An economic waiting game: While it feels like we’ve spent the past 18 months waiting for a recession to kick in, it remains vital for CFOs to prepare for the next downturn.
Why it matters: The elongated lead-up to the next recession doesn’t mean that finance groups can afford to press the pause button. It’s never too early to prepare for the next downturn or the one that follows it.
The keys: Three strategies can help CFOs position their organizations to strengthen their resiliency and prepare for and stay ahead of any recession.
- Think cost optimization versus sweeping reductions
- Don’t forget the war for talent
- Lead with transparency
The bottom line: Cultivating and sustaining organizational resilience prior to and during a recession is a challenge, but it’s well worth the effort. CFOs should deploy all of the tools and techniques they have at their disposal to manage margins with an eye toward preserving financial health and support investments that accelerate their organization’s recovery once the economic cycle turns.
- Don’t wait – it pays to prepare now.
It seems like it’s been a long wait for the other economic shoe to drop.
While it feels like we’ve spent much of the past 18 months standing by for a recession to officially kick in, it remains vital for CFOs to prepare their organizations for the next downturn … whenever that may happen. While many questions remain and certain economic indicators are trending more positive, a debt-ceiling debacle in the United States or another disruptive economic wildcard could trigger a recession at any time.
The economy is that fragile. The debt-ceiling-scenario clock has just two weeks before it stops ticking. Yes, the probability of a default is low, but it is not zero. Should that periodic game of political brinksmanship in the United States steer clear of an economic calamity, the Fed has gone on record to say that avoiding a recession is more likely than having one. So, a recession remains a gray rhino looming on the horizon ready to charge at any moment.
Finance leaders are concerned about the impacts of a looming downturn, regardless of its arrival date, duration or depth. A Coupa survey of 600 senior finance executives in $500-million-plus companies based in the U.S., Canada, the UK, Ireland, France and Germany shows that the threat of a recession has more than 90% of CFOs concerned about hitting sales forecasts. Finance leaders also are concerned about declining profitability and margins (42%), meeting payroll (39%) and liquidity risks (36%).
The elongated lead-up to the next recession doesn’t mean that finance groups can afford to press the pause button. It’s never too early to prepare for the next downturn or the one that follows it. The most effective recession responses perform double duty, strengthening organizational bulwarks that blunt the downturn’s negative impacts while delivering benefits related to cost reduction, profit margin growth, operational efficiencies, organizational culture enhancements, and recruiting and retention improvements. These actions also enable organizations to accelerate out of a downturn ahead of the competition.
Much has been written on the topic of preparing for a downturn. The key has always been, and continues to be, positioning the organization for the rebound. To that end, three strategies can help CFOs position their organizations to strengthen their resiliency and prepare for and stay ahead of any recession.
Think cost optimization versus sweeping reductions
Across-the-board cost cuts, shifts to low-cost suppliers and discounted pricing are traditional reactions to the profit margin pressures recessions trigger. When implemented without consideration of future implications, however, such moves can have negative long-term consequences. On the other hand, a cost optimization mindset helps CFOs reduce costs without subjecting the organization to costly side effects such as the loss of valuable trading partners, talent drain, and customer dissatisfaction and defections after the organization raises prices once conditions improve.
In lieu of sweeping cost cuts, CFOs can identify cost optimization opportunities across many areas (e.g., reassigning top talent, negotiating lower prices with high-value suppliers, shifting from an on-premises system to a SaaS solution with lower monthly fees) that yield structural savings without impeding revenue-generation activities. Frequent snapshots of changing customer behavior help CFOs and sales teams adjust prices in more nuanced and dynamic ways that sustain revenue among hard-hit customer segments and geographies while keeping profit margins stout in more resilient segments and geographies.
Improvements in supply chain risk management, agility and resilience also can lower costs while bolstering revenue opportunities. CFOs who help build supply chain resilience deploy measures like time to recover (TTR) to track how long it takes for production, revenue and profit margins to recover following supply chain disruptions. They also extend supply chain risk management activities deeper into the demand side by deploying predictive analytics, environmental scanning and scenario planning to project customer ordering trends.
Don’t forget the war for talent
Rather than pulling the staff-reduction lever in a hasty fashion, CFOs should keep in mind that, in the big picture, the war for talent is over, and talent has won. Unemployment levels remain at historical lows, and over the long term, the pool of available talent will continue to shrink. Too many human capital game plans tend to lurch from hiring sprints and salary increases to slashing benefits and instituting layoffs in reaction to external conditions and revenue forecasts. Recruiting and retention challenges, especially for the most valuable technology-related skills, will outlast even a prolonged recession. It is one thing to terminate marginal performers, but it is quite another to part with those who are highly talented, as they will almost assuredly be hired by a competitor or a player in another industry.
This makes it imperative for CFOs and HR leaders to parse the short- and long-term implications of talent management decisions. Layoffs can improve short-term financial performance, but they can also spark more costly recruiting and retention issues down the road when the reductions are communicated and/or performed in a manner that violates cultural values. CFOs play a pivotal role in setting, funding and executing talent management strategies enterprisewide. In addition, thinking specifically about the finance organization, CFOs should design and test knowledge transfer processes and leadership development plans prior to losing seasoned managers and professionals. This helps reduce the high costs and stress associated with reassigning roles and responsibilities in a reactive manner following unexpected departures.
Lead with transparency
One of the first recession-preparation steps for CFOs should be taking a hard look in the mirror. They should reflect on how much their roles have changed since the brief pandemic recession began in 2020. Today, CFOs have more powerful tools, access to larger data sets and responsibility for delivering far more business insights to far more internal customers and stakeholders than ever before. It helps to consider all of the many ways—including next-generation forecasting, dynamic cash flow management and more integrated contingency planning activities—CFOs can employ to manage costs, deliver value and provide business leaders with the insights they need in any economic circumstances.
Candid self-reflection can also help CFOs evaluate the degree to which their actions embody the cultural values they, their CEO and their peers in the C-suite promote. That alignment is critical if difficult recession-driven adjustments become necessary and are shared within the finance group and with the organization as a whole. In these communications, CFOs should demonstrate transparency by conveying the message personally and by clearly laying out the strategic rationale for tough but necessary decisions.
Cultivating and sustaining organizational resilience prior to and during a recession is a challenge, but it’s well worth the effort. Research by McKinsey suggests that, during downturns, resilient companies report margin improvements, whereas margins decline for nonresilient companies. Bottom line, CFOs should deploy all of the tools and techniques they have at their disposal in order to manage margins with an eye toward preserving financial health and support investments that accelerate their organization’s recovery once the economic cycle turns.
In other words, don’t wait – it pays to prepare now.
This article originally appeared on Forbes CFO Network.
