisations considered the company's culture when implementing their ERM programmes.

ERM implementation is a management — not a technical — project. When companies have an ERM system that works, it's usually thanks to a clear focus on communication and stakeholder management at the implementation stage. They have carefully considered how to successfully make change happen within their existing culture and they've put in place communication plans designed to engage and win over their colleagues.

Where CFOs do this well, an ERM programme changes the way companies think about managing threats and grasping opportunities.

Alex Hindson
Head of Enterprise Risk Management, Aon Global
Weybridge, UK