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 A CFO’s Plan for Overcoming a Down Economy By Richard Flynn, senior vice president and general manager for American Express OPEN You’d be hard-pressed to find a CFO who hasn’t found this economy to be more than a little challenging, but the good news is that there may be a real payoff for all the hard work. In times like these, even the most accomplished and financially knowledgeable small business owners are in search of additional financial counsel to keep their businesses running. When these business owners seek special financial advice, one of the first people they turn to is most likely their CFO. As a result, a skillful CFO’s stock and trade rises, and perhaps his or her role in the company will also grow. Whether co-leadership will actually become a widespread trend remains to be seen, but one thing is certain: if CFOs are to advance in stature, they will have to do their best to keep their companies afloat, regardless of what the economy sends their way. Fortunately, as challenging as this economy is, the basic goals and principles of sound financial management remain the same. CFOs, however, will need to put greater emphasis in some areas, such as managing risks, building steady profit, and maintaining healthy cash flow. To help you identify new ways to adapt to the economy and usher your company through to better times, consider how you’re dealing with the following three areas. Focus on Risk Risk is always something a CFO must keep in balance, but the current economy creates an environment where risks are greater and less predictable at every level, from big-picture industry issues to day-to-day collections and vendor relationships. In this environment, one of the greatest financial risks is to continue operating under existing business assumptions. Be wary of any assumptions you have made about the downturn and its duration. While optimism has its place, counting on a recovery too soon could lead to overstated revenue projections and overly large budgets, and a resulting depletion of reserves. The current recession may have reached its end, but we’re still in uncharted territory and don’t know when substantial recovery will take place. To keep risk under control, reassess your growth and earnings projections. For many companies, earnings and growth projections calculated on a yearly basis, for example, may prove to be too inaccurate over time, given the increased volatility of a down economy. Revisit projections made six months or more ago and assess how accurate they have been to date. If there are already considerable discrepancies between projections and reality, you may need to adjust current budgets to stave off losses. And for the future, you may want to consider the benefits of projections and budgets for shorter periods, potentially trading annual calculations for bi-annual or quarterly figures. In addition to adjusting assumptions, developing contingency plans can also help reduce risk. In better times, conventional planning and budgeting serve well, but a volatile environment with multiple heightened risks requires multiple backup plans. Developing several worst-case scenarios can benefit any company by helping to avoid on-the-fly decisions if the worst does occur. One area to look at is the risk passed on by customers and vendors. Evaluate which of your customers and vendors are the most critical to your business, and take the initiative to learn about their solvency and overall financial strength. For new customers or vendors, exercise the option of doing a credit check through Dun & Bradstreet. You may also want to take the extra step of requesting trade references and bank references, which can provide detailed information about business dealings with the company in question. For existing customers or vendors, take a look at their track record with your own company over the past six months. If a vendor’s delivery time has lengthened or reliability has slipped in any way, it’s safest to assume risk has also increased. Likewise, customers whose payment time has extended significantly, may be greater risks. In addition, stay abreast of industry news that affects vendors and customers. A loss of large accounts, increased market turbulence, lower stock prices, or rising raw materials costs for either customers or vendors all serve as warnings of elevated risk. Being aware of rising risks will allow you to plan accordingly, should a customer’s or vendor’s situation take a turn for the worse. If customers appear to be growing credit risks, you will want to reassess any credit you extend as soon as possible. You may also simply want to encourage customers to pay by credit or charge card, so that you will be guaranteed timely payment and avoid the risk of slow payment or non-payment. Customers will still be able to delay payment and may also appreciate the benefits and rewards that a number of charge and credit cards offer. Look for small but steady gains Most companies build profitability in small steps, not through major high-profit opportunities, which tend to arrive sporadically even in the best of times. In a slow economy, profitability is more than ever likely to be the result of long-term discipline and small, consistent gains. Target predictable savings and discounts that will help boost profits in a time when profits are soft. Trade terms, for example, are one such opportunity. With diligence, these seemingly small advantages can be significant over the long term. While some terms will allow you to defer payment when cash is short, nearly all reward early payment with a discount. Delayed payment may present greater benefits depending on your organization’s cash flow, but when paying early is an option, the rewards are worthwhile. Although one or two percent seems like a small amount, it’s a deal since these savings represent cash that can be reinvested in your business. If you’re not able to take advantage of trade terms with some or all vendors, look for other options, such as credit and charge cards that offer cash-back rewards, miles, or other advantages, or those that offer trade-like terms. Opportunities for discounts may be less abundant in a down economy, but there is often room for negotiation. Identify or create additional opportunities by assessing vendor relationships across the board. If you provide steady business to a vendor but haven’t been able to negotiate better payment terms, discounted prices, or other advantages, then consider how you might better your standing, whether now or in the future. For example, consider whether it is worthwhile to formalize a standing order, instead of ordering on an as-needed basis. You might also gain negotiating power by consolidating your business with one vendor. Sync accounts payable and receivable To create optimum cash flow, accounts payable and receivable have to be more than well managed; the two must work in lockstep. While accounts receivable will always present greater unpredictability, streamlining accounts payable can lend more focus to cash flow efforts. Assure that outflows are not continually due before receivables by standardizing payment dates whenever possible. Negotiate payment dates with vendors and creditors to streamline payments and better coordinate them with the receivables cycle. This can also help reduce the distraction of dealing with payments in a scattered manner and will create more focus in areas of accounting that require greater attention and effort. Look at late payers to determine how you can help keep them on track. When a customer is past due, immediately open a dialogue to understand the situation. In addition to learning more about the customer’s situation, evaluate your own organization’s role in late payments. Spot checks in specific late-payer cases will help you determine whether your own accounting system is getting invoices to the customer promptly. Keep in mind that getting the invoice in the mail is not the last step. Invoices must reach the appropriate customer contact and must contain all essential information, such as purchase order and vendor numbers, so that the customer can process the invoice in a timely fashion. Challenging times are undoubtedly here for at least a little longer, but with perseverance and a measured approach that’s based on sound financial principles, CFOs can help guide their companies through to better times. Building solid footing in the downturn will not only keep the company resilient today, but will also position the business to profit from the many opportunities that will come with a stronger economy. And with any luck, having served your company well through the bad times, you’ll be rewarded with a stronger role in leading the company when the economy bounces back. Top
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