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Why Inefficiency Is a Balance Sheet Asset

Excess capacity and surplus working capital help companies survive shocks to the supply chain.
Andrew Sawers, CFO.com | US
June 27, 2012

CFOs and the accounting profession know well how to do an upbeat financial report on the performance of any efficiently-run organization. But how can you turn inefficiency into a profit or an asset?

Well, why would you want to? Prof, Ian Goldin knows why. He's the director of the Oxford Martin School at Oxford University, an educational establishment that specializes in thinking about global questions that affect the future. In short, Goldin believes that "the professional push to sweat your assets is dangerous."

In a recent presentation to CFOs at the annual Finance Directors' Forum conference in London, Goldin talked about how the high degree of globalization, integration, and connectivity has been "the best positive force that humanity has ever known." At the same time, he argued, "we must get much smarter at managing the systemic risks - whether they are cyber risks, pandemic risks, financial risks, or other risks."

In business, he said, we see this with "increasingly tight, elongated, tense supply chains and smaller capacity": efficient, yes; highly connected, certainly. But "whether it's your working capital, oxygen bottles in a hospital, parts in a factory, spare people in your
firm . . . when there's a shock in the system, it amplifies much quicker," he warned. A factory in Oxford can be brought to a standstill because of a small disruption in the English Channel.

Goldin challenged the accounting profession, which, he said, "is not giving us a reward for resilience and spare capacity." And he asked the CFOs present, "How do you ensure that you're able as a finance director to value resilience and some capacity to absorb shock? How do you explain to your shareholders that actually having some spare capacity or backup systems is a good thing for the long-term survival of your firm?"

Goldin, a former vice president of the World Bank and a onetime adviser to former South African President Nelson Mandela, was delivering the opening keynote address at the conference. Straight afterward, the conference delegates split into a number of different sessions.

In one of those, CFOs lamented to one another about the harsh strictures and the unrelenting demands from their companies' private-equity owners for more and more cash generation. Ringing in their ears were Goldin's words: "We need to educate around resilience and get away from the threat of hyper-short-termism."

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.




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