It is easy to view 2016 through grey tinted spectacles, mostly because it’s been an unrelenting onslaught of celebrity deaths, economic warnings, and bombastic politicians throwing out the kind of wild lies and accusations that would terrify even the most casual observer. As a CFO, your main priority is ensuring the financial stability of your company regardless of market conditions, and the level of uncertainty at the world is currently worse than at any point since the financial crisis of 2008.
Britain's decision to leave the EU, in particular, has led to a ’dramatic deterioration’ in economic activity that has shaken CFOs plans to their core. The idea that the Brexit vote would at least provide a degree of certainty has not borne out, and it appears that it has actually created less. According to a survey of 132 UK CFOs by Deloitte that was carried out five days after the EU referendum, uncertainty was found to have increased, with 95% saying it was either high or very high, up from 83% three months earlier, while the survey also indicated higher levels of risk aversion and increased pessimism about the economy compared with three months earlier. CFOs are adjusting their balance sheet strategies accordingly, and becoming more cautious with all forms of spending, with many anticipating that they will stop hiring. Deloitte’s findings were reinforced in a recent global survey of more than 375 CFOs by Adaptive Insights, the CFO Indicator Q1 2016, to which 30% of those surveyed said they expected sales to decrease, 49% that sales revenue would increase, only 25% that valuations of private companies decreasing, and 45% a rise in M&A activity - suggesting that, ultimately, to quote William Goldman, nobody knows anything.
Their attitude reflects issues within the wider economy. Chris Williamson, chief economist at IHS Markit, said the UK economy could contract by 0.4% in the third quarter of this year, telling the BBC, ‘The only other times we have seen this index fall to these low levels, was the global financial crisis in 2008/9, the bursting of the dot com bubble, and the 1998 Asian financial crisis.’
And it is not just the UK that is suffering. Slowdown of Chinese growth is deeply worrying, while the US elections could still go either way, with Trump’s new campaign style likely to win back some of the voters he lost as a result of his increasingly polarizing statements over the last months. Also of concern is the precarious situation of the Italian banks. Italy’s banks currently have bad loans of £300bn - a remarkable 17% of Italy’s total bank loans, and many multiples of the levels of debt held during at the peak of the 2008 financial crisis, and it would not take too dramatic a series of circumstances to occur before we find ourselves in a situation where the Italian financial system needs a significant bailout.
The UK government is currently formulating its post-Brexit plans, a program even the most optimistic estimates put at 2019 at the earliest. CF0s must ensure they are not overawed by the scale of the challenges they face. First of all, it’s important to understand whether or not any event is going to impact your organization. CFOs should be planning for multiple scenarios, and have stress testing models in place that can quickly and easily be adjusted to examine different events. This means having clean data, adjusting forecasting models promptly, and taking action. The CFO is now not just expected to foresee coming dangers, they’re expected to act, and mitigate - or a least hedge - against coming risks. The CFO of today is operating in an uncertain world, but it is important not to overreact and to understand how risks will have an impact. It is easy to cut costs at the first sign of trouble, but you may well be stymieing growth unnecessarily.