MACROECONOMIC PRINCIPLES are essential tools for the FD’s understanding of a variety of aspects of the job, and the FD is the one member of the management team expected to have some expertise in economics. Many are well schooled in this area. Most have studied economics up to a point and our accountancy qualifications do contrast us favourably with others on the management team, but the expectation placed upon us is unreasonable.
The FD needs to understand economics for many purposes which include evaluating markets, reviewing opportunities, calibrating capital proposals, managing treasury, assessing risk, developing trading, validating forecasts, making acquisitions, and developing strategy.
Unfortunately, the subject of economics is one about which just about everyone holds at least amateur opinions, although not everyone recognises the complexities and academic rigour of the subject or the discipline. Management teams and boards are no exception, with forceful opinions on economics often expressed by the least qualified members, and this presents a danger to the business which the FD has a responsibility to address.
We have recently been tortured by the endless speeches in the UK party conferences which have focused on the national debt, the deficit, the recession and a range of economic issues that the general public is called upon to evaluate. In the US, the presidential election campaign is covering much the same economic issues, with an equally non-expert electorate. I am astonished by the simplistic manner that such important economic issues are presented. Have we learned nothing since Mayer Amschel Rothschild (1744-1812), founder of the Rothschild banking dynasty, said, “Give me control of a nation’s money supply, and I care not who makes its laws”?
However, I was impressed by the recent BBC series, Masters of Money, presented by the highly respected economist, Stephanie Flanders. This explained, compared, and contrasted the theories and observations of three giants of economics in an easily digestible and straightforward manner.
My thoughts as an FD on this series were numerous. Surely, most FDs should have been familiar with all the concepts presented and most FDs would have been keen to engage in a technical analysis. More importantly, and with the greatest respect to Keynes, Hayek and Marx, I would have expected many FDs to be interested also in other great economic thinkers such as Friedman and Galbraith. And I would suggest the inclusion of influential economists whose views may have practical relevance to today’s FDs, such as Paul Volcker, Paul Krugman, Alan Greenspan and our own Sir Mervyn King.
It is clear accountants and economists do look at certain issues very differently from each other. These include the role of opportunity costs in investment evaluation, key variables in strategic plans, availability of scarce resources, the view of the ‘organisation’, and the search for certainty where the FD is the kingpin of the data. The challenge for the FD is to balance these differing viewpoints and to present a coherent summary to the management team. This is a dilemma for the FD as an enforced economist and presents dangers that are not widely understood but are faced by us on a daily basis.
Of course, FDs can use external advisors. On the one hand, economists can be accessed in the banking and professional services fraternities, but, on the other hand, I have found advice from economists to be more ambiguous and open to contradiction than in almost all other areas. Therefore, it comes down to the judgement, skill and experience of the FD to make the correct call and to recognise that many of us are, in fact, DIY economists.
Last month, The Secret FD saw 50 good, bad and ugly situations. Good business was the 50-deep queue at the Ikea tills; bad economy was the 50-strong empty taxis on a Dublin Saturday evening; and the Beach Boys no longer looked so young and handsome at their 50-year anniversary concert in London
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Companies across the world have the opportunity to release €1.1trn in cash from one of the cheapest sources available, working capital