FOR MANY finance directors at UK companies, the last 12 months will have represented some of the toughest economic and trading conditions they will have experienced during their careers. At the start of the year, there was talk of tentative green shoots of economic recovery slowly starting to emerge. That hope was all but torpedoed by the deepening debt crisis throughout the eurozone.
Add the trade and supply chain disruptions caused by the civil unrest sweeping across the Arab world and by the Japanese earthquake and tsunami, and it soon becomes apparent that 2011 has been a year to forget.
The year even ended on a rather gloomy note. Chancellor George Osborne announced in his Autumn Statement that businesses in the UK should not be expecting any let-up in the tough austerity conditions any time soon.
To assess how finance directors can begin trying to navigate their businesses through what is bound to be another difficult and tempestuous year, Financial Director has brought together a panel of FDs from a number of FTSE-100 to mid-market companies – ranging from banks and retail businesses to construction firms – in order to garner their thoughts on the strategic approach for their companies in the year ahead.
What has the past 12 months taught you about business?
Richard Drean, finance director group strategic review, Lloyds TSB (RD): The importance of the finance director focusing on the critical big picture issues and not being distracted by all the underlying noise. The FD must remain agile and flexible to respond to changing circumstances and ensure that there are contingency plans in place to cover all scenarios – however unlikely they may appear at the outset.
Stephen Puckett, former group finance director, Michael Page (SP): The last 12 months have again confirmed our conservative approach to organically growing the business, maintaining a strong balance sheet and diversifying our income streams.
Arif Kamal, group finance director, GL Hearn (AK): We have seen the toughest economic conditions to operate in and I have learnt that you should not automatically assume that you cannot grow in a downturn, though you do need to batten down the hatches. Opportunities present themselves and it is up to individual businesses to seize and exploit them for their success.
Over the last year, the turnover of GL Hearn grew by 12% and gross profit increased by 18%. In spite of adverse market conditions since the start of the recession in 2008, GL Hearn has remained profitable and cash-positive.
Charles Scott, chief financial officer, Age UK(CS): Reducing income streams puts pressure on the bottom line and makes it harder to release marketing spend when that is exactly what you have to do in order to generate income. Thus, some hard decisions need to be made around non-core expenditure to preserve income generation.
Andy Blackstone, finance director, M&C Saatchi (AB): The key factor that increases or decreases revenue is how much revenue you can win versus how much you lose. The economic backdrop just means you have to win more business to stay still.
Paul Pomroy, vice president, finance, McDonald’s (PP): Our long-term partnership approach with our suppliers has really paid off, giving us sustainable supply at prices that work for the suppliers and our franchisees. We work with our suppliers and farmers to ensure that they continue to make the returns they need to invest for the long term.
And our open and transparent relationship with the banks means they have supported our business plan since the crisis of 2008, which gives them confidence to lend to our franchisees and suppliers.
What will be the most serious risk to your business in 2012?
SP: Undoubtedly, the issues surrounding the eurozone and the negative effect they are having on business confidence.
PP: Without doubt, commodity price inflation is an area of concern for us as a food business. We have hedged commodity prices where we can across our basket of goods, but we are still exposed to market prices for some of our key ingredients. Consumers are feeling the pinch at the moment and therefore it’s vital that we are able to continue to offer an outstanding experience at great value.
AK: The most serious risk is clients getting cold feet and not doing the deals. There are deals to be struck in the market, but the time frame continues to be much longer
– from initial discussions to completion – than pre-recession.
The other risk to many businesses is the threat of their clients, both large and small, going into administration or liquidation.
CS: As a charity, a significant proportion of our income comes from legacies, which are largely uncontrollable and unpredictable. They are affected by property and stock market prices, as well as people’s desire to donate to us, and we can only cover any shortfall with reserves.
RD: The most serious risk to all banks at present is liquidity and maintaining their funding levels. The crisis in Europe will put renewed pressure on interbank funding, so the key will be to attract retail deposits while driving down non-core lending. This requires careful management of the conflict between profit and balance sheet.
What single government action would most improve the outlook for UK
business going into 2012?
AK: Any action that will grow the economy and create jobs. At the moment, I believe the second round of quantitative easing is helping a little. The government policies so far are taking much longer to make their impact than is desirable.
PP: Measures that reduce the burden of red tape and create the space to grow – so that businesses like McDonald’s can continue to provide products that consumers love at a price that they can afford. We want to continue to create the jobs that will drive growth and make a difference to local communities. I think that the government’s deregulatory agenda is encouraging.
