The Prague Post
http://www.aaaradiotaxi.cz/index.php?xSET=lang&xLANG=2
December 1st, 2008
Endowment Fund     Business Listings ONLINE      Reservations      Classifieds    Subscriptions
Prague accommodation

Home » Archives » Business

KPMG warns against the pitfalls of profits

ČSA's near-bankruptcy experience last year should serve as example

By Markéta Hulpachová
Staff Writer, The Prague Post
June 20th, 2007 issue

In times of economic upswing, prospering Czech businesses tend to neglect their reserves.
So says the global business analyst KPMG, whose June 11 study indicates that growing profits are distracting businesses from keeping their expenditures under control, placing their long-term well-being at risk.
“Cost control is a vital issue for Czech companies, but, when profits soar, solving expenditure problems is usually not a top priority,” said KPMG risk management consultant Eva Racková, who contributed to the study.
Conducted in cooperation with the Economist Intelligence Unit (EIU), the study surveyed 427 senior executives at small, midsize and large corporations worldwide.
According to the study, nearly 75 percent of polled companies admitted that, in lucrative times, like the Czech Republic has seen over the past few years, their goal is to lower expenditures only 3 percent — and only 8 percent of respondents said their companies met this goal.
When a favorable economy causes profits to rise, the top priority is expansion. Because of their growth-oriented focus, “managers forget to watch the other side,” Racková said.
Often, CEOs neglect cost control due to the short-lived nature of their business plans.
“Many managers either have transient ambitions or short-term goals,” she said. “Their priorities tend to revolve around raising profits.”
By slighting cost awareness during prosperous periods, companies risk harsher consequences in times of stagnation, which could come as wages level with Western Europe and public finances continue without reform.
“When the [economic] situation turns, lowering expenditures suddenly becomes a top priority,” said KPMG spokeswoman Kateřina Konečná. Cost-cutting methods such as layoffs, outsourcing, consolidation and downsizing become rampant, and none of these is “the best way to manage the situation,” Konečná said.
To prevent the fallout caused by such panics, KPMG analysts advocate an increased emphasis on long-term cost awareness. But, while most managers agree that implementing changes in long-term cost structure would strengthen their company’s positions, these measures are typically carried out only when a change on the market forces companies to react.
Such shifts can occur even when the overall economic climate is favorable.
“There’s always a risk that some agile competitor with a more flexible cost structure will overtake part of [a company’s] market,” Racková said.
Look to the skies
Among the industries recently cut short by increased competition are traditional airlines.
“Low-budget airlines quickly stole a large volume of short-distance flights from traditional airlines,” Racková said. The volatile market caused established companies such as Czech Airlines (ČSA) to take heavy losses, with ČSA alone losing more than 894 million Kč ($41.6 million) in 2005–06.
The sudden drop in profits forced ČSA to concentrate on cutting expenditures. After selling off subsidiaries and downsizing personnel in 2006, the airline aims to increase its profits 700 million Kč this year.
“Last year was our salvation, a year of settling [financial] obligations,” said ČSA President Radomír Lašák. This year will bring stabilization, he said.
ČSA’s behavior amounted to what Rackhová called a “rescue mission,” a cost-cutting strategy in which time constraints force companies to undergo drastic money-saving operations.
“Although these kinds of missions increase cash flow, they tend to quickly deplete the newly allocated funds,” she said.
To avoid this situation, companies must implement long-term budget awareness in their corporate culture. According to Konečná, this should be the responsibility of top management, but, in reality, expenditures are a significant responsibility for only 60 percent of executives.
“Responsibility for individual projects can always be delegated to lower managerial levels. But motivation and leadership have to come from the highest positions,” Racková said.
Because of the time-consuming nature of grassroots changes in corporate culture, it is hard to say whether Czech businesses will heed Racková’s advice.

Markéta Hulpachová can be reached at mhulpachova@praguepost.com


Other articles in Business (20/06/2007):

Browse the Current Issue

If you enjoyed this article, why don't you subscribe to the print version!
We accept secure online transactions provided by PayPal and Moneybookers

Be the first to add a comment!


Full Name: *
City: *
E-mail: **
This comment can be published in the print version of The Prague Post
Enter the text on the right:
 visual captcha
Comment: *
* Required field. In order to be approved for display, comments must have a first and last name and a city.
** E-mails are required and will only be used for internal purposes.

Most visited in Business Listings

Hotel booking
The Prague Post Online contains a selection of articles that have been printed in
The Prague Post, a weekly newspaper published in the Czech Republic.
To subscribe to the print paper, click here.
Unauthorized reproduction is strictly prohibited.