These are very challenging times for all. While there are some encouraging economic signs, it would be prudent as business leaders to plan with the downturn in mind.
The downturn has been less harsh in Indonesia mostly because we use far more traditional banking structures and vehicles, but the contractions in tourism and export are hurting us. These will take longer to recover because they depend on the global economy’s resurgence, and prospects for a real global recovery are modest over the next year.
There are four key measures to managing successfully during a downturn: sticking to the basics, being prepared for the unexpected, looking for ways to manage costs, and proactively managing stakeholders to avoid surprises. The CFO’s role in this is critical. [There are at least] ten priorities for managing through the downturn:
In terms of business priorities, they are (1) When changes happen, take a closer look – what drives your business, what do you do best and why?; (2) Focus on what matters – products, customers, channels. Are they delivering?; (3) Plan for different scenarios – remain agile, use modelling to explore options; (4) Make tough decisions early; (5) Identify opportunities, not just risks; (6) Manage and retain your best people carefully.
Priorities for the CFO:
- Cash is king.
- Manage your cost base.
- Reliable management information is critical.
- Communicate with, and manage, your stakeholders.
Let’s look at the last four in detail:
Cash is king: Companies that came out of the last recession on top had an average net debt-to-equity ratio before the downturn of half that of the companies that were not successful. They also had more cash on hand. What does this imply?
- Closely examine external financing to see if it’s still appropriate (re-financing, loan agreements, facilities, financing structure).
- Actively and obsessively manage cash.
- Align treasury management with business focus (volatility in foreign exchange rates, interest rates, commodity prices etc).
- Optimise working capital (accounts receivable/payable, contract compliance, inventory levels).
Manage your cost base: Many CFOs are helping their companies achieve significant and sustainable cost reductions. Most companies have gone into survival mode, except for the few that can cash in because they’re cashed up. The skill of the finance function in cost reduction is critical.
The CFO individually, and the function as a whole, have a unique view of the business across its costs, complexity and revenue drivers. Taking out the wrong costs can be worse than taking out no costs at all. In fact, it is the CFO’s and the corporate finance function’s key responsibility in these times to reposition the business’s finances. So how can this be done?
- Earn the mandate to lead by demonstrating competence: Create a reputation for the finance function as an efficient, lean service. Focus on information. Be credible, diplomatic and decisive. Be visible in driving cost management.
- Develop a plan: Assess both value and cost to the business of all operational and support activity. Establish a baseline, define the outcomes needed, identify what drives costs and value and how to balance these? Track benefits and ensure your finance team is fully engaged in helping drive these changes.
- Address the short-term fixes decisively: Consider quick wins in the light of sustainability. Consider impact on culture and morale. Importantly, quick wins can often tide you over until the longer-term initiatives start to deliver benefits.
- Tackle complexity: Sustainable cost reduction comes through eliminating complexity. Take a radical look at legal and corporate structures. Rethink service delivery. Consolidate and simplify processes. Think shared services and outsourcing.
- Communicate: Manage your stakeholders. Your goal is to retain business confidence and avoid surprises. Shareholders and lenders need to be kept informed, they don’t like information or nasty surprises being kept from them. Under these circumstances, it is almost impossible to over-communicate. It is preferable to overdo it than to leave important messages unsaid. Develop strong two-way communication with customers, investors, suppliers, and staff.
Reliable Management Information: The more volatile the market, the more you need to be able to trust your information. Curiously, most companies stick with their same old reporting templates and key performance indicators (KPIs) because “this is how we’ve always done it”. Forecasting and scenario modelling are critical in volatile markets. What we should pay attention to:
- Reducing what we manage, and what we worry about, to the essentials – less is more
- Speeding up reporting processes to reflect critical KPIs
- Giving senior management clear accountability for these critical KPIs
- Developing cash and liquidity indicators
- What-if scenario modelling and testing
- Putting high-risk items on the reporting dashboard