CFO Best Practice: Hope for the Best, Plan for the Worst

The role of the Chief Financial Officer (CFO) is never easy and yet, the pandemic drove home the meaning of hoping for the best but planning for the worst – guidance which rings true today. The cost-of-living and energy crises, combined with consistent supply chain disruption, staff shortages and the prospect of a deep recession continue to impact businesses nationwide. Factor in an ever-quickening race to meet Environmental, Social and Governance (ESG) goals demanding the attention and expertise of finance leaders, and you’ll understand why this is now a tougher job than ever.

Still, recession-wise finance leaders are sticking with their plan by preparing for all eventualities, and focus on insulating their companies from economic fluctuations, year in and year out. Even if a downturn never materialises, these measures should make businesses more resilient and ready for nearly any circumstance.‍

Keep an eagle eye on cash flow and employ rolling forecasts‍

Analysing cash flow and assessing your working capital should be the first response to signs of an economic downturn. This continues with establishing rolling forecasts that will help you dynamically adapt to market and economic changes. Even if these changes don’t emerge, it is about creating habits that build resiliency in the long run and ensure you can make quick and decisive decisions when necessary. This means keeping a close eye on free cash flow or money left from operational and capital expenses when it’s business-as-usual, so you’ll know what’s available if circumstances change.

Once this visibility is achieved, CFOs can then implement rolling forecasts to ensure accurate and up-to-date predictions. Having an idea of how long the situation may continue is key to maintaining operations. When a recession is looming on the horizon, it’s better to forecast with a shorter timeframe so you can ensure more accurate cash flow projections.

When making plans based on forecasts, don’t discount the possibility of unexpected changes. If situations materialise in unforeseen ways, you want to know your liquidity options and any alternative means of financing before it’s too late. Technology like data warehousing can be beneficial as it helps CFOs keep their finger on the pulse of customers and supply chains as well as see gaps for compromise.  ‍

Build a castle of tiered forecasts with calculated cuts‍

Reductions are response 101 if a downturn materialises, but go too far, and you’ll leave the company at a disadvantage. A study that analysed the 2008 recession found that 17% of public companies didn’t survive, and either went private, bankrupt, or were acquired. While the majority failed to regain prior growth rates three years after the recession ended, a narrow 9% managed to outperform both rivals and their own previous performance. As it turns out, those that made big reductions and investments had the lowest chances of beating the competition. The learning here is not to stress excessively and make impulsive decisions. Follow a clear framework to evaluate your business’s strengths and decide whether cuts or investments will contribute to them.

A simple yet effective approach is compiling tiered forecasts representing cuts that correspond with different levels of revenue reductions. For example, in a drawn-out recession, the focus needs to be on reducing operating expenses and fixing long-term solutions to preserve your cash runway beyond six months minimum. Recession-wise CFOs will keep a variety of expenditure plans in their back pockets that are in line with predicted economic conditions and their own cash flow realities.‍

Regularly perform customer supplier analysis exercises‍

While no company is completely immune to a downturn, many industries and business models are recession-resistant, meaning they fare well even when other companies are slashing costs and struggling to survive. The most recession-wise CFOs know this and take lessons from these firms.

Consider how customer demand and supply availability might change if the economy slows. Are you certain of your product's extravagances versus necessities? Modelling likely buyer behaviour will provide insights into how you might adjust production. It all goes back to conserving a holistic view across the spectrum of the business. If the economy slows, ask yourself how customer demand and supply availability might change and how you should respond.

Enterprise Resource Planning (ERP) technology can generate data to model customer spending. This information can inform which customers are at higher risk and how much they affect revenue, so CFOs can then adjust rates and perform outreach accordingly.

At the same time, CFOs should closely monitor supply chain risks upstream and downstream. Map out all suppliers and partners and make a list of risk factors such as credit history or financial dependence associated with each one. Next, identify where the company would benefit most from diversification. Here, ERP can function as a central record and improve accessibility to relevant information.‍

The Bottom Line‍

When growth slows, leaders scramble to get a holistic view of the business to make sure it’s operating as efficiently as possible. Top CFOs don’t need to scramble because they regularly use contextualised insights to game out potential scenarios by modelling elements such as new sales, upselling, and cross-selling to existing customers and business renewals on a monthly or quarterly basis. They’ve also already ensured employees are completing high-value and strategic tasks with the help of automation technology and have assessed inventory that can have an impact on cash flow.

Decelerated growth is when CFOs should conduct a thorough re-evaluation of business technology and processes, but it is crucial for them to play their cards right. They shouldn’t wait until employees are paddling their hardest against the current and when confidence is at an all-time low to act. CFOs should proactively make preparations to ensure the business pulls through stronger than before.