Rising above a recession: The CFO’s keys to financial resiliency in an economic downturn

Abdul Shroff

Vice President - Strategic Growth Organization Global CFO Practice

Learn key steps to financial resiliency that CFOs should know to minimize the impact of a recession.

If you sit in the CFO’s seat, you know that managing change is a constant – but effectively managing through difficult changes can lead you to greater success.

Internal and external stakeholders look to CFOs to capably navigate companies through major business events, meaning that every crisis can be an opportunity for you as a strategic CFO. The last big event was the COVID-19 pandemic; you probably experienced challenges at the outset in 2020 but you were able to maneuver through that storm. Now there’s the prediction of a recession later this year or early in 2023 because economic growth has slowed amid rising interest rates and 41-year-high rates of inflation, all while COVID-19 variants continue to lurk in the background.

The Harvard Business Review found that the most resilient companies during the 2008 economic crisis geared up for the recession earlier than their competitors. Even if they lost revenue during that downturn, the resilient ones had higher EBITDA margin because they reduced operating costs earlier in the recession cycle. The resilient companies were in a stronger financial position than others in their industry because they built flexibility into their investment planning and operations and were able to increase earnings. When that recession was at its worst, the resilient ones were able to reduce their debt more than others, using funds from divesting businesses and certain assets. The resilient ones had more cash that was then used to acquire assets from their competitors that had to sell assets when the overall economy improved.

There have been 12 recessions since World War II according to the National Bureau of Economic Research and a recession can last between two and 18 months. Not all businesses are affected to the same extent as others in a recession. Industries that are recession-resistant include healthcare, food, education, household goods, and utilities. No matter where your business lands, you’ll find these key steps to help minimize the impact of a recession and come out stronger on the other side.

Cash flow/liquidity

Understanding your company’s cash flow and liquidity positions is always important, but it is even more so when heading into a recession. What is your working-capital requirement to ride out the recession? Should you look at increasing your line of credit and access to other funding options in anticipation of increased cash needs? Working capital management is vitally important during a downturn.

Assess your receivables and identify risky customers in your customer mix. Is your industry sensitive to economic cycles? For instance, if you’re in hospitality, you know that consumers pull back from entertainment and travel because they are concerned about job security. Knowing which customers pay slowly offers insights into their financial health and creditworthiness. You can improve collections by offering customers early payment discounts. You can also reach out to customers to understand their situations and prepare for potential rough points so that you maintain strong ongoing business relationships.

Maintain optimal inventory to serve your customers and plan with your suppliers to ensure appropriate inventory levels. 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.

While you manage collection, it’s critical to control your cash outflow. Effective management of payables includes renegotiating with your vendors, which can include asking for extended payment terms or price concessions, or taking advantage of early pay discounts.

Operating expenses

Your company’s expenses should be carefully evaluated leading into and during a recession. Cost containment is necessary and should be clearly communicated to the entire company to align spend expectations. Discretionary spending, like non-critical travel and non-essential headcount, should be cut. Also, evaluate your overall workforce and their skills to ensure that they align with your business needs during the recession and beyond. Renegotiate with your vendors and examine services that your business needs to survive.

Capital structure

You’ve heard the saying that the best time to have capital is when you don’t need the money. 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. Do you have debt repayment due within the next 12-18 months? Will you be able to repay that debt with your current plans in place, or should you look into refinancing when capital markets are accommodating?

Reevaluate your planned strategic initiatives, such as capital projects and acquisitions, and determine whether they should proceed or be delayed. Reexamine the non-strategic assets of the company that can be divested. Connect with your lenders to ensure that they know your strategy and have the capital available to support your strategy. Proactively evaluating your capital structure and forecast is paramount to managing successfully through a recession.

Anaplan: The right technology for recession planning

You need to make smart data-derived decisions – not decisions based on guesses. And you want complete and timely updates on data and metrics, which are required more frequently during a recession. Intelligence about cash flow, operating expenses, capital structure, supply chain, sales performance, and workforce let you and your team collaborate and make the right decisions at the right time.

Your planning technology should enable you to view data, gain insights, and make forecasts as frequently as you want in line with the fluidity of business. You should be able to perform scenario analysis whenever you need it. You should be able to generate management reports instantaneously to present to executives and the board so can you get buy-in on actionable steps to achieve business results.

Do you have the right technology to make faster, informed decisions to drive your business objectives? Do you have the right tech to be as agile as you need to be in a recessionary environment?

The right technology can help define the winners in uncertain times. Anaplan can be implemented in weeks, not months, and allows you to fearlessly steer your business during normal and turbulent times.

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