Do your best

Be prepared. It’s tough out there right now, isn’t it? But it’s not so much
the credit crunch that is causing headaches; the sheer volume of bad news and
doom-mongering being thrown at us from every direction is the real killer. Sure,
the numbers aren’t good. According to Eurostat, the eurozone saw GDP shrink in
the second-quarter by 0.2% ­ the first contraction since the launch of the euro
­ sparking many a ‘European recession’ headline. However, the UK was one of the
only countries that grew, albeit by 0.2%. We’ve not yet had those two
consecutive quarters of negative growth that define a technical recession ­ but
it seems we may be talking ourselves into a psychological slump, at best.

A year on from the start of the credit crunch, and mindful that even
Financial Director is susceptible to the power of suggestion, we
thought it would be a good time for our readers to tell us the facts as they see
them. Our credit crunch survey asked FDs to tell us what they have done to
respond to these new challenges, and to give us their four-year predictions for
the direction of the UK economy right up until 2012. To download a PDF of
the full results of our Credit Crunch Survey, click
here.

We had a fabulous response, which gave us a great cross-section to examine,
from the upper reaches of the FTSE-100 to unquoted mid-caps; the survey cut
across a range of sectors to give us the best snapshot of finance director
experience and opinion on the economic situation across UK business as a whole.

What we found was that, while finance directors accept recession is either
upon us now or will be shortly, they have spent year-one of the crunch preparing
their businesses for the worst and feel confident they can manage their way out
the other side. According to the results of our survey, the FDs, FCs and CFOs we
heard from are as realistic about the prospects for the economy as they are
upbeat about their readiness.

What they say about the ‘big picture’ isn’t good. Just over 60% thought that
the UK might already be in recession, while just under 40% believed that we’re
not there yet, but we probably will be soon. To add to that, 82% of respondents
thought the effects of recession (if not, perhaps, the recession itself) will
last into 2010, while half thought the knock-on effects will spill over into
2011. Just under a quarter said the aftershocks would hang around until 2012.

We asked our readers to tell us in what corners of their business they believed
they’d have to lead cuts in 2009, offering them a raft of options including M
&A activity, green initiatives, pension contributions, staff cuts and
business lines, and asking them to give us their top three in descending order
of importance.

Overwhelmingly, the option ‘We are not planning any cuts as a result of the
credit crunch’ came top, with more than 30% of respondents telling us this,
indicating surprising confidence and stability for the coming year.

Jobs on the line
For those that are planning cuts, as expected, staff cuts loom large as the
first option for 28% of our respondents, the second priority for another 11% and
the third choice for a further 10%. Travel and entertainment budgets were next
on the hit list. Creeping in as further options were cuts in systems investments
­ 13% of respondents put this third on the list ­ and, even more startlingly,
just over 11% of respondents made cutting management bonuses and other
management reward schemes their second priority for next year (less
surprisingly, only about 2% chose to list board-level compensation or bonuses as
a target for cutbacks).

Some tough action has already been taken, though, as 37% of respondents told
us they had already reduced their headcount while a similar number said they
were planning redundancies for 2009.

Worryingly, however, when we asked if FDs thought it was necessary to make
short-term cuts that might be potentially damaging over the longer term, 9%
strongly agreed that it was and a further 34% slightly agreed.

There was optimism to be found from what finance directors told us about the
effect the crunch had on expansion and growth strategies. Sixty-one per cent of
respondents felt the crunch had not forced any change in existing business
strategies and 67% said they had not had to put any major strategic moves on ice
this year or, so far, those scheduled for next year because of the worsening
conditions following the crunch. In fact, in terms of corporate bravery, almost
half said they thought the new conditions provided them with an opportunity to
make acquisitions cheaply and would actively seek targets out this and next year
as a direct result. Inside this figure, a further half (or just over 24% of the
total) thought financing costs or terms might end up being prohibitive.

