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Don’t spend money like a drunken sailor

AS I BEGIN the reviews of the medium-term plans of the subsidiary businesses, I am anticipating a rash of requests to fund expansion programs, R&D, capex, acquisitions, staff and the like, rather than the more recent pattern of restructuring and downsizing proposals.

I am encouraged that the businesses believe we are moving from austerity to growth, but faced with the dilemma about taking an entrepreneurial position on the one hand and a sceptical and careful position on the other. It is difficult to know who or what to believe.

The challenge is to balance the business opportunities against risks of judging it wrongly during a possible recovery at a time when reliable information is scarce. The term ‘green shoots’ has been discredited since it was used by people such as Norman Lamont in 1991 and Baroness Vadera in 2009 in describing signs of early recovery. But I expect the term to be used in presentations by colleagues who have limited experience of managing through previous recessions. I do appreciate that people are exhausted from seeing their businesses put on hold, and they are keen to deliver growth rather than cut costs.

A common sentiment is: when the pain of doing nothing is greater than the risk of pushing forward, it is time to act. In bad times, people often make good decisions such as finding new sources of income and driving out inefficiencies, but they are also tempted to take bad decisions due to frustration. During recessions, FDs tend to become more collegiate in their decision-making, seeking out a wider variety of opinions, and these deliberations can slow things down.

The FD should exploit the business cycle in order to invest effectively, and has to decide how entrepreneurial to be. There are great deals on offer during recessions such as capital equipment, premises and supplier terms, and a judicious use of debt financing (if it can be found) can leverage the opportunities to enhance growth. It is tempting to find ways to use (rather than lose) tax losses, but decisions on expansion must address both the business risks and the financial risks.

During a recovery, timing is important in order to avoid taking on more business than the organisation can do, and it may also be necessary to change certain people who may not be well equipped for the next phase of the business cycle. One role of the finance function should be to act as a key enabler and it must be staffed accordingly, but – as the ACCA recently pointed out – no business sets out with developing a top-notch finance function as its main priority.

Then there is the question of how to go about the next phase without the business reverting to the bad habits of old, such as incurring large consultancy costs and omitting to check the robustness of suppliers and customers. The focus of the risk register will change significantly and it is important for the FD to prevent people from spending money like drunken sailors.

Judging the business cycle calls for the FD to review a wide variety of internal and external information. The business itself is a rich source with its order intake trends, customer enquiries, supplier activities and employee turnover.

External data sources are numerous, although economic data is invariably late and inaccurate, but these sources can be augmented by taking advice from audit firms, which can report on the activities of their clients, FD forums, conferences and conversations with customers. But the FD must calibrate regional and country differences, and where we are in the election cycle.

I tend to be both sceptical about the recovery and selective in my support for certain opportunities, and I have already seen a number of false starts. Am I convinced about George Osborne’s recent declaration that the economy is ‘turning a corner’? I really want to be, but I am not ready to drink on it just yet.

Last month the SFD visited New York and saw massive construction work but little evidence of recession; it will be a great city when it is finished.

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