Is Your CFO Ready for the Next Recession?

There’s an old saying that goes: “Everyone talks about the weather but nobody does anything about it.”

That line could also apply to recessions except that unlike the weather, there is something you can do about a recession to mitigate the negative impact it could have on your company.

And a good CFO can go a long way toward lessening the negative impact of an economic downturn.

Recessions traditionally last between two and 18 months. And there are some key steps you and your CFO could be making now so that you ride out the next recession in good order later.

Cash flow

Understanding your company’s cash flow and liquidity positions is always important, but it is even more so when heading into a recession. Preparing for a downturn starts with a cash flow analysis to assess your working capital and continues with establishing rolling forecasts that will help you dynamically adapt to market and economic changes.

Strategic Spending Cuts

CFOs anticipating a downturn have a variety of spending plans in their back pockets that align with likely economic conditions and their own cash flow realities.

One approach is as simple as compiling tiered forecasts representing cuts to respond to revenue reductions of 10%, 20% and 30%. All line items are on the table, and plans include enough specificity that the CFO is confident the company can achieve expected savings if needed.

A smart CFO will plan for cuts that they can dial back as conditions improve. Layoffs, for instance, are not easily reversed, particularly given persistently low unemployment.

Customer Analysis

Consider how customer demand and supply availability might change if the economy slows. Many companies offer a suite of products or services ranging from absolute necessities to more elaborate extravagances. Modeling likely buyer behavior will provide insights into how you might adjust production.

Supply Chain Considerations

When recessions hit, customers may stop buying, while suppliers may cancel orders and delay deliveries. Recession-wise CFOs closely monitor upstream and downstream supply chain risks so that you won’t be left with idle production lines and some orders you can’t fulfill even as other inventory piles up.

Inventory Management

A good CFO ensures that you maintain appropriate inventory levels going into a recession. Holding too much inventory reduces your cash and doesn’t improve sales. Inventory can also deprecate or spoil, meaning that you have invested and lost. On the other hand, having too little inventory results in loss of sales and, maybe, customers. It’s always complicated but managing inventory at the correct level presents a greater challenge during a recession than during a normal economy.

Capital Structure

You’ve heard the saying that the best time to have capital is when you don’t need the money. Your CFO should review your capital structure now to ensure that you have the flexibility to withstand a downturn, which could put pressure on your revenue and the ability to service debt.

You may also want to meet with your CFO to reevaluate your planned strategic initiatives, such as capital projects and acquisitions, and determine whether they should proceed or be delayed. Your CFO should connect with your lenders to ensure that they know your strategy and have the capital available to support your strategy.

Scenario Planning

When growth slows, leaders scramble to get a holistic view of the business to make sure it’s operating as efficiently as possible.

When faced with a crisis, finance leaders quickly establish salient facts, like cash position, and develop guidelines for how the organization should respond. Scenarios are built on a set of assumptions around events that affect the survival of the organization and should trigger a series of actions. Each scenario should contain enough detail to assess the likelihood of success or failure of different strategic options. Once this is all established, finance leaders can create a framework that helps the executive team make decisions, then track results in real time so the company can be nimble in its ongoing response.

Panic Early and Avoid the Rush

I started this article with an old saying so I’ll end this article with another old saying: “Fix the roof when the sun is shining.”

The last major economic downturn happened about fifteen years ago. You don’t have to be Janet Yellen or Jerome Powell to predict that we’re overdue for the next recession. Having a smart, qualified, recession savvy CFO in place goes a long way to ensuring that your company survives the next downturn in good order and is positioned to thrive when the economy turns around again.

If you’re not confident that you have the right financial leadership in place and would like to explore what your options are, please call me direct at (416) 567-7782 or schedule a meeting with me here: https://calendly.com/d/g4m-sp2-27b.