Lessons for ’08 from the ’07 Rollercoaster

Tatum's annual survey of CFOs — marking a record low opinion of business conditions — shows the strains of boom and bust. Credit markets far outpace other causes of CFO stress.

Tatum LLC’s 2007 CFO Survey of Business Conditions shows executive assessments at an all-time low point in December. It also offers a window on a turbulent year, with “the biggest source of stress” for finance executives taking clear shape by November: credit market volatility and economic conditions.

Like some presidential candidate coming out of the blue to befuddle pollsters, the credit-market category overwhelmed the competition with a 43-percent vote: topping regulatory compliance at 29 percent and managing board expectations at 28 percent. Suddenly, concerns or expectations about private equity investment — which began drying up around mid-year seemed distant thoughts indeed.

With the “worsening trend of recent months [having] leveled off at least for the moment,” the Tatum survey cast a glance back at the turbulent business conditions of 2007 in an attempt to augur lessons for the current year.

It also helped explain why Tatum’s Index of Business Conditions hit that record low in December.

From a June peak for the index at 12.3, indicating an average of ratios of respondents reporting “improvement” versus “worsening” for the past 30 days, and for the next 60 days, the average ratio plunged to 1.7.

To the question of which events or trends are expected to impact 2008 corporate budgets most significantly, fully 68 percent gave the credit-crunch or volatile-markets answer, followed by the dollar’s decline, at 16 percent. The private equity boom? That was listed as having the biggest impact by a mere 8 percent, followed by 7 percent for Fed rate cuts. (Remember, that was last November.)

The survey at year-end gave a negative picture of capital expenditure commitments, a major confidence indicator, with cap-ex commitments declining signficantly in the last thirty days, and more deterioriation expected in the next two months. Order backlogs remained about the same as in the previous month, however, and were expected to improve slightly in the next sixy days.

The more-difficult financing picture emerged from the survey, with sub-prime mortgage problems still haunting financial institutions. As Treasury rates trend down and concerns about a slowing economy trend up, borrowers are facing more scrutiny and underwriting standards are being tightened. This was reflected in the “cautious but flat” outlook CFOs presented in that area.

In December, Tatum let CFOs wax philosophical in answer to this question: “Have we entered into a new era where a CFO is as powerful as the CEO?” A strong minority of Tatum’s 1,000 partners and professionals, who serve at U.S. companies of all sizes and in many industries — 20 percent, in fact — answered in the affirmative, with an explanation. “Yes, the CFO now serves on boards, where he/she plays an integral role in key business decisions, and this is the position that many shareholders trust the most,” came their interpretation.

One level of “no,” at 14 percent, suggested that the finance chief “remains the CEO’s scapegoat should the board or shareholders have problems with company performance.” And 66 percent said no for the more standard reason: “The CFO is viewed as the finance expert, and the CEO is viewed as the visionary.”

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