According to EY, last year saw 299 profit warnings, 17.3% more than the 255 in 2013. This was a six year high - and among FTSE 100 companies, there were more warnings than at any point during the financial crisis. This included a number of organizations that had hitherto appeared to be in rude financial health, such as Tesco.
For investors, a profit warning can appear incredibly daunting, and the hit to share prices can be massive. They can be caused by a variety of factors, many of which are outside a company’s control. Bad weather is often cited as a cause of a retailer’s poor seasonal performance, although when a competitor announces solid profits just weeks later, it can call into question such logic.
Often, a profit warning calls for a full review to really examine the causes. The finance function and the supply chain are both important parts of any plans that companies may make when trying to navigate their way out of such stormy waters.
The finance function must look to innovate in order to keep costs down without prohibiting growth across the company. For supply chain managers, this means developing and maintaining collaborative relationships with both suppliers and customers, and using technology to streamline and automate operations. Wherever possible, firms should attempt to balance the security of supply contracts with opportunistic spot purchases. It is also important to note that any dip in results could come from a shock to the supply chain, and it is important to find how this shock arose and mitigate against the risk that it may happen again in the future.
One example of a CFO attempting to dig a company out of trouble is Debenham’s CFO Simon Herrick, who resigned just days before the firm issued a profits warning on New Years Eve, which saw shares fall over 12%. Herrick sent out a so-called “Santa tax” letter to suppliers just eight days before Christmas, requesting a 2.5% discount on their supply prices - seen by many as a last-minute attempt to boost falling profit margins, damaging relationships while also diminishing investor confidence. The CFO is often an easy person to blame when poor revenues occur, scapegoated for factors such as poor marketing or the wrong products poorly priced. In the case of Herrick, investors cited a series of unexpected costs that should have been flagged up by Herrick as reason that he had lost credibility, including £7.5 million on relocating its head office to Regent’s Place in Euston.
CFOs must attempt to work with CEOs to set strategy across the company to dig it out of a hole, and collaborate with all departments to ensure that costs are down and they are working efficiently. This does not mean simply agreeing with them. CFOs are in a position where they can argue effectively with the CEO’s decisions and drive innovation.