Surviving the downturn? Prepared for the upturn?

There are two vital factors about a company today: how it went into the downturn and how it goes into the upturn.

Going into the downturn, the ACT produced a treasurer’s guide. Since the Annual Conference in the spring however, we have been thinking about the upturn.

We have said that larger UK companies generally came into the downturn with more cash and longer funded than for some years. Companies learned the lessons from the fate of the more highly geared ends of the ICT sector after the millennium. Treasurers had mostly followed the mantra of “fund early and fund long”. Company cashflow had benefitted from the long economic upturn. “The corporate sector financial balance is estimated to have been in persistent surplus since 2002, and to have picked up sharply in 2009 Q1" the Bank of England August Inflation Report said .

This doesn’t mean all companies were well placed. Some (notably in retail, building and automotive sectors) were more vulnerable, as were medium sized companies more dependent on bank finance. But most larger and "investment grade" companies which had not gone through leveraged buyouts were in a position to adjust to the harsher environment and to carry their providers of finance with them in that.

So, what about the upturn?

We think that the world has changed as a result of the current crisis. The new normal will not be quite like the old normal. How that affects companies will depend on their specific contingencies and the circumstances of the industries and the jurisdictions in which they operate.

In the autumn, we are hoping to issue a note on preparing for the upturn. We will look at some of the macro influences and what they might mean in the long run for a treasurer’s corporate financial strategy that is the treasurer’s direct concern. Strategies adopted and policies pursued in the coming months and next few years will be crucial for long term success. Treasurers must be part of the debate in their companies about managing for the upturn and preserving and exploiting the company’s real options, whatever the upturn’s shape.

As always we welcome views to help our thinking. E-mail the Policy and Technical team at technical@treasurers.org.

^1.Contingency Planning for a Downturn, http://www.treasurers.org/contingencyplanning.
^2.http://www.bankofengland.co.uk/publications/inflationreport/ir09aug.pdf, at page 23

By John Grout