Bancorp Treasury Services Limited

Make Risk Count.

BUSINESS LEADERS: BUDGET TO AID SHIFT FROM SPENDING TO INVESTING

26 May 2010

Although more than 90% of 157 business leaders surveyed at post-Budget events held in Wellington and Christchurch felt the Budget would aid this shift, financial risk management and taxation experts counsel businesses to maintain a steady hand on the tiller while still ensuring they are well placed to take advantage of an economic upturn.

Peter Cavanaugh, Senior Client Advisor at Bancorp Treasury Services, says the Budget may encourage many businesses to think ahead and plan to invest but they needed to understand that the Budget itself will not drive the economy.

“They should watch for signs of positive change and be prepared to leverage it by investing cautiously,� he says.

He notes that financial risks typically facing most businesses investing in productive assets – such as foreign exchange exposure, credit and counterparty risks – will remain the same but their potential impact upon a business will be proportionate to investment level.

“When businesses are in investment and growth mode, it’s easy to get carried away and focus on the future rather than continuing to also pro-actively examine potential risks,� says Mr Cavanaugh. “The best time to manage financial risk is before it happens – not after.�

Greg Thompson, Grant Thornton’s National Director, Tax believes businesses will find tax cuts helpful but only to a minor extent.

“The Budget’s tax benefits are a bit of an enigma for businesses because the cuts will provide some incentive to retain profits and therefore be healthy, but they are not really big enough to trigger significant changes in business thought processes.�

Mr Thompson warns that the pending GST increase provides businesses with medium-term uncertainty because even though they can control their own spending, they can’t control or predict how their customers will spend.

“The best advice is to avoid making any assumptions about GST’s medium-term impact on spending.�

Messrs Cavanaugh and Thompson agree with business leaders that the Budget will help to stimulate investment in productive assets by encouraging businesses to grow and invest in the future. They both, however, counsel businesses to take care and to identify, manage and mitigate their tax and financial risks before undertaking any significant capital or workforce investments.

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