CFO Innovation Survey: Don't Waste Crisis Gains

(Click here to download the full survey results)

 

What a difference one quarter makes. When we asked CFOs in September and October last year how optimistic they were about growth prospects for the economy where they were based, 61% said they were more optimistic than they were in the previous quarter, with 4% saying they were very optimistic.

 
We posed the same question again in December last year and January this year. This time, only 54% of you were more optimistic compared with the previous quarter, with 7% very optimistic. Not a steep fall overall – three percentage points down – but the decline is quite significant in some markets.
 
The level of optimism in China, for one, is down 11 percentage points to 69%. In Singapore, it has fallen 10 points to 70%. Hong Kong’s economy is still seen as having lukewarm prospects, with less than half (46%) of the executives based there saying they are more optimistic compared with the last quarter or very optimistic.
 
Reality Check
I don’t see this as a bad thing. I would even argue that CFOs and other finance professionals in Asia still have rose-coloured spectacles on when it comes to the region’s economic prospects.
 
True, asset managers like Hugh Simon of Hamon Investment Group expect Asian economies "to continue to post healthier GDP growth rates and build from the low base of 2009.” But one of the Asia economists I most respect, Dr. Jim Walker of Asianomics Limited, is far more cautious.     
 
He believes that central banks will stop injecting cheap money into financial systems and claw back some of what they have already given out even as governments raise taxes to plug gaping budget deficits. “The result, in our view, will be renewed weakness in asset prices and renewed weakness in economic activity,” says Walker. “Far from the crisis being over we expect to see a resumption of major strains in the system.”
 
These fears may explain in part the waning CFO optimism in China, whose central bank is moving more aggressively than most people anticipated to tighten monetary policy. Beijing has raised reserve requirements for its banks and analysts expect more tightening measures in the coming weeks and months.   
 
Nobody really knows what’s going to happen, of course, but on balance, my money is on Jim. His timing is not always perfect – he was wrong in forecasting a slowdown in China’s economy last year, for example – but his analyses have proved remarkably accurate over the long term. Formerly chief economist at CLSA Asia-Pacific Markets, he famously predicted the fall of the baht and the subsequent 1997 Asian financial crisis and was out with early warnings on last year’s global crisis.
 
Beware the Backsliding
The danger with being overly optimistic is that the company may be lulled into thinking that the crisis is over and it’s back to the old happy days for financial management.
 
“In my opinion, the worst thing that can happen,” Germon Knoop, Vice President, Finance, Asia Pacific at BT Global Services, recently told CFO Innovation, “is that you just say that everything is fine and rosy again . . . and start raising salaries, hiring more people and investing in projects which are not profitable immediately but will come later. Then you’d be eroding all the gains you made last year and you’d be back to where you were before.”
 
It’s too early to say whether Asia’s CFOs are falling into this potential trap. Our latest survey does indicate plans to raise wages and salaries (61% compared with 43% in the previous survey), hire more people (42% versus 33% in the previous survey), spend more on marketing and advertising (45% versus 32%) and increase capital spending (40% versus 33%).
 
At the same time, however, the executives surveyed say that their company will increase cash on the balance sheet (48% versus 42%) and will continue to keep inventory levels the same or even lower (84% versus 82%) in the next 12 months.
 
How can companies spend and save at the same time? On the back of higher sales and earnings, apparently. Seven out of ten executives surveyed (74%) say sales will rise this year, compared with 60% who said the same in the previous survey. More importantly, 64% believe that profits will be higher this year, from 56% previously.
 
Calibrated Approach
I’m not saying Asia’s CFOs should not hire more people or raise salaries (although some experts insist that non-monetary incentives can help with recruitment and retention). Indeed, our survey finds that attracting and retaining qualified employees is now a top internal issue, ranked as a top-three challenge by 57% of CFOs, up from just 30% in the previous survey.
 
Certainly intensified capital investment and spending on marketing and advertising can be justified as well. Being overcautious and overly tightfisted is not ideal either. “As a CFO you have to balance risk and business opportunities,” Loong Foong Min, head of finance for Asia ex-Japan at personnel and HR solutions company Adecco, told me when I spoke to her last year. “It’s situational. You have to look at things on a case-by-case basis. If you’re not too sure, maybe you’ll [expand] incrementally. But if there’s something that you need to do urgently, because otherwise competitors will come in and take market share, you have to get in immediately.”
 
That, I think, is the key. Asia’s CFOs should take a calibrated approach to financial management in 2010. Spend if you must, but do so only if a valid business case can be made for it – and if sales and profits indeed increase, therefore giving you room to both spend and save.
 
It’s a no-brainer for BT Global’s Knoop. “In the past, many companies focused on bringing in incremental profits to compensate for existing inefficiencies,” he says. “That’s where a lot of companies went wrong and that’s where BT has learned its lesson as well. Now, I want to make sure that I start from a profitable base, an efficient baseline, then put incremental profit on top of it.”    
 
“We do want to grow and we’re willing to invest in that growth,” he adds. “But we want to make sure that the net impact of that investment is incremental cash. We’re not going to invest just to make everybody happy again, because we would end up where we were before.”
 
The efficiencies the company gained from cost-cutting and productivity improvements in response to the crisis is freeing up cash for investment. But BT Global Services will only spend if it is convinced the investment will bring incremental profit, not just revenue and market share. It’s a calibrated approach that many other companies have undoubtedly adopted. Those who have not should consider doing so as well.
 
About the Author
Cesar Bacani is senior consulting editor at CFO Innovation. Click here to download free of charge the white paper CFO Innovation Asia Business Outlook Survey: First Quarter 2010, which is available only to CFO Innovation readers.   

 

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