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Hit the road Positive leadership for troubled times - ICAEW

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NEWS<br />

News on <strong>the</strong><br />

financial front<br />

COMMODITIES<br />

Input inflation could come<br />

under more control if IMF’s<br />

<strong>for</strong>ecasts <strong>for</strong> commodity<br />

prices are right. In a recent<br />

report, it claimed: “The<br />

weak global economic<br />

outlook suggests<br />

commodity prices are<br />

unlikely to increase at <strong>the</strong><br />

pace of <strong>the</strong> past decade. In<br />

fact, under <strong>the</strong> baseline<br />

World Economic Outlook<br />

projections, commodity<br />

prices are <strong>for</strong>ecast to<br />

decline during 2012-13.<br />

Sizeable downside risks to<br />

global growth also pose<br />

risks of more downward<br />

adjustment in commodity<br />

prices.” Slower growth in<br />

China looks set to fuel this<br />

trend. Oil could be a major<br />

exception, with traders<br />

suggesting an average price<br />

above $130 a barrel <strong>for</strong><br />

much of 2012. Any armed<br />

conflict with Iran would see<br />

this higher by around 20%.<br />

CASH<br />

UK corporates have cash<br />

worth £754bn sitting on<br />

<strong>the</strong>ir balance sheets,<br />

according to Ross Walker of<br />

<strong>the</strong> Royal Bank of Scotland’s<br />

economics team. According<br />

to KPMG, if all UK defined<br />

benefit schemes had a<br />

mark-to-market funding<br />

valuation at 30 September<br />

2011, <strong>the</strong> aggregate deficit<br />

was £300bn.<br />

But according to evidence<br />

to <strong>the</strong> Commons Finance<br />

Committee in April by<br />

Robert Chote, chairman of<br />

<strong>the</strong> Office <strong>for</strong> Budget<br />

Responsibility. “There is a<br />

fair amount of cash out<br />

<strong>the</strong>re, but it is not clear it is<br />

in <strong>the</strong> hands of companies<br />

that might engage in capital<br />

investment to <strong>the</strong> extent<br />

<strong>the</strong> official figures suggest,”<br />

he said.<br />

FDS LEAD THE WAY ON OPTIMISM<br />

Judging by <strong>the</strong> pronouncements of <strong>the</strong><br />

Organisation <strong>for</strong> Economic Co-operation and<br />

Development (OECD) over <strong>the</strong> past couple of<br />

months, <strong>the</strong> UK is both in a double-dip<br />

recession – and on <strong>the</strong> <strong>road</strong> to recovery. At<br />

<strong>the</strong> end of March, it’s data suggested that UK<br />

output declined at an annual rate of 1.2% in<br />

<strong>the</strong> final quarter of 2011 and 0.4% in <strong>the</strong> first<br />

three months of 2012.<br />

But just two weeks later, according to its<br />

composite leading indicators (CLIs), which<br />

reliably predict <strong>the</strong> economic outlook <strong>for</strong> <strong>the</strong><br />

next six months, <strong>the</strong>re was an increase in UK<br />

economic activity in January and February.<br />

The OECD might be in two minds – but its<br />

more upbeat data was confirmed by <strong>the</strong><br />

Deloitte CFO Survey, where finance leaders<br />

expressed renewed optimism <strong>for</strong> <strong>the</strong>ir own<br />

businesses, albeit with some caution over<br />

<strong>the</strong> wider economy.<br />

True, on average <strong>the</strong>y assign a 30%<br />

probability to a double-dip recession – but<br />

FINANCE HEADS IN THE CLOUD<br />

that’s down from 54% in December. And<br />

<strong>the</strong>ir aggregate confidence <strong>for</strong> <strong>the</strong>ir own<br />

companies’ finances has risen at <strong>the</strong> fastest<br />

rate since <strong>the</strong> survey began in 2007. For <strong>the</strong><br />

first time in a year, higher numbers of CFOs<br />

are more optimistic about <strong>the</strong>ir own financial<br />

prospects than less so.<br />

That’s reflected in a new appetite – among<br />

<strong>the</strong> larger company CFOs, at least – <strong>for</strong><br />

risk-taking, which has also risen at record<br />

levels. But that appetite is focused on new<br />

product development. CFOs remain<br />

conservative on balance sheet issues, still<br />

looking to maximise cash and minimise<br />

new borrowing, see chart below.<br />

Deloitte reckons this is at least in part a<br />

function of global instabilities. Weak global<br />

growth, eurozone unpredictability and<br />

volatile commodity prices make tight balance<br />

sheet management – and, in particular, <strong>the</strong><br />

near record levels of cash being held by UK<br />

corporates – sensible course of action.<br />

Corporate priorities – percentage of CFOs who rated each of <strong>the</strong> following as a strong priority <strong>for</strong> <strong>the</strong>ir business<br />

Introducing new products/services or<br />

expanding into new markets<br />

Reducing costs<br />

Increasing cashflow<br />

Expanding by acquisition<br />

Increasing capital expenditure<br />

Reducing leverage<br />

Disposing of assets<br />

Raising dividends or share buybacks<br />

The increasingly strategic role <strong>for</strong> IT –<br />

particularly as new technologies like cloud<br />

computing change business models – is<br />

<strong>for</strong>cing finance directors to up <strong>the</strong>ir geek<br />

game. That’s <strong>the</strong> central finding of a survey<br />

Google conducted earlier this year into <strong>the</strong><br />

strategic impact of IT.<br />

Nearly 67% of <strong>the</strong> senior financial<br />

decision-makers questioned said “cloud” has<br />

highlighted <strong>the</strong> IT department’s contribution<br />

to corporate strategy. Half <strong>the</strong> respondents<br />

think this will result in closer involvement in<br />

decisions traditionally seen as <strong>the</strong> preserve of<br />

<strong>the</strong> IT function or CIO. And 93 per cent said<br />

10 % 20 % 30 % 40 % 50 %<br />

2012 Q1<br />

2011 Q1<br />

that cloud computing would be important to<br />

<strong>the</strong> success of <strong>the</strong>ir company in <strong>the</strong> next year<br />

to 18 months.<br />

“Enterprise cloud adoption has been<br />

largely driven by <strong>the</strong> IT function,” said<br />

Thomas Davies, head of Google Enterprise <strong>for</strong><br />

<strong>the</strong> UK and Ireland. “However, today we see<br />

ourselves having more discussions with<br />

CFOs, COOs and CEOs. The strategically<br />

significant role [cloud] can play within an<br />

organisation in terms of driving innovation<br />

and productivity is making it an increasingly<br />

attractive option <strong>for</strong> businesses that want to<br />

remain competitive and agile.”<br />

FINANCE & MANAGEMENT MAY 2012<br />

5

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