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There may be trouble ahead

1 Sep 08

Gloom about the economy and a wide range of suggestions for improving it are revealed in our finance directors’ survey, writes Robert Outram

by Robert Outram

These are challenging times for business, but this is when the finance director really earns his or her salary. With revenues under pressure, costs rising and the crisis in liquidity choking the supply of finance for more than a year now, a skilled and experienced FD can make all the different between survival and catastrophe.

CA Magazine’s annual survey of finance directors reveals plenty of pessimism over the credit crunch and prospects for a recession in 2008, and also some very contrasting suggestions as to how we can get out of this mess.

First, thanks to all who responded to our online survey. We have received input from and chief financial officers at listed companies, subsidiaries of multinationals, private businesses large and small, not to mention public sector and not-for-profit organisations.

The economic situation is a testing one for all of them, but how optimistic are they about the near future? Not very, is the answer. We asked “Do you think the UK economy will be in recession in 2008?”

More than a fifth (22.5 per cent) believe that the UK is already in recession; 42.5 per cent believe that recession this year is “very likely” and 27.5 per cent “quite likely” (see graph alongside). Only about 6 per cent believe that a recession is “not likely”.

The Scottish-based FDs are very slightly more optimistic – only 20.4 per cent of them believe the recession has already arrived, compared with 26.4 per cent in the rest of the UK – but only as regards when, not whether, the downturn will comes

The Scottish-based FDs are also slightly more optimistic that the first half of 2009 will see the end of the credit crunch – 15.7 per cent believe this as opposed to 9.4 per cent in the rest of the UK.

FDs at listed companies are the most pessimistic of all. Half of those polled believe the credit crunch will go on into “2010 or later” and just under half of them (46.7 per cent) expect that their organisation will lay people off this year. Finance departments are less likely to suffer the axe, however. Even amongst listed companies, only just over 13 per cent expected to be laying off finance staff, which is only slightly more than the average for all FDs.

Asking “What should Government and regulators be doing to combat the credit crunch” attracted a wide range of opinions and, indeed, ideas on whom to blame.

Our FDs essentially fall into two factions. One is calling for swift and decisive action to restore confidence in the housing market, liquidity in the money markets and transparency in banking. The other would rather see Government back off and allow the business cycle to run its course rather than interfering. The dilemma facing the Government is a hard one.

Meanwhile the priorities for our FDs remain remarkably constant. A new challenge, “availability of finance”, has gone straight into fourth place, but apart from that, the preoccupations of the typical FD are much as last year (see “Top 10 challenges”, previous page). It is notable that “staff recruitment and retention” remains at number three as a priority.

Pensions, a big preoccupation a few years ago, have been out of the top 10 issues for some time and the table (right, above) shows how few employers still run a defined benefit scheme open to new staff.

In 2008 there has been a lot of talk about businesses quitting the UK over the corporation tax system, particularly the way overseas earnings are treated. Only a few have made the move in reality. Of those in our survey, only 8 per cent were considering, or had considered, relocation – for listed companies, the figure was 16 per cent. Their reasons for doing so are shown in the table below.

For those staying on in the UK, a bumpy ride is guaranteed over the next year or so. A firm hand on the financial wheel and a sharp eye on the road ahead will be vital assets for any FD in times like these.

For tables/charts, please see printed magazine or download the PDF. 


WHAT SHOULD GOVERNMENT AND REGULATORS DO ABOUT THE CREDIT CRUNCH RESPONSES

  • Avoid the urge to react to public and professional demands and produce a short term fix — they need to focus on a solution that will see us through this period without longer-term damage to our economies.
  • Bring confidence back into housing… purchase stock from developers at a discount for social housing; relax stamp duty; find ways to make first-time buyers creditworthy.
  • Basically, nothing other than sympathetic words. Let the invisible hand do the work over the next year.
  • Shoot the bankers who started it all by lending money to people who could not pay it back...
  • Ensure greater transparency in reporting of risk by financial institutions... to ensure that the credit boom of past years and the credit crunch average out in the next cycle and are adequately considered by investors in their evaluation of performance.
  • Action needs to be taken to increase the availability of mortgage finance. The impact of the lack of such funding and the corresponding state of the housing market is a lot more significant and long term than they appear to realise.
  • Regulate banks in a much more effective way to restrict the availability of financial products that are not understood by boards of those providing them.
  • What we don’t need is more regulation. What we do need is better management and better regulation. The financial institutions are the most heavily regulated area of UK business and they still got it wrong. It doesn’t suggest we can rely on regulation in its currrent incarnation. We need a period of examination, research and reflection to ensure we do this better next time.
  • Keep out of it — in the words of Burns, they “do nae gude at a'".

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