Planning During Uncertain Times
Eight best practice tips that CFOs can’t live without.
November 2, 2009
In terms of market fluctuations, is this recession a “V,” “W” or an “L”? The world’s greatest economic minds cannot seem to agree. It’s time for CFOs to accept these uncertainties and get down to the business of planning for 2010.
With so much instability in the business environment, every objective you set will take longer to achieve, not to mention to gain consensus on internally. Consider a few: revenue growth, cost cutting continuations, hiring, obtaining financing, attracting new investors and locking in longer-term supplier contracts. Strategies that once worked to reach these goals may no longer be effective. It’s a situation that can paralyze the most confident financial leaders. Despite the speed of change and complexity of the environment, it’s important to look beyond the headlines and consider all of the facts. Look at your liquidity, your industry and your income stream, then take a stand about where you think your business is going and create an operating plan for next year.
In order to succeed, businesses are forced to adapt. Those who have adapted to the recent downturn are still in the game, watching for signs of recovery. There have been some positive signs of late, particularly in the stock market, but caution remains the operating word. While the one-percent contraction in gross domestic product (GDP) for the second quarter marks a less severe decline than the first quarter’s 5.5-percent figure, there is no guarantee that the economy has bottomed out. What does this mean for your organization? Reduced revenue growth could be the “new normal,” which speaks to the need for a longer term outlook. You need to formulate assumptions for your business, build-in flexibility to adapt to upside and downside surprises.
Make Plans Based on Assumptions
Focus on cash-flows rather than accounting profits, emphasizing financing decisions, capital expenditures and working-capital changes. Prepare two or three scenarios built on different assumptions from the best case to worst case. These scenarios should reflect company-specific risks, such as sudden unavailability of short-term funding, bankruptcies of major customers or suppliers or a loss of access to working capital. It is critical to develop detailed plans in the event that these scenarios come to pass. Find the balance between biding your time and taking actions that depend on a near-term comeback.
Assess the Competitive Landscape
The underlying economics of most industries are shifting with unprecedented speed. In the day-to-day press of business, it’s easy to lose track of what’s happening in your industry and ignore your competitors. Are they struggling with the same changing conditions? Will the structural changes in your business persist beyond the recession? Your priority must be tailoring your plans to your industry. Keep your options open, fine-tune assumptions and create a “fairway” to begin planning. This is a time to be focused on the market, not looking inward. It’s also a time to face realities. Be aware of tendencies to resist hearing bad news from your staff. Create an atmosphere in which people can talk about the forecasts incorporated into their plans, how they can improve it and resources they might need. You’ll know this is working when you start to reveal problems earlier.
Recessions disrupt and reshape industries, creating threats to the unwary and opportunities for the bold and agile. Companies have twice the opportunity to improve their position relative to competitors during a recession; compared to growth times. Look at your competitors and assess their strengths and vulnerabilities. Determine what the recession has revealed about your strength. Can you leapfrog your competitors while they are troubled? The recession has more than likely crippled your original strategy; you must revisit your strategic plan and adjust annual goals.
Look for New Funding
If you are in need of funding, ask yourself some important questions: When do you think funders will jump in? Will more funding be available this year? To position yourself to secure those funds, start courting lenders and investors now — before you are certain you need them. There are hopeful signs for companies seeking funds. For example, banks are looking for business again; it could be a good time to try to renegotiate lines of credit and fees. It is important to consider a full range of options including bank credit, asset-based lending and private equity. An upturn in private equity (PE) could be faster than anticipated, which could bid up valuations. If you are interested in PE funding, start networking to meet private investors. Prepare a compelling investment profile and formal business plan.
Take on People Issues
One of the most challenging aspects of recession-time planning is the human element. As the lull drags in, employee morale becomes an issue as layoffs; cost-cutting and loss of retirement remain in the forefront. Keep employees hopeful, focused and on task. If you initiated pay cuts, set a realistic trigger to return to former salary levels. Think of ways to provide employees on-the-job training and/or job enrichment at minimal out-of-pocket cost. This is not a substitute for a raise (and can backfire if it’s perceived as more work for no pay), but in the right situation it can make employees feel they have received new capabilities they’ll be able to monetize in the future.
Communicate Early and Often
In tough times, difficult decisions must be made quickly, requiring regular communication with your board to keep it abreast of developments. Supplement board meetings with e-mails, intranet postings, informal discussions and conference calls. Discussions of strategy should not be left to a once-a-year offsite meeting. Frequent communication pays off when difficult decisions must be made.
Highlight Performance Metrics and Liquidity
Use this planning process to refine models of the relationships between your revenues and costs. When you encourage “what-if” modeling, this prepares you to deal with a range of scenarios. Make liquidity a focal point of your planning. When you understand what you will do to turn over every balance sheet dollar faster, you contribute to working capital. Build working capital by matching inventories to sales, reducing safety stocks and improving production planning.
Bill earlier, enforce payