8 Things CFOs Must Do Before The Next Recession

By Nick Araco posted 05-23-2022 02:41 PM

"It is not the strongest or the most intelligent who will survive but those who can best manage change."   This quote by Charles Darwin, in framing his theory of evolution, certainly seems relevant to anyone currently sitting in a CFO seat.

Now more than five months into 2022, it has become clear that CFOs from emerging and mid-market enterprises are facing stiffer challenges in meeting the aggressive enterprise top line, bottom line, and shareholder value increases that more than 2/3 of them had agreed to when asked in December, 2021. They have to tackle the convergence and impact of rising inflation, rising interest rates, supply chain issues, a global talent crunch and war in the Ukraine on their short and long-term revenue and EBITDA performance.  No easy task!

Consistent with rising recession risk, the following S&P 500 industries are all down between 20% and 35% from their peaks: Autos, Media/Entertainment, Homebuilders, Asset Managers, Retailers, Software, Banks, Investment Banking, Employment Services, Consumer Finance, and Hotels/Restaurants/Leisure. The Bloomberg consensus of economists' odds of recession has jumped to 30%, which may not seem high, but it's nearly double the norm of 17% for a group that generally tends to skew quite optimistic about the economy. 

So, if the data and experts are right and we are indeed heading toward a worldwide economic recession, what are the 8 things that CFOs must do to develop a plan and prepare now to enter a recession with confidence so that they and their enterprises can emerge stronger.

Act now and don’t wait for the economists. Economists won’t officially declare a recession until two consecutive quarterly declines in real GDP have occurred. Smart CFOs get ahead of the economists by carefully monitoring their own KPIs and being prepared to respond in real time to new and rising red flags. Critical to all of this is the need to identify the core sales, production, and operational metrics that drive the revenue and EBITDA of the business and be prepared to adapt and adjust to any material changes that may occur.

Don't think that you and your enterprise are recession-proof. While some essential products and services are less exposed to cyclical economic trends, few businesses are truly recession-proof. Check the ego at the door and recognize that dramatic consumer and business spending swings can change virtually overnight. Take the time to understand how the dominoes fall and where your business and customers fit into these equations.  

Develop and communicate your individual, team and enterprise forecasts and game plan with transparency and consistency.   For most enterprises, it’s likely that sales and revenue will drop when a recession hits. CFOs and their teams need to develop forecasts and resulting plans to evaluate the impact that material slow downs and drops in sales will have on the business and company culture. It is important for CFOs and their teams to determine what cuts in costs are needed at each stage for their enterprises to stay profitable and solvent. It is equally, if not more, important for CFOs to work with their CEOs, sales leaders, and market-facing employees to prioritize and engage their key customers to ensure that their relationships are strong enough to weather possible difficult times ahead.  

Be proactive and improve enterprise balance sheets now. Many current CFOs have never been in the top seat during a recession. CFOs must understand that companies entering a recession with strong balance sheets, lower debt ratios, and larger untapped credit lines are more likely to be better able to operate with greater financial flexibility during a recession than those who wait and watch it play out.  

Finance and HR leaders need to work together to review and modify current compensation plans. While it will be difficult to hire talent in today's environment and even more difficult to try to undo the significant price increases paid to talent during the current workforce crunch, CFOs and HR leaders must work together to determine ways they can avoid committing to additional fixed compensation plans as the economic expansion potentially winds down. It is becoming increasingly clear to many CFOs and CHROs in our Alliance Networks that now is the right time to consider adopting plans weighted toward variable compensation designed to reward employees’ performance, rather than permanent raises.

Review and assess your Customer Experience (CX), so that you can better manage your Accounts Receivable (AR). If a recession is looming, it is inevitable that some of your customers may become strapped for cash and it will become even harder to collect from them, leaving many enterprises exposed to their customer risks. CFOs who keep close tabs and continuous and consistent communications with their customers are less exposed to outstanding debts. 

Now is the time for CFOs and their teams to do granular customer/product/service profitability analyses. CFOs and their teams should identify best customers and the most profitable products and services. Identifying these parts of the business and protecting them from any suggested investment cutbacks can help an enterprise maintain its identity with both customers and employees during a recession.

Resist cuts in innovation and R&D. New products, services and innovation often separate the best businesses from the pack during any economic cycle, and they become even more crucial during a recession. Even when overall demand for products and services decline, enterprises that differentiate themselves during down cycles have a better chance of surviving and prospering in the short and long-term.  

Now is the time for CFOs and their teams to test their mettle and validate why they are in their seats -- Act with confidence so that you, your teams, and enterprises can emerge from a possible recession stronger.