CFO survey Q3 2010: executive summary

In a turbulent year, this quarter has seen a number of further dramatic national and international developments unfold. While there are still a number of dark clouds and uncertainties on the horizon, the overall view is that Irish CFOs remain confident in the ability of their companies to weather the storms and return to positive revenue and profit growth.

Dark clouds...
The key challenges to the Irish economy are well documented at this stage – the budget deficit and the cost of bailing out banks. Some clarity is being brought to the scale of these challenges and, over the coming months, the measures that will be put in place to redress them will be revealed by Government. The most significant event in the coming quarter will be the announcement of the Budget 2011, in addition to a four year austerity plan to bring the country’s finances back into order. The budget, which is being signalled as one of the toughest in years, will now seek to exceed its initial €3bn deficit reduction target with figures of €4bn to €5bn being quoted. 

Competitiveness is also a key challenge but also one of the enablers of a return to growth. The Annual Competitiveness Report 2010, prepared by the National Competitiveness Council in July had some positive messages but gains have to be maintained and interest and exchange rates pose additional threats. 

While the Government has been able to raise bonds on the international market, these have been at substantially higher costs with ratings agencies again downgrading Ireland’s ratings status. With the Government not needing to return to the bond market until Spring 2011, budget measures over the next few months are critical to ensure a stable supply of funds.

 ...with a silver lining?
It’s not all doom and gloom out there though. Our topical questions this month show that in terms of competitiveness, the Irish labour market is at last starting to readjust to expected norms with 88% of CFOs stating that salary expectations are average or low. The survey results also indicate that CFOs believe that the quality of available resources is also high. Standard and Poor’s have further highlighted this perception by stating that Ireland’s economy will recover more quickly than several other European countries as our competitiveness improves due to the flexible labour market. Also, the agency does not detect ‘reform fatigue’ in Ireland’s politicians, and believes that concerns about fiscal and political risks to the country are exaggerated. 

Alongside this, 24% of CFOs are now looking to reverse some of the cost reduction measures implemented during the initial stages of this recession. CFOs are also still confident in their own company’s ability to return to growth in the short term with over 40% stating that their company has already done so. 

Expectations of revenue and turnover still broadly positive
Almost 60% of CFOs are anticipating increases in turnover over the next six months, while 30% are projecting no change. Another positive finding is a fall in the number of CFOs predicting a decrease in turnover. These figures continue the trend in previous quarters with a broadly positive outlook for growth in turnover, perhaps reflecting the high percentage of the respondents whose businesses trade internationally. However, analysis of the underlying data indicates that no CFO expects significant turnover growth in the next six months, demonstrating that optimism is being tempered by continuing uncertain economic conditions, and the expectation that Budget 2011 could have a negative impact on consumer confidence and spending power in the domestic market.

As for profit, a significant proportion (61%) of CFOs surveyed anticipate some continuing improvements in profitability, again continuing the positive trends of previous quarters. Only 9% of respondents are anticipating a decrease in profitability. 

Cost and availability of credit continues to clog up the system
We have consistently highlighted in our surveys that the high cost and lack of availability of credit is hindering business in the Irish market, particularly smaller companies, and this quarter is no exception. While the Deloitte UK CFO Survey for Quarter 3 has shown a dramatic rise in credit availability and a reduction in cost in the UK, our survey reports that Irish companies continue to be challenged by the availability of new credit and that there is widespread difficulty in obtaining funding, be it from banks, equity release or bonds. Respondents rated domestic banks as the most challenging source of credit with 54% of CFOs considering that it is still very hard or somewhat hard to obtain credit domestically. 

Market risk is the key worry
Market risk has emerged as the key concern facing CFOs with 58% ranking it as their highest concern. Respondents cited fears of a double dip, deterioration in customer confidence, lack of credit, the impact of Budget 2011, and confidence in the Irish economy as just some of the key market risks companies are currently managing. 

Strategic, operational and financial risks were significantly less of a priority for CFOS. 

What to expect from next quarter
Quarter 4 2010 will be a key milestone in our country’s economic landscape. The budget that will be announced in December 2010 will have significant implications for all of our economic futures. Our survey will have a budget focus with topical questions covering some of the key issues surrounding Budget 2011 and will contain key insights from CFOs on the impact of the budget on their companies and the economy. 

We look forward to gauging the views of CFOs on these and the many other important factors that impact economic and corporate financial performance.

Shane Mohan
Partner, Deloitte