July 16, 2023
Insights For Finance Professionals: How The CFO Can Navigate Teams Through A Recession
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In times of economic downturn, the role of the CFO becomes even more critical. In the context of an uncertain economic landscape, it’s imperative for those in this role to steer their teams through a recession with strategic financial management and leadership.
We’ll explore the levers that finance leaders can pull to successfully navigate a recession, and provide valuable insights and strategies to effectively come through a recessionary period.
We’ll look at the key strategies to employ in three distinct areas:
- Assess the current financial situation
- Develop a resilient financial strategy
- Communicate and engage with stakeholders
1. Assess the current financial situation
Much like a surfer observes the wave patterns before diving into the ocean, so too should CFOs facing mounting headwinds step back and get a sense of where things are headed before jumping in. This way, they can choose the optimal strategies to weather the recessionary storm.
Understanding the economic landscape
To successfully guide teams through a recession, it’s important to have a clear understanding of the prevailing economic landscape. Ideally, finance leaders should also be tuned in to economic “tripwires,” or any kind of early warning that hints at upcoming recessionary conditions.
By monitoring key macroeconomic indicators, such as GDP growth, inflation rates, and unemployment rates – together with indicators that are super relevant to their organization’s business – CFOs can identify the signs of an impending recession and proactively prepare their teams for the challenges ahead.
Predicting recessions is not a science, but a combination of the following factors can often be used as an indicator of conditions ripe for economic slowdown:
- Slowing GDP growth: particularly over consecutive quarters, often allied with reduced consumer spending, declining business investments, or decreased exports
- Rising unemployment rates: as well as other signs, such as cost-cutting measures including layoffs and hiring freezes.
- An inverted yield curve: the inversion of the yield curve, where short-term interest rates exceed long-term interest rates, has historically preceded many recessions.
- Financial market volatility: including sudden drops in stock prices, elevated market volatility, and reduced investor confidence.
Evaluate financial strength and vulnerabilities
Once a possible recession is identified, it’s imperative to conduct a comprehensive assessment of their organization's financial strength and vulnerabilities. An assessment should start with having all of the required information available, including the right technologies.
Key ratios need to be stress tested, with multiple scenarios modeled.
Have all information at your fingertips
McKinsey researchers note that many companies expect the CFO to “have a granular understanding of all elements of the business” as this is critical to making informed and data-driven decisions on such elements as strategy and resource allocation.
How can finance leaders ensure that they have visibility into – and in control of – all facets of the business?
The answer is the right technology partner. For example, leading CFOs trust PayEm to be their platform of choice to get real-time data and immediate insights, and modernize AP processes by implementing automation and control, by setting rules and designating limits.
2. Develop a resilient financial strategy
A resilient financial strategy is more than just cutting costs. Cost optimization is usually aof this strategy, but any moves should be consistent with risks and opportunities identified, and not haphazard or reactionary. In many cases, CFOs decide toinvestments in certain key areas if this is consistent with the goals outlined in their investigation of risks and opportunities.
The Harvard Business Review examines this choice in detail, noting that “During recessions, of course, consumers set stricter priorities and reduce their spending. As sales start to drop, businesses typically cut costs, reduce prices, and postpone new investments. Marketing expenditures in areas from communications to research are often slashed across the board – but such indiscriminate cost cutting is a mistake.”
The authors go on to write that “Companies that put customer needs under the microscope, take a scalpel rather than a cleaver to the marketing budget, and nimbly adjust strategies, tactics, and product offerings in response to shifting demand are more likely than others to flourish both during and after a recession.”
They give the example of the De Beers diamond conglomerate, that in 2008 – during a heavy recession – initially slashed its marketing budget. However De Beers subsequently chose totheir budget during a Christmas campaign that year, seeing this as a strategic investment in its brand.
Establish cost optimization measures
During a recession, cost optimization becomes crucial for the survival and sustainability of businesses. CFOs must lead their teams in identifying cost-saving opportunities without compromising long-term growth and competitiveness. This may involve implementing expense control measures, renegotiating vendor contracts, optimizing procurement processes, and rationalizing non-core activities.
Strengthen cash flow management
Cash flow management is paramount during a recession to ensure the availability of funds for essential business operations – and to take advantage of opportunities as and when they arise.
This is especially important given historically high borrowing costs.
Eddie Yoon and Christopher Lochhead offer 5 steps to stimulate cashflow during a downturn:
- Offering generous warranty or return policies
- Implementing new revenue/pricing models
- Accelerating innovation
- Cutting sacred-cow marketing costs
- Engaging in new kinds of customer acquisition
Emphasize risk management
Recessions bring heightened financial risks, and these risks must be proactively addressed through robust risk management practices.
This includes identifying and prioritizing risks, and establishing contingency plans. By leveraging advanced risk assessment tools, finance professionals can proactively identify potential risks and develop strategies to mitigate their impact on the organization.
Identify areas of opportunity and growth
In a recent Deloitte CFO Signals™ survey, the majority of finance professionals surveyed cited the following priorities, in order of importance:
- Invest in growth, sales, customers, and new markets
- Control costs/increase operational efficiency
- Build inventory/production capacity to meet demand
This shows that even during a recession, forward-thinking CFOs are looking at opportunities for growth – if not now, then immediately after, in the recovery period.
3. Communicate and engage with stakeholders
It’s one thing to feel prepared for a recession, but in order to guide your team – and other stakeholders – through a recession, effective and clear communication is a necessity.
Enhance internal communication
During a recession, there are increased levels of uncertainty and insecurity, which in turn can lead to poor decisions and results. Finance leaders should establish open and transparent channels of communication, providing regular updates on financial performance, cost optimization initiatives, and potential risks. By keeping employees informed and engaged, leaders can foster a sense of unity and boost morale during challenging times.
Strengthen external relationships
Maintaining strong relationships with external stakeholders, such as lenders, investors, and suppliers, is crucial for navigating through a recession. CFOs should engage in open dialogues, provide timely and accurate financial information, and reassure stakeholders of the organization's financial stability and long-term prospects.
Crunchbase puts it nicely when it observes, “Strong relationships with investors can provide a source of support and guidance during a recession.” They recommend being transparent, being prepared, and having a strong direction of how to move forward.
Recessions: no match for a well-prepared CFO
In the face of a recession, CFOs play a pivotal role in leading their teams through financial challenges and uncertainties. By understanding the economic landscape, evaluating financial strength, and developing resilient financial strategies, finance leaders can effectively guide their organizations through difficult times.
Moreover, by enhancing internal communication and strengthening external relationships, CFOs can foster trust, collaboration, and resilience within their teams and among stakeholders. With strategic financial management and strong leadership, they can navigate their teams through a recession and position their organizations for long-term success.
To achieve these goals, CFOs need visibility so that they know exactly what is happening in real-time and where to find answers; control, so that they are aware of everything transpiring in the business, and approve accordingly; and automation, which is critical to allowing finance teams to become unstuck from daily distractions, and keep a strategic mindset.
For organizations looking to effectively navigate their teams through a recession, success can be achieved by breaking the challenge into the three core elements, namely:
- Assessing the current financial situation
- Developing a resilient financial strategy
- Communicating with stakeholders
With these in place, organizations can be perfectly positioned to ride out the storm – and benefit from the inevitable recovery.
To learn more about PayEm, including how the platform empowers CFOs and other finance and procurement specialists, get in touch today.
