Make Your Borrowers’ Concerns Your Own

Chief financial officers are increasingly pessimistic about economic conditions, according to a recent Duke University/CFO Magazine Global Business Outlook Survey. For the first time in the survey’s 13-year history, bears outnumbered bulls nine to one. In fact, many CFOs don’t expect the recession to end until 2010 or later.
Lenders who understand their borrowers’ financial expectations are better equipped to mitigate risk. Your borrowers’ greatest concerns can tell you what to watch for in terms of high-risk behaviors and management quality. Good borrowers take charge of impending threats; weak borrowers take a “wait-and-see” approach.

What’s worrying CFOs, exactly?

“Throughout the history of our survey, CFOs have shown remarkable ability to predict future economic conditions,” warns John R. Graham, director of the Duke/CFO survey, which was published last December. Senior financial executives are in the trenches and know firsthand how internal and external factors affect their businesses.

Many of early 2008’s top concerns — rising fuel and commodity prices, supply-chain risks, and attracting and retaining employees — were put on the back burner by year end. Now CFOs are most concerned about:

Consumer demand.

U.S. consumers are worried about high energy and grocery prices, job security and declining property values and are, as a result, postponing major and unnecessary purchases or looking for deep discounts. Consumer spending habits trickle down through the economy. In 2008, retailers were especially hard hit by waning consumer demand. Now it’s manufacturing’s turn.

Credit markets and interest rates.

Financial market turmoil is forcing many lenders to tighten their lending practices. In addition to reduced access to loans and credit lines, CFOs report higher interest costs — especially among small businesses and those with low credit ratings. As a result of the credit crunch, many CFOs have forgone profitable investment opportunities.

One business’s accounts receivable is another’s accounts payable. In tough times, it’s important that borrowers continually monitor aging receivables and rethink credit policies to prevent unexpected write-offs.


Predicting what will happen in the financial markets is more difficult than ever. This uncertainty confounds the management planning process because forecasts and budgets underlie many business decisions, including ordering inventory and supplies, hiring workers and leasing equipment. And forecasting risk can be a double-edged sword. Overzealous forecasts lead to excess capacity and unrecoverable fixed costs, but overly pessimistic ones risk forgone sales. Lenders should review business plans and forecasts skeptically.

Employee morale and productivity.

Employees face a tense work environment. Layoffs abound across all sectors, raises are the exception and pay cuts are becoming common. What’s more, employee retirement account values have plummeted.

The success of many types of businesses — including professional service firms, restaurants and clothiers — hinges on a skilled, established workforce. Business reputation and profits will suffer if employees seek greener pastures or let their own financial worries affect productivity.

What else concerns them?

CFOs also are concerned and uncertain about the new presidential and congressional administration, the housing market fallout and balance sheet weaknesses. Of these, the last should be particularly disconcerting for lenders who collateralize loans based on the book values of tangible assets.

In particular, CFOs in the transportation, media, technology and health care industries express mounting concern about whether their balance sheets accurately portray asset recoverability and market values. This year may bring record numbers of impairment losses for long-lived assets (such as property and equipment) and indefinite-lived intangible assets (such as acquired goodwill or brand names) in these sectors.

How are CFOs reacting?

Proactive CFOs think of ways to counteract business threats. For example, sales and promotional campaigns might counter waning consumer demand and, therefore, increase revenues. Alternatively, performance-based compensation programs might enhance employee morale and productivity.

As the economy limps forward, many companies are in “survival mode.” The CFO survey predicts that in 2009 U.S. companies will cut employment by 5%, outsourced labor by 2%, capital spending by 10%, technology spending by 4%, and marketing and advertising costs by 7%. Despite their corrective actions, CFOs expect average annual profits to decline by 9%.

What can you do?

During a recession, keep your strong borrowers close, your weak ones closer. Communicate often and openly — don’t wait until year end to find out how your borrowers are faring — and ask what’s keeping them awake at night. More important, how are they taking charge of adverse conditions?

Above all, remember that the market is cyclical and will eventually recover. Lenders who stand by borrowers in both good times and bad build profitable, enduring business relationships.

Survey says

What’s making CFOs pessimistic and causes them to stay up at night? According to a Duke University/CFO Magazine Global Business Outlook Survey, their top internal and external worries are as follows:

Top external concerns

  1. Consumer demand
  2. Credit markets/interest rates
  3. (tie) Housing market fallout
    New administration and Congress
Top internal concerns

  1. Ability to forecast results
  2. Maintaining morale and productivity
  3. Balance sheet weaknesses

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