If there is one thing we are all supposed to have learned from the credit
crunch, it is that short term is bad and long term good. Or, to put it in a
rather more sophisticated way, while short-term measures may temporarily lift
the spirits of investors and your remuneration package, it is the long-term
stuff that enables you to remain in the market big-time and avoid being
consigned to the administration and insolvency heap of history.
As ever, though, the temptation is to take the currently fashionable path,
while ignoring the actions that will ease the chances of long-term survival.
Deloitte’s latest CFO sentiment litmus test makes clear what is in the forefront
of the FD’s mind at the moment. Its subtitle tells you everything: Priorities
for 2009, it reads: ‘Cash, confidence, costs.’
And the story it tells is blunt. It says: ‘The dominant themes for the fourth
quarter 2008 CFO Survey are a shortage of credit and weakness in the economy.
CFOs see these threats as posing the greatest challenges to their businesses in
2009. When we asked about the greatest concern for their own business, the words
liquidity and cashflow kept recurring. Looking ahead, CFOs are contemplating the
possibility of extreme outcomes. One CFO wrote that his main concern was that
‘this is going to be like the 1920s or ’30s rather than the early 1990s’; in
answering this question another CFO cited ‘“the lack of visibility about when
the up-tick starts”.’
But the problem with this is that it suggests FDS are reverting to
fire-fighting and crisis management as remedy. In a perverse way, they find this
comforting. No one will be fired for shouting that the only way to avoid being
shipwrecked is to have all hands on deck. Investors and board members are going
to clock the increased level of activity and presume everything is being done to
survive and remain afloat when calmer waters return.
‘The overriding aim for most CFOs in 2009,’ says the survey, ‘is to
strengthen their balance sheets and there are three priorities CFOs are focusing
on to achieve this: maximising cashflow, bolstering investor confidence and
This is an admirable return to a ‘back-to-basics’ approach. It is something
that has been emphasised quite rightly by regulators and standard-setters for
The trouble is that, just as the awful days now upon us are due to an
emphasis on leverage alone, then unforeseen problems ahead may equally spring
from an emphasis on cash alone.
While FDs are gathering in piles of cash to boast about to their investment
community, they may not be noticing corporate governance, the world of the audit
committees and so on.
No one has forgotten risk in these difficult times, as Deloitte’s survey
makes clear. ‘Faced with a downturn and exceptional uncertainties,’ it says,
‘CFOs have become significantly more risk averse: 98% of CFOs surveyed believe
this is a bad time to be taking additional risk onto the balance sheets, twice
the level of a year ago. Their overriding aim is to strengthen balance sheets.’
That is the inevitable short-term correction to the previous strategy. But
the lesson that needs to be learned is not just that cash is king. It is also
that any heavy emphasis on only one answer is another way of saying that we are
still enmeshed in the honey trap of the short-term mindset. Lack of cash is far
from the only risk. FDs need to look note of all the other risks around them.
They should not forget, in all the crisis-management of the cash and the
nitty-gritty of the figures and the bank covenants, that regulators and, to a
lesser degree, auditors, are going to come pitching in and shouting about who
knew what and when and why safeguards were forgotten about.
This is a version of an article that first appeared in
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