Superior Business Performance Takes Balancing the Short-Term and Long-Term

One of the hardest tightrope acts for any business is balancing the short-term with the long-term. For a variety of reasons, many companies are sacrificing long-term value creation strategies for short-term financial gains. In a management study, a majority of managers said that they would forgo an investment that offered a decent return on capital if it meant missing quarterly earnings expectations.  Achieving short-term and long-term success takes performance balance.

For public companies, this can be due to pressure from the Street.  For private companies, this may be a result of pressure from their VC’s eager to see strong short-term performance to facilitate the sale of the company. In another study, more than 80% of the executives responding said that they would cut expenditure on R&D and Marketing to ensure that they hit quarterly earnings targets, even if they believed that the cuts were destroying value over the long term.

How to Achieve Performance Balance

It is “the responsibility of the management team to be about the importance of both long-term value creation and short-term financial gain to their boards and to the capital markets.  The ability to sustain and improve performance year after year is an indicator of business health. This year-over-year performance serves as a key performance indicator (KPI).

While achieving short-term results is important, it is a mistake to do so at the expense of sacrificing future cash flows from the company’s growth prospects, capabilities, and relationships. All companies, whether public or private, revolve around the share price. Too much focus on the short-term may actually undermine confidence and trust in the markets and put your company at risk.

The expectation of future performance is the main driver of shareholder returns and, therefore, share price. According to business analysts, up to 80% of a company’s market value can be explained only by cash flow expectations beyond the next three years. Even private equity companies that are expected to realize their investments in a five-year time frame must still have a credible proposition for future earnings and cash flow growth to underpin a sale or IPO.

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Balance Entails Juggling These Five Elements

Do you have these 5 components in place to ensure long-term value growth and profitability?

1. a robust and credible strategy
2. productive, well-maintained assets
3. innovative products, services, and processes
4. a fine reputation with customers, regulators, governments, and other stakeholders
5. the ability to attract, retain, and develop high-performing talent

Achieving the appropriate balance between the short-term and long-term isn’t an easy task. Managing both time frames is very challenging. However, it is imperative that your company’s strategy include initiatives across multiple time frames, with some initiatives focused on short-term results and others that will create opportunities for the future – new products and/or services, entering a new market, creating new channels.

To be successful at this approach, you will need to define how future success will be measured. For example, if long-term performance depends on revenue from new products, then there needs to be a metric around the proportion of sales coming from new products. Your success factors and, therefore, your metrics will depend on what enables your long-term health – new products, customer retention, category ownership, etc. Of course, you’ll want a balanced mix of metrics that address all aspects of the business.

These are all things where we can help.  Let’s talk today!

FAQ:

1. A robust, credible strategy
2. Productive, well-maintained assets
3. Innovative products, services, and processes
4. A strong reputation with customers, regulators, governments, and stakeholders
5. The ability to attract, retain, and develop high-performing talent

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