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Brain circuits

Questions to ask yourself as money gets tighter

Published 23 March 2022 in Brain circuits • 2 min read

Inflation is changing the financial landscape as we speak, so if you haven’t yet sat down and thought about what changes you may need to make in your strategy or future plans, there is no time like the present. The war in Ukraine is adding to the pressures business are feeling with shortages in some areas, soaring energy prices and increased disruptions in the supply chain. The ultra-cheap money of past years has caused some corporates to develop some bad habits. These questions will help you clarify where your organization stands.

Should you really be planning that acquisition?

With historically high asset valuations, there is a risk that companies may be overpaying for targets. With increasing debt costs and sky-high valuations, the downside risks for acquirers are magnified. You need to be willing to walk away from acquisitions with high multiples. Do not allow ego or empire building to cloud your judgement.

Is a share buyback more expensive than you realize?

With the stock market still near past highs, companies risk overpaying for their own shares. Many companies developed a habit of leveraging the balance sheet and taking up debt to repurchase their own shares when money was cheap, but now the landscape has changed it is time to rethink that, and resist pressure from activist investors.

Do you understand the financial situation of your suppliers?

This is a very important question as it’s not just the pandemic disrupting the supply chain these days. Some future degree of greater vertical integration across the value chain may be inevitable. If you have any cause to be concerned about key suppliers, reach out – and, if necessary, make a proposal to ease the strains. The risks of serious disruption caused by failing to act will far outweigh any short-term costs. 

Further reading: 

Higher borrowing costs call for financial prudence by Karl Schmedders

Authors

Karl Schmedders - IMD Professor of Finance

Karl Schmedders

Professor of Finance at IMD

Karl Schmedders is Professor of Finance at IMD. In his research, he applies numerical solution techniques to complex economic and financial models, shedding light on relevant market issues and industry problems. He is also Director of IMD’s new online certification course for structured investment products in partnership with Swiss company Leonteq, teaches in the Advanced Management Concepts (AMC) and Executive MBA programs, and is an advisor on International Consulting Projects in the MBA program.

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