As the 10th anniversary of the financial crisis approaches, Governor of the Bank of England, Mark Carney, has claimed that many of the issues that led to the financial crisis have been fixed. The world’s biggest banks are apparently stronger, misconduct is being tackled, and the toxic forms of shadow banking are no longer a threat. In a letter to G20 leaders before their meeting in Hamburg later this week, Carney said: ‘A decade after the start of the global financial crisis, G20 reforms are building a safer, simpler and fairer financial system. The largest banks are considerably stronger, more liquid and more focused.’
This does not, however, mean that CFOs should rest on their laurels and assume that there is no risk of another crisis. Many pundits have, over the past year, warned of the precariousness of the global economy. Claudio Borio, head of the BIS monetary and economic department, recently argued that ‘Leading indicators of financial distress point to financial booms that in a number of economies look qualitatively similar to those that preceded the global financial crisis.’ Billionaires including Sam Zell and Carl Icahn have also expressed concerns, as well as money manager Crispin Odey, who argued last year that: ‘Everything points to it being a bubble. You can never know the height of a bubble, but by the time it gets to here, you haven’t got much time.’
CFOs have to be vigilant. They need to understand the nature of any potential crisis on the horizon. Following the last financial crisis, Paul Krugman warned that the idea people would have acted differently if they'd known what was coming was a delusion. This cannot happen again. CFOs need to maintain a constant state of preparation if their companies are to stand the best chance of surviving and recovering any crash.
CFOs firstly 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 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. They need to test their supply chains for strength and put contingencies in place should struggling customers delay payments. Contracts also need to take into account the likely currency fluctuations.
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 stifle growth and undermine a company’s competitiveness when the economy turns around. Cuts need to be carefully considered, 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 in a position where you are having to react to fast-moving events. CFOs should learn the lessons of the last crash, and ensure that they know where to cut and where to invest ahead of time. Recessions take many different forms, but there are ways of putting in protocols to suit a number of scenarios built upon different likely macroeconomic assumptions. Technology has evolved tremendously since 2008, and companies now have access to a wealth of data and predictive analytics tools enable them to gain a better understanding of the way the market goes and how their decisions they make in response could have an impact.
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. Many have rebuilt cautiously and diligently over the last ten years, keeping costs low and adopting new technologies that automate systems. This means most are agile enough to alter course, and preparation will allow them to do this proactively. Without it, they will fail to manage threats that could bring down their company.