If the media and politicians are to be believed, storm clouds are gathering over the global economy. That being said, they’ve been gathering for a while and the heavens have yet to open. However, financial market turbulence, slowing growth in China, falling asset prices, and a host of other portents of doom have led the IMF to tell a group of 20 nations that they need to take ‘bold multilateral actions’ to stimulate growth and limit risk. The chances of another crisis are very real, and CFOs need to start preparing now if their companies are to stand the best chance of surviving and recovering.
CFOs need to ensure that their firms are as well insulated from global shocks and that they’ve mitigated against financial risks that could occur in a downturn. They need to ensure that their supply chains are strong and contingencies are in place for customers delaying payments. Contracts also need to take into account the likely currency fluctuations. They need to be ready to help re-position their company to suit the changing market, making sure that they have the right data in the right place to recognize when things are going badly and when the company needs to make changes in the first place.
The immediate temptation for CFOs faced with adverse market conditions is to cut costs and reduce investment. This may appease shareholders, but if done badly, it can hamper growth and undermine a company’s competitiveness when the economic climate improves. Cuts need to be made intelligently, rather than just applied across the board. Marketing departments, for example, may seem like an obvious place to start when CFOs start cutting budgets, but the best evidence suggests that cutting underperforming marketing efforts while maintaining investment in areas that are working will leave a company in the best position. Digging your way out of a financial crisis is a collaborative effort, and assembling a cross-functional task force that includes team members from the finance function, as well as representatives from the sales, supply chain, production, and business-management function, will show where cuts and investments should be made.
These decisions should not be made when the crisis begins though. The important thing is to have a plan in place, and not to get left having to make quick decisions when a crisis jumps up on you. CFOs should learn the lessons of the last crash, and ensure that they know where to cut and where to invest ahead of time. Technology has evolved tremendously since 2008, and companies now have access to a wealth of data and the tools to analyze it so as to predict the outcomes of their decisions. They can also use this data to get an idea of risks way ahead of time, and act appropriately to counteract them.
Indecisiveness is often cited as a fatal quality for a CFO, but rash decisions can be equally damaging. CFOs don’t want to be in a position where they have to be choosing between the two, but they also have to be ready to change a plan if it’s not working. In a global crisis, you sometimes have no idea what’s going to happen next, and whether something will work. Finance leaders need to review own plans objectively, asking ‘Is this what I thought would happen’, and acknowledge when it isn’t working. The CFO should prepare strategies to suit a number of scenarios built upon different likely macroeconomic assumptions, planning for the worst but hoping for the best.