RD: The government should maintain its current stance of balancing the need for reducing its level of debt while introducing measures to drive some growth to maintain levels of employment. Like a company, this means improving the cash flow by cutting business as usual (BAU) expenditure but then using some of the surplus generated to provide short-term investment. Infrastructure projects take too long to plan, so I would encourage technology projects that can be delivered quickly, have a known completion date, and will use UK subcontractors to implement.
SP: Following through with the plans to reform the employment law system – particularly for small businesses.
CS: Creating credit would increase business confidence and enable investment, which is the only place that growth is going to come from. Income growth will make jobs more secure and people will feel more able to spend.
AB: All methods to increase the production of homes, particularly if those homes aim to be zero-carbon.
What is the biggest single factor likely to affect the UK economy in 2012?
AB: The euro, its effects on our banks and our exchange rate.
AK: The escalating crisis in the eurozone is limiting whatever little growth is forecast for the UK economy. Common currency bloc accounts for approximately 40% of UK exports of goods and services.
However, we must also note the 2012 Olympic Games in London, which will be a boost to the economy.
CS: The eurozone crisis will precipitate many effects upon the UK, whether via lack of demand for exports or measures taken to solve the problems.
PP: The eurozone. As the chancellor flagged in his Autumn Statement, the UK economy is expected to grow by just 0.7% next year, but that forecast is based on the assumption the eurozone finds its way out of the debt crisis. If it heads into recession, the chancellor has been clear that the UK will suffer. The government’s priority should be to ensure inflation begins to come down, to ease pressures on hard-working families in a difficult climate.
RD: Apart from whether the euro survives, and if so in what form, the biggest single factor is whether wages and salaries start to rise in line with the current high inflation rates. If the fear of unemployment keeps pay rises small, then companies will have more opportunity to generate profits and hence invest in the future. If not, then the country could be locked into high inflation levels, requiring interest rates to rise and killing off any hope of short-term growth.
SP: It is the eurozone crisis but the Olympics will have a significant impact.
In what way has the economic uncertainty shaped your business
strategy for the coming year?
SP: It has undoubtedly made us more cautious about our plans for investment, particularly in Europe.
RD: At the basic level, there is a clear need to reduce costs to reflect the tough environment for growing income. This requires both pressure on core BAU costs to deliver ever greater efficiency, which we are doing through a clear objective to eliminate complexity, and removing costs entirely in some areas.
This follows a group strategic review that we announced in the summer. It involves tough choices between core businesses where we will grow income and areas where activity will be stopped and costs therefore removed in their entirety.
AK: We need to work more closely with our clients and understand their needs better, together with a service delivery that should be second to none. Every client relationship should be seen as a mutually beneficial partnership. At GL Hearn, we are keen to manage a sustainable business and try to avoid seeing clients fall into receivership. So, short of providing banking services, we have been working with some clients to agree flexible credit terms. It is not about just delivering results; it is about building strong long-term relationships.
The current economic uncertainty is likely to last for at least another two years, in my view.
PP: The recession has changed consumers, possibly permanently. They have less disposable income so they are choosier about how they spend it. In other words, they want more for less. Price cuts and discounts will work for a while, but winning customers for the long term is about improving the quality and the experience. Investment is key, which means we can’t afford to take the foot off the accelerator where innovation and investment is concerned.
2011 was a tough year but our business remains strong. We are doing well because our focus on value and quality, combined with sustained investment in our food, restaurants and people, has driven great momentum in our business and ensures that we continue to differentiate ourselves from the competition.
CS: We are looking carefully at our fundraising plans, as competition increases and mechanisms to generate donations become more expensive and less efficient. Our reserves are also worth less as share and property prices fall, investment in marketing is more risky, and cuts in government grants reduce available funds for our partner charities.
AB: It adds to caution, focus and worry, but it does not distract us from delivering great results for our clients globally.
What single piece of advice would you give to a fellow FD for navigating their business through 2012?
AB: Export or die.
RD: Embrace risk. While the level of risk has grown enormously of late, this provides opportunities as well as threats. Remember your competitors are in the same position, so your role is to work with your directors to determine how you can use the risk and difficult trading conditions to gain an advantage – either short- or long-term.
AK: We have to remain optimistic. The positive attitude from finance will permeate throughout the organisation and produce a better and more productive environment for everyone. Finance is the driver and backbone of any business.
CS: It is more important to provide insight that leads to greater understanding of the drivers of the business rather than pure divisional budget variances. Then better and harder decisions are easier to make.
PP: Stay close to your suppliers and your customers. Understand what your customers need, why they visit and work closely with your suppliers to deliver it, now and in the long term. Connecting your entire supply chain to the customer is vital, as they need the same level of understanding as you do.
SP: Remain cautious and ensure you maintain as much flexibility in the resources tied up in the business as the business model and legislation allows. ?