Let's start with brutal reality. The US economy is tough and looks like it will be much tougher.
This puts the CFO in a difficult position. The evidence is not yet clear to most people, but you are forced to adapt to what you see coming. It's your job, but unfortunately, it often causes people who have been affected by the difficult financial decisions you make to see you as your enemy. The impact includes anyone affected by the job offer, but can also be extended to the remaining employees whose budgets and the entire department may be reduced to maintain profitable operations. They may understand logically, but the emotional element is always there.
But like in other jobs, you have to do things you may not want to achieve success. By tracking the right signals and communicating through the necessary changes, we can more effectively navigate these challenging times, minimize the impact on workplace morale, and dramatically increase our competitors' ability to thrive when they are not.
Track important metrics
I'm in the financial world for my entire career. After that, I ventured out myself and launched a Haren Equity Partner. It's embedded in a nearly $800 billion empire focusing on struggling companies. Essentially, I rebuild a struggling company into an efficient and profitable asset. I know one or two things about managing a company facing challenging situations.
The first thing every CFO needs to do now is to track every aspect of the company's financial health in real time. This helps management to make more detailed information faster. This could mean the difference between adaptation and blinding. It can also provide important insights into incredible opportunities before others see them.
For example, AR aging is important internal information, but can also show external opportunities. If the customer is paying later, competitors' customers may also pay later. If your competitor is financially vulnerable, it could be an opportunity to acquire something smaller and in the process to acquire market share, talent, and even unique skills. It assumes you are in a position to do so without exposing your company to unnecessary financial risks.
Topline Revenue is the first and most obvious metric to track, but it's quite downstream from the actual metric, so it's wise to work backwards to get data early in the equation. You start there after thinking about all the data that will ultimately lead to topline revenue.
It is also important to closely track broader economic data, including interest rates, consumer and business debt levels, default rates, unemployment rates, and inflation rates. All of these could be early warning signs of future economic changes that could harm or benefit your business.
A less quantified measure to track is the quality of the relationships that affect the company's financial health. These include relationships with teams, vendors, suppliers, lenders and partners. You should work to develop stronger relationships and look for signs of problems that could negatively affect the company.
The idea is to identify and track as many relevant data points as possible, connect them to an evolving economy, and predict how business will change. By placing current information at your fingertips, you can make the most important and effective decisions possible at any time, spot risks and opportunities, and plan for short- and long-term.
Create multiple budgets
Business lives on budget and dies. This is true during a good economy, five times more critical when the economy is weak.
However, it is not enough to just make a budget. It's not enough to adjust to fit today's economic situation. Faced with economic uncertainty, there are a number of different budgets that can be quickly pivoted as conditions evolve.
Think of these contingency plans that the military will use when preparing for operations. Military leaders develop robust major plans, but often do so when things don't go according to the original plan. So, if other situations arise while the original plan is being implemented, they will develop a plan as to whether they are unable to achieve the main mission and what to do if other situations arise. They even plan what to do if all the plans fail. In other words, the last resort is called the “commander's intention.” This is an indication that no matter what goes wrong, it must happen.
Treat your budget the same way. The current situation has budgets, but there are other budgets that have been adjusted to address situations such as a significant increase in tariffs, inaccessibility to credit, dramatic declines in revenue, increased costs, increased new regulations, or significant labor cuts. Windfall opportunities should be planned as it tends to be more common in these times.
For example, you can see that competitors encounter economic problems and lead to opportunities to market more aggressively to gain market share. If you are planning this scenario, you can effectively capitalize, but if you are not, it can be a coincidence and economically dangerous move. The key to success is planning ahead.
Plus, you need to live on a budget. One of my favourite and most successful CEOs said, “The budget is a promise and you'd better keep it up.” I love that line. A lack of budgets will not only cause financial problems, but people will also lose confidence in you. If that happened, we cannot talk about sobs about this or how it happened. Before it's too late, you need to turn it around and get it back on track.
Prioritize relationships
One warning is to keep it in a budget perfectly when important relationships are involved and go overboard. Always place enormous value in your relationship.
Whether it's a vendor, supplier, partner, lender, or someone else, traditional wisdom is to actively negotiate to maximize every penny. It's total nonsense. Business and the big picture, life is a long-term game. The value of your relationship is less obvious when things are going well, but when you are in trouble and need a real partner, it becomes abundantly clear. You only get those real partners by proving that you are someone in your words and know what you are doing.
People need to know you're there. It develops confidence that your team, vendors, suppliers, lenders and partners need to have you.
Maintain the foundation
Another budget-related mistake I often see is that CFOs cut critical infrastructure and operations out of excessive attention and desire to be viewed as careless.
Unfortunately, to surround the wagon and save as much capital as possible, they end up hamstring the company in a variety of ways, making it even more challenging to generate the revenue the business desperately needs to operate to the current level, especially when customers are cutting their spending.
If a company no longer has people who effectively provide products and services in a way that satisfies its customers, it will irreparably damage the brand and significantly reduce revenue. Marketing – the area where many companies were first and most aggressively reduced – another area where this could happen. The problem is that marketing cuts can reduce revenue and lead to conservative companies increasing the mass of market share over time. It can take years to recover.
It's wise to cut where it makes sense, but it's important not to go outboard and cut down on the basic aspects of your business. Essential for continuous operation.
