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The history of the stock market has been one of bubbles and bursts. From the South Sea boom of the early 18th century to the oil crisis of the 1970s, we've seen how rapidly confidence can inflate the market, and how dramatically major shocks can bring it down in periods of overconfidence.
We may be on the verge of yet more dark times, once again fuelled by a drop in investor confidence. Last month Ernst & Young revealed that UK-listed firms have issued 313 profit warnings in the last twelve month, the largest number of downgrades since the low points of the Long Recession. The news follows a turbulent few months which have seen rocky growth in China and an unprecedented plunge in commodity prices.
Profit warnings frighten investors, and with good reason. However, this is as much down to what a warning says about the business’ future as to the fact that that it often comes out of the blue. We react much more impulsively to last-minute news than we do when we have more time to plan ahead.
The truth is that profit warnings often fail to tell the whole story. While on the surface they may give investors the impression that a business is losing its way, a downward turn can also be caused by unpredictable external factors, like the unseasonably mild weather that hit the retail sector over Christmas, or long-term internal transformation initiatives. Context is therefore just as important to measuring a business’ financial health as its stock price.
Fortunately, today’s back-office technologies have made companies agile enough to anticipate a potential downturn and react well ahead of time to mitigate its impact. For example, a fashion retailer could move forward the release of its spring lines or step up marketing around its year-round best-sellers if it anticipates low demand ahead of a warm winter.
Of course sometimes the market just doesn’t move the way we expect. In these instances the best course of action is to flag an impending missed projection as soon as possible and keep stakeholders posted every step of the way. Being transparent gives investors peace of mind; it shows them their money is in the hands of a company that prioritises their investment and is operating in their best interest.
And while this won’t necessarily make the business’ balance sheet look any better, understanding the context behind a downturn and knowing what plans are in motion to turn things around makes profit warnings easier to swallow. At the very least, this reduces the panic and resulting drop in investor confidence that usually accompanies a missed projection.
A commitment to openness and transparency is essential, but business can only deliver on this promise if it can access and share detailed information on its various operations in near real-time. This is where cloud finance applications play a role. They allow organisations to centralise and analyse huge volumes of information from across the business in a matter of minutes, putting them in a position to not only share the latest outlook with investors but also adapt their plans to meet new contingencies.
There is of course no way to completely eliminate the effects of a difficult economic outlook on investor confidence, but like any savvy gamblers investors prefer to make decisions based on as much sound information as possible. By being faster and more detailed in the way they share financial data outside their organisation, businesses can give stakeholders the complete picture they need to make a well-founded assessment.
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