Leaders Cautiously Optimistic as They Look to Future

Chief financial officers have more confidence about the U.S. economy and their companies than last quarter, but are hesitant to declare a start to the recovery, according to the third quarter “CFO Outlook Survey” conducted by Financial Executives International and Baruch College’s Zicklin School of Business. The CFO Optimism Index for the U.S. economy jumped from 41.9 in the second quarter of 2009 to 54.2 in Q3, a rating not seen since March 2008. CFO’s prospects for their own companies increased 12 points to 64.10 from last quarter’s all-time low of 51.44. Over the next 12 months, CFOs expect increases in technology spending, hiring and capital spending. When asked to identify the most effective actions taken in response to the economic downturn, 58 percent of CFOs pointed to reducing their workforce. This was followed by retaining talent (22 percent), and redesigning products in order to lower costs (21 percent). CFOs in the greater Valley area said they’re still reeling from the economic downturn. Optimism about the economy varies from one company to the next. And all implemented cost-cutting measures in response to the crisis. But the term “optimism” about the U.S. economy is a stretch for Jim Corwin, CFO of Facey Medical Group. The company, which employs 1,300, provides clinical health care to families in the San Fernando, San Gabriel and Santa Clarita Valleys. “It has all been negative news with the drop in enrollment,” said Corwin. Insurance companies are also paying slower, and the healthcare reform debate in Washington adds another set of unknowns for the industry, he added. While Facey is not cutting staff, about 80 percent of its employees have a family member or spouse dealing with unemployment, he said. Increased unemployment means more people are losing health benefits, which has a direct effect on Facey’s bottom line. On the bright side, last November Facey execs threw the former budget out the window and implemented cost cutting and new revenue generating initiatives to offset the decrease in enrollment. Among the initiatives, employees were encouraged to save 10 percent on supplies and better manage their vacation banks. Decreased enrollment tied to the recession resulted in an immediate 5 percent drop in revenue for the company. Cost cutting initiatives offset 3.5 percent of the drop, and revenue generating initiatives offset 2 percent. “We got everybody to rally around cost cutting,” said Corwin. Another positive is Facey has a strong balance sheet. Creditors are proactively offering financing to the company, a rarity given the tight credit markets. And the company’s board recently approved borrowing $3 million to fund growth initiatives. Other CFOs have similar stories. “I feel like in the first quarter of 2009 I was shocked and the second quarter I was numb,” said Mena Finkel, CFO of Anthony Gallo Acoustics, manufacturer of home theater and stereo speakers. “I feel like things are turning around,” she added. “We had a positive September and so far October is looking good. We also recently launched a new product that was well received and are doing a little more advertising.” Ways to cut costs The company’s sales have dropped during the downturn. Understandable, said Finkel, since Anthony Gallo is producing luxury items at a time when people are losing jobs and cutting back on spending. The company laid off two employees. Top management also prioritized and found other ways to cut costs. Finkel said she has been surprised how well the company has done during the recession. Laying people off was the tough part, she added. Balancing the budget boils down to one simple rule: Live within your means. Darren Hernandez, deputy city manager and city treasurer for the City of Santa Clarita, said the economy of Santa Clarita has not started to show significant signs of recovery. The most recent data shows revenue from sales tax is down compared to the same time last year. But the local mood seems to be better. “While the local economy has not started to improve, it feels like the rate of decline has tapered off,” said Hernandez. “There’s not a great sense of optimism, but it’s as if the pessimism is abating.” Balanced budget The City of Santa Clarita managed to maintain a balanced budget through the recession and not implement layoffs. When financial times were good the city lived below its means, said Hernandez. Instead of committing increased revenue from the real estate bubble to on-going programs, it used revenue for one-time programs and capital improvements. When the economy started showing signs of a major downturn, the city quietly initiated a hiring freeze. That freeze became formalized as the economy got worse. And every city department slashed budgets by at least 5 percent. Hernandez doubts the economy will quickly spring back to the same level as before the meltdown. The drop in real estate values, tight credit markets, and unemployment mean people have less discretionary income. It takes time to recover, financially and emotionally. But the experience of the past couple of years reinforces what Hernandez calls his overall financial and budget mantra. “The decisions you make in good times are more important than the ones you make in bad times.”