We asked them to tell us more about funding and nearly 67% said they had
found it slightly more difficult to raise finance generally in 2008. Our FDs
also told us they did not favour disposals as a route to cash raising, though
spin-offs did get a brief look in with about 6% of FDs. Instead, getting more
mileage out of existing credit lines and lender relationships ­ going back to
lenders after ensuring the company is in good shape to weather a long downturn,
keeping finance providers happy at a time when there’s scant supply of that
sentiment ­ was popular, with nearly 56% of respondents selecting this as their
primary source for refinancing. Coming in second was asset-based lending,
followed by the dark knight, private equity investment, with 21% of the vote.
Only 6% of companies were considering share issues, which makes perfect sense
right now.

In our respondents’ opinions, the weakest link, in terms of potential
problems heading into a protracted recession, was lack of support from ­ and
belief in ­ government policies and regulation to help see them through. The
most obviously stricken businesses, the banks, have at least Gordon Brown’s ear
and the wet-nurse emergency policies of the Bank of England to shore them up.

Other businesses must manage shrinking order pipelines and slipping down
suppliers’ debtor hierarchy. We were surprised at the detail and length of
responses (well, impassioned complaints, really) we got when we asked readers to
tell us what they felt the government could or should do to help the economy
now, versus what they believe the government will do.

Rolling on past the barrage of “Call a general election”, “Resign” and “Admit
we are in a recession now” comments, valid though they may be, finance
directors strongly showed they don’t believe in the incumbent government, either
in terms of them understanding the job of business at the moment, or its
interest in actively helping. Overwhelmingly, we received many comments focusing
on the need to simplify tax, not just to make the lives of UK plc easier, but to
encourage foreign investment when it is needed.

Regulating the regulators
Many finance directors said they thought that, rather than changing regulation
itself, the government needed to look at who is regulating the regulators at the
top, such as the Financial Services Authority and suggested everything from
scrapping it altogether through to investing it with more, clearer and stronger
powers to set the agenda, move more quickly, do away with what many think are
piffling, inconsequential fines and allow it to more aggressively and
effectively regulate. The criticism of the FSA as a toothless regulator isn’t
new, but so many comments on its total impotency in one go make startling
reading.

“Regulation continues to suffer from ‘small-picture-thinking’ with little or
no attention paid to long-term strategic investment needs,” says one FD, “and
the government is slow to recognise the need for new regulatory frameworks even
when the existing powers have failed. “They need to reduce the role of the FSA
as it has failed to perform its broad regulatory role effectively since 1997 ­
but the prospects for change are not good in our lifetime.” Another criticism:
“They should do nothing; their failure to manage the economy shows they lack
competence to improve regulation of the banking industry.” Those who thought
things are going to get much worse in 2009 also thought regulation would suffer
from panic tinkering if, for example, insolvencies keep rising and occur higher
up the FTSE food chain. “We will see several FTSE-350 companies go to the wall
in the next 18 months,” one finance director said. “The knee-jerk reaction will
be that the politicians will be expected to do something, anything, and their
reaction will be more regulation which will have entirely the opposite effect of
what is required. The law of unintended consequences will strike.”

Reality check
Surprisingly, few finance directors thought the government should try to stop a
recession, with many emphatically saying a “reality check” was badly needed on
everything from consumer spending patterns to financial forecasts, tax
complexity, the housing market and fuel consumption at individual and corporate
level. “[The government] has gotten itself into a terrible mess and sees no
irony in presiding over 10 years of growth during which it continued to borrow
more than it could afford,” one finance director told us. “Now when we should be
relying on reserves to cut taxes and lift the economy out of recession, the
cupboard is bare.”

The best news, perhaps, is that finance directors have confidence in their
staff and the skill of their finance functions to see their companies through
the trough. Eighty-one per cent said they were confident or very confident their
finance function had the necessary skills to deal with such a challenging
environment. FDs, then, are prepared and appear to have earned their ‘credit
crunch’ badge. The next task on the FD’s agenda must be to keep hold of the best
finance staff in order to survive over the next five years. More bank runs may
seem unthinkable ­ but brain drain may be just as harmful in such a difficult
downturn.