Profit warnings caused by ‘too little, too late’ policies

The surge in profit warnings by UK companies could have been prevented if
more companies stopped using ‘rear-view mirror accounting techniques.

Speaking at last week’s Financial Director Summit, Robert Bittlestone,
chairman of consultancy Metapraxis urged companies to use up-to-date techniques
to provide more insight into their business.

‘It is hardly surprising that “rear-view mirror” accounting increases the
likelihood of a profit warning, which is the business equivalent of the lookout
on the Titanic: too little and too late,’ he said. He recommended companies
focus more on ‘upstream’ indicators — often including key non-financial data —
rather than relying simply on ‘downstream’ profit.

Bittlestone also suggested that multinational corporations were particularly
exposed to the risk of profit warnings when business uncertainty increased or
when a long-standing finance director left.

‘In any company there will be some subsidiaries or product groups that
consistently under-perform, some that tend to come in on budget and some that
consistently exceed their targets. Once a group finance director has spent a few
years becoming acquainted with his or her business colleagues, he or she will be
able to compensate for their forecast bias via some form of central provision.

‘But this informal system tends to collapse when there is an increase in
business uncertainty or when a well-established finance director leaves and the
new incumbent lacks these intuitive antennae.’

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