The negative side of the economic cycle is once again showing its way, and you don’t have to look far to find business media awash in negative economic news. Although not inevitable, all signs point to an impending reduction in growth around the world and a probable recession in the near future. We have no way of knowing how long this economic downturn might last or how it might affect our organizations, but CFOs need to prepare today for whatever lies ahead.
So imagine the CFO of a medium-sized company – a company too small to directly influence the market in which it operates, but large enough that a drop in revenue would have a substantial impact on its owners, employees and other parties. stakeholders. This CFO is currently trying to decide if the organization can afford to invest to support future growth, if the company can survive the coming economic turmoil, and if the company should act now to avoid the adverse effects of a slowdown before it happens.
It is useful to remember that none of these decisions are new. Many CFOs have taken on this role since the last major crisis, but anyone who has worked in finance for a few decades will remember the early 2000s and the challenges of 2008-2010, to which the next two years will surely be compared.
If a recession occurs, then yes, there will be a jolt. Companies whose business models are not resilient are likely to falter. Entire industries with immature ecosystems — I’m looking at you, crypto — are in jeopardy. There will be closures, layoffs and possibly even social unrest, depending on how long it takes to restore growth and recruitment. However, for stronger and more adaptable companies, there will also be new opportunities.
Where should finances be concentrated?
There is a natural tension between short-term urgent action and longer-term planning. This tension tends to be exacerbated by macroeconomic trends, such as inflation or recession, or by disruptive events, such as the Russian-Ukrainian conflict. Too often, external crises shift the CFO’s focus horizon to the very short term. CFOs are primarily concerned with liquidity, access to capital, retention of suppliers, etc. This is understandable, but it is also, by definition, short-sighted. financial directors to have to keep looking at the long term.
This is because opportunities arise in difficult circumstances. Recessions, inflation, and other painful short-term conditions present a chance for the leadership team to truly refocus on the organization’s key mission, whether product-, customer-, or service-focused. ‘industry. Leaders can implement new approaches to deepen relationships with key partners, including suppliers, customers and investors, as their organizations come together to weather the storm.
Finance teams preparing for a possible recession must plan for the future of their business after the event and focus their resources on the initiatives that will have the greatest impact on the organization in the long term. In many companies, this means the CFO needs to focus on expanding into new geographies, product lines, or customer markets. This growth may need to be funded by pruning initiatives which are not expected to contribute as quickly or as much.
For finance professionals, a tough economy highlights the criticality of our capabilities. Financial analysis skills are never more in demand than during times of uncertainty. Financial planning and analysis (FP&A) teams, in particular, tend to have high visibility when times are tough, and for good reason. It’s the team members, especially those with additional certifications, who are tasked with constantly looking ahead, peeking around corners to prepare the organization for what’s on its way. path. That said, the planning and forecasting essential skills are useful for all finance professionals, as anticipating the future is a key part of the job description for every treasury, finance and cash management professional. risks.
For CFOs and other senior financial leaders, the senior management perspective supports systems thinking that can ensure that decisions made reflect what is best for the entire organization, unlike the narrower focus of CFOs. sector of activity on the objectives of the individual groups.
And for risk managers, preparing for deteriorating economic conditions presents an opportunity to test company policies in real-world situations and learn from the outcome.
5 steps for CFOs to prepare for the downturn and recovery
1. Make a plan. While it would be great to have action plans already written for the potential economic downturn, many organizations have yet to do the longer term thinking and scenario planning needed to be prepared.
If your business already has a plan, take the time to review it carefully. Build and run several different scenarios, so the organization has a game plan to deal with any economic situation that unfolds.
If you don’t have a plan yet, start making one now. Engage your finance and business leadership teams in thinking through the various possible impacts of a recession and eventual recovery. What challenges would it present? What opportunities would be created? And what is the best way to equip your organization to tackle both sides of this equation?
2. Know your key players. Every organization has people who know their individual processes inside and out, and others who are the system thinkers – they understand how all the pieces work together and how the organization interacts with its various stakeholders. Understand these capabilities across your organization, as well as how you can leverage each skill type to handle tough times.
3. Communicate with everyone. The stakeholder ecosystem works best when everyone knows what others are doing. This requires a level of collaboration and trust across the supply chain, customers and investors.
A crucial part of mitigating a company’s bumpy ride through the recession is approaching the downturn with strong, trusting relationships with all stakeholders. CFOs should make it a priority to build that trust continuously, so your organization can rely on its partners and stakeholders when you need them most.
When evaluating your communications strategy, remember the owners, shareholders and/or members of your organization to whom you owe a duty of care. Make sure they know what is happening in the external environment, how you react to this situation and the results you anticipate as a result of your actions.
4. Look beyond today. The operational issues of the day are high, but as leaders we must not lose sight of the long term. To persevere in difficult circumstances, people will want to understand that there is a future they are working toward.
Together with your leadership team, imagine this future – and probably several possible futures – and think about how to prepare for it. Understand what the most likely outcomes are, but also what indicators (triggers) would signal a change from this most likely case, and plan how the organization should react if these signals arise.
5. Value your team. Continue to invest in your treasury, finance and risk management teams. Now is not the time to fall behind in terms of skills, either on a personal level or on an organizational level. Make sure you understand what capabilities your staff have now, as well as what you will need in the future. Set and execute a game plan to develop these capabilities, even when times are tough—above all when times are tough.
Certainly, the economic conditions that we seem to see on the horizon will present challenges to the finance teams of many organizations. By having a plan, keeping longer-term ideas at the forefront of the planning process, and building the right capabilities within the organization, finance leaders can help their businesses not only weather the storm, but also thrive there.
Russ PorterCMA, CFM, CSCA, is Chief Financial Officer and Senior Vice President of Strategy, Technology and Analytics at Institute of Management Accountants (IMA)one of the largest and most respected associations dedicated exclusively to advancing the management accounting profession.