Most stock market players are conditioned to heartily compliment managements which cut costs. However, there are ways of boosting bottom lines for a particular year that actually hurt investor interests in the long run. The ongoing nature of a business implies that certain maintenance and development expenses are musts even when the going is not the best. Every stock market participant has therefore to look for details when a company in which they have investments reports short term profit increases due to cost cutting.
Employees, especially the most senior ones, are known to walk away with handsome bonuses when a company reports an exceptional profit: some may even move on to other jobs. However, stock market investors need reassurance that their long term interests have not been compromised. The stock market needs to make distinctions between cost cutting and cost effectiveness. There is relatively broad awareness that cash flow is more meaningful that book profits, but the benefits of future related expenditure, written off against a current year’s profits, are less commonly appreciated.
It is not our case here that the stock market should negate cost effectiveness: it is, on the contrary, a mark of professionalism in a management team. The trick is to cut back if not cut out waste, while focusing budgets on items that strengthen a company’s competitive position. Interest and the cost of goods sold are the two biggest items in which top management teams effect big ticket savings. Efficient logistics, new supplier development and shrewd negotiations can make deep inroads in to cost structure without any loss of competitive and brand strengths.
Insurance, routine repairs, brand advertising and product specifications are areas which cunning executives can use to window dress financial performance, but these are almost inevitably at the cost of those who remain invested in the company. So, get out your glasses and pour over details every time a company in which you hold important investments claims cost cutting!
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