Credit crunch fatigue or no credit crunch fatigue, there’s no denying that the chief financial officer's role is currently very focused on how to add value to the business on a much broader agenda.

But as the challenges of dealing with a downturn become more prominent, a focused approach is required from CFOs to adequately address the challenges they face.

Recent reflections on the latest quarterly report from the Ernst & Young ITEM Club show a turbulent picture. Although the UK economy has remained relatively buoyant so far this year, our reliance upon international banking markets, and the knock on effect on consumer confidence linked to house price deflation, means it is only a matter of time before it slows. We are facing a massive sea change in the balance of the economy.

ITEM Club is currently forecasting that GDP growth for 2008 and 2009 will fall to 1.8 per cent and 1.5 per cent respectively down from 3.0 per cent in 2007, while interest rates (3 month) are forecast at 5.5 per cent by the end of 2008 – falling to 4.4 per cent in 2009.

Taken together the environment is extremely uncertain, for the remainder of 2008 at least. However, many of the indicators in the forecast are in fact positive, such as the rebalancing of the economy from consumer consumption towards export and investment. Positive indicators point to significant opportunities for certain businesses. Although admittedly the credit crunch, coupled with consumer retrenchment, does make it extremely difficult to assess the timing of the likely turning point.

The real challenge for CFOs and their finance teams during this period of uncertainty will be whether or not they can satisfy themselves and reassure the board, that their current and future business plans are realistic and achievable.

In this regard, the CFO should ensure that the following key areas are addressed:

• ‘Stress-test’ the existing business plan and making sure that the assumptions around revenue, costs and working capital reflect current/future market conditions and the likely impact of a slowdown in consumer spending.
• Re-evaluate the supply chain across the business and ensure that the risks associated with the commodity price increases, volumes and commercial terms and conditions are considered, particularly with regard to how they impact your customers and suppliers.
• Review the stability of the financing structure, including compliance with covenants and headroom on facilities, to ensure that the banks/other lenders are being closely managed.
• If you have growth plans, ensure that the necessary funding arrangements are locked in and look at contingency planning around alternative options in the event that funding is withdrawn.

These are exceptional times. Now is the moment to think about the ‘worst case’ scenario ahead of time and have a plan ready to deal with it. The ITEM Club forecast shows a ‘net, net’ positive picture, but the context is one of considerable uncertainty.

The leading CFOs will be those who are able to sort through their priorities to stay on top of their forecasts and provide the confidence to support growth opportunities. 2008 will be a year to remember!

*Bob Ward is a partner in corporate restructuring at Ernst & Young

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Tags: item club, ernst young, cfo, credit crunch, economic forecast, dealing with a downturn, bob ward, chief financial officer,

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