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Attack is the best form of defence

Shifting from survival mode to funding expansion is the order of the day as FDs enter 2011 in a more buoyant mood

While the past couple of years may have been regarded as the financial doldrums for the majority of companies, it looks as if the outlook for the UK and global economy may at last be taking a turn for the better.

According to the latest quarterly survey of chief financial officers (CFOs) by Deloitte, finance directors are entering 2011 in a more buoyant mood with a new focus on growth. Deloitte’s survey found that CFO confidence rebounded in the fourth quarter of 2010, regaining much of the ground lost in the second and third quarters.

Additionally, fears of a double-dip recession have abated. The auditor suggests that major UK companies are shifting from a focus on survival and protection to expansionary strategies, starting to take on new staff, and undertaking capital expenditure. In addition to that, corporate risk appetite has risen even more rapidly than optimism, reaching the highest level since the survey began in the third quarter of 2007.

“For many corporates, 2010 was dominated by the need to cut costs against a backdrop of slow revenue growth,” says Ian Stewart, Deloitte’s chief economist.

“Cost control has now dropped from first to third priority for CFOs. Introducing new products or services, or expanding into new markets is the top priority for corporates in 2011. Even risk-averse CFOs rate this as a top priority,” he adds.

“Greater confidence seems to be feeding through to corporates’ spending plans. In the last three months, CFOs have become much more positive about hiring and undertaking capital expenditure.”

It is an observation that FDs share, although some are more cautious about the turnaround than others.

“During the last quarter of 2010, we definitely saw an increased emphasis on planning for the future and looking for longer-term solutions within our customers and prospects,” says Owen Nisbett, CFO at datacentre management company nlyte Software. “Companies are now willing to invest for longer-term business gain.”

Marc Giraudon, co-partner at Langham Hall, a fund administration firm specialising in real estate and private equity, is even more optimistic.

“If the majority of CFOs in the UK’s biggest companies say that business confidence is being restored, then it’s a fact,” he says. “If these companies are saying that in 2011 they are prepared to spend money to invest in new products, services, markets and deals, then that confidence will trickle down to the rest of the economy.”

Others such as Andy Welsh, FD at IT data management company 8 Solutions, are more cynical.

“Compared with the beginning of 2010, it looks like we are beginning to turn a corner. But then again – what other direction could we take?” he says. “Recessions are temporary and there comes a time when businesses realise that if they want to make money, they have to spend it. Businesses can’t continue to sit on their hands and not spend anything; they have to push forward.”

Life on Mars

Paul Jones, FD at Uninterruptible Power Supplies, a power backup company, says that business confidence is generally more upbeat going into 2011, adding that his company wants to pursue a more aggressive marketing strategy this year, hiring new talent and looking for potential acquisitions. But he believes the change in business behaviour will be gradual and only become more apparent in the second half of the year.

“We are not going to experience a Life on Mars moment where suddenly we end up back in 2007 with banks rushing to lend us money and clients desperate to spend theirs,” says Jones. “In 2009 and 2010 companies were cash conscious and held back from large capital expenditures. That will change this year because companies simply need to invest capital in new equipment, IT, human resources and so on if they want to win more business. But it will be a gradual process, and I don’t think we will see signs of a proper business recovery until the third quarter.”

Narin Ganesh, regional FD for the UK, Ireland and Scandinavia at relocation company Crown Worldwide, believes that companies will generally spend more cash in 2011 to grow their businesses and expand their market share, which he thinks is likely to result in more mergers and acquisitions. However, he also believes that the lack of available credit will remain a considerable barrier to growth for a large number of companies.

“Making sure that you have enough working capital is one of the greatest fears for any company, and there have been signs over the past two years that companies have had to cut back on capital expenditure because payment and credit terms have become more onerous and banks are reluctant to lend as easily as they have done,” says Ganesh.

“For companies with a substantial client base outside the UK, late payment is a problem as currency fluctuations between the sterling, the euro and the US dollar can mean thousands of pounds in losses by the time they are paid.”

Yet, while there may be some encouraging signs, not all FDs are convinced that 2011 will be a significant departure from the past two years.

To revisit that rather over-used term that underlines how popular playing it safe may still be, Simon Hancock, CFO of ControlCircle, an IT company that manages datacentre services for websites, says that he remains “cautiously optimistic” about 2011.

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