By Jim Mackaness
A sudden turn of events from a business standpoint, regardless of the cause, requires strategic, timely, and well-crafted decision making by the management team. Delaying necessary but painful changes can be costly over both the short term and the longer term. But business teams must be careful to avoid making knee-jerk reactions in these types of crisis management situations, failing to understand the full context and impact of these hasty decisions can cause more harm than good. These situations put a company’s corporate IQ to the test: what level of business intelligence does the management team possess to make the right choices? They need to be able to rely on facts and relevant assumptions about the company’s future risks and opportunities, as opposed to half-truths and “urban myths” about how the business operates. And they must leverage company culture to communicate successfully with their extended teams. When the broader team is brought together and is all “on the same page,” execution of the contingency plan will be more successful as employees recognize the transparency, fairness, and equity of management’s decisions, even if they represent hard choices.
My experience as a finance executive managing through business crises, internally and externally imposed, leads me to believe that the CFO is best prepared to add-value in these types of situations.
Why is that? I give you four main reasons. Together, these drive increased business intelligence, help raise corporate IQ and lead to better company decision making, vital in times of crisis.
#1: At the Crossroads of Business and Financial Performance
The one person who sees it all at a company is the Chief Financial Officer. While a Controller might understand the business from an accounting standpoint and an FP&A Director from a spreadsheet perspective, a CFO must really absorb and actualize how the business itself functions to really be successful – especially in the midst of a crisis.
By definition the CFO must understand how changes in how a business operates impact financial performance at both a tactical and strategic level. They must be able to integrate data into a comprehensive view of business health and truly isolate the points of influence or levers which will improve performance. They appreciate how important the timing of execution is to ROI. They must understand how each function and business unit is interconnected, how internal and external factors change forecasts of revenue, cashflow, and profitability, and the nuances of P&L vs balance sheet dynamics. And they must be able to proactively create 3-, 6-, and 9-month forecasts tied to business-based scenarios that will withstand scrutiny by their CEOs, management teams, boards, and investors.
#2: Masters of Pattern Recognition
An experienced CFO will go one step further. They will move beyond today’s snapshot of performance to recognize patterns which are key to managing performance over a longer-term horizon. They will isolate factors that are unique to a product or business vs. those that are common to many.
At one client of mine, a medical device company, we manufacture lasers and probes. We have essentially two lines of business: capital equipment-based (facility buyers) and a “per procedure” (physician driven). Our revenue forecasting is completely different for these two businesses in the face of COVID-19. Our capital business will be more volatile until at least Q4 where we expect a modest bounce back as capital budgets begin to get refunded, and where we may make up for lost ground when the environment normalizes as delayed purchases are expedited. Furthermore, the timing of capital equipment purchases tends to be skewed to the end of any quarter impacting the timing of receivables and ultimately cash collections. Our procedure-based business (where anticipated growth is based on sales to more physicians as well as frequency of procedures per physician), we see taking a pause in terms of both growth variables. We see this business restarting at a lower overall base in Q4, but since it’s hard to make up for significant lost ground during Q1-3, the overall effect is that the growth curve effectively gets moved out. Per procedure purchasing also tends to be more linear throughout the quarter creating a different accounts receivable and cash collection pattern.
Therefore, taking a broad-brush “x% decrease” in the total revenue forecast vs. conducting a more in-depth, thoughtful sensitivity analysis in times of crisis can possibly lead to nasty surprises if all underlying trends are not fully understood.
#3: Able to Pinch Hit When Required
When business is good, it seems Finance is at least 3rd, maybe even 4th, in the pecking order in most companies. Often operating behind the scenes and not as visible internally as the commercial or new product introduction teams that lead the charge. But this all changes in the face of an economic crisis such as the one we now face.
Unfortunately, when business is bad, one of the side effects of a crisis is that it can expose functions that have been neglected or suffered from underinvestment. In these situations, CFOs are frequently the ones asked to pinch hit and cover the bases. Strategic and sensitive internal communications need to be carefully vetted and timed. Relaxed policies, systems, and controls need to be tightened up immediately. Capital investments need to be rethought and expense management handled transparently and fairly. Supply chain and partner contracts and purchasing volumes need to be renegotiated without ruining relationships. An experienced CFO knows how and when to add value without getting in the way, or bruising egos and creating even more chaos internally and externally.
#4: An Independent Voice and a Partner to the CEO
Finally, a CFO becomes a trusted and valued partner to the CEO when navigating rough waters (and calm ones). With their more comprehensive view of the business, they can map out the financial impacts of strategies for revenue forecasting, expense management, look at opportunities and risks to the balance sheet, watch the inventory of critical supply chain inputs and forecast projected delays in accounts receivables. With no dog in the fight, they can independently mediate painful discussions between internal teams faced with expense cuts and furloughs or RIF layoffs. And they can cut to the chase, speaking to a CEO in a clear and calm style with a fact-based perspective, prioritizing only the most essential elements for discussion and decision making.
Being masters of true business intelligence, they can focus on future scenarios which still map back to the CEO’s and company’s vision – even in the worst of times.
If you lack a CFO or one with the capabilities your company needs to manage through the next 18-24 months of business disruption, now may be the time to make a change. Can you afford not to?
Give us a call. We’ll be happy to see if FLG Partners can assist.