With limited access to credit and short term funding, it is increasingly important that companies focus on working capital management to free up funds and optimize liquidity. This appears to be one of the looming issues for CFOs for 2011. Perhaps it’s just more of the same then given that businesses have been voicing their concerns about lack of funding availability since early 2009. If public comments from CFOs form listed companies is anything to go by, then CFOs enter 2011 in a more buoyant mood with a new focus on growth.
This position is also confirmed internationally according to the findings of the latest Deloitte CFO Survey. CFO confidence rebounded in the fourth quarter of 2010, regaining much of the ground lost in the second and third quarters. This is significant given that in the northern hemisphere at least and in Europe in particular fears of a double dip were permeating earlier in the year. Now they have abated.
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In the language of C-level corporate spokespeople, business leaders at major UK companies for example are shifting from “defensive” to “expansionary” strategies including taking on new staff and undertaking capital expenditure. The so-called “defensive: position is generally taken to mean a lower appetite for risk and would be expected to rise alongside optimism. A growing appetite for risk is leading to a willingness to embrace more expansionary balance sheet strategies.
In Australia the concerns of CFOs have been around balance sheet rebuilding and cost cutting. This evidenced by a number of industry groups but especially those exposed to commercial and business activity such as the REIT (real estate investment trusts) given their huge exposure to the commercial, office and industrial property market. After a massive hit immediately at the onset of the GFC where several large names took near fatal write downs (such as Centro), most REIT CFOs have been, on the one hand continuing to write down balance sheet valuations including the $1 billion write down announced by Mirvac last week, while on the other hand, raise equity capital and secure long term credit lines.
Defensive actions may continue at the fringes but all up, 2011 looks set to be the year in which corporate start spending again. A new emphasis on expansion by the large listed companies (for example Leighton and ANZ) lends support to the idea that the recovery is likely to broaden out during 2011 aided by growth in private sector hiring and capital spending.
Risks
The risk of a double dip recession appear to be diminishing thus allowing CFOs to focus on financing their activities as banks operate in less defensive economic environment. Improving credit conditions are also likely to have contributed to rising optimism and risk appetite. Indeed larger companies are now speaking of supply constraints particularly in skilled workers driven by the continuing resources boom and now exacerbated by the Queensland floods and the ensuing rebuilding of houses and infrastructure in that state.
CFOs are increasingly positive on the outlook for revenues and are focussed on growth opportunities with some citing opportunities for acquisitions at lower prices, given the lack of competition from the largely absent private equity operators. Public statements suggest a strong focus on growth opportunities in our Asian Pacific region for 2011 and beyond.
What risks are real and present? The consensus view is: 1. Sovereign risk amongst PIIGS nations remains a threat given struggling European economies. This has the downstream risk of higher inter-bank lending rates 2. High Australian dollar continues to hurt key export sectors including wine, tourism, education 3. Labour market shortages in skilled categories threaten to impact costs in key sectors, including construction 4. Continued weakness is commercial property sector affecting balance sheet valuations.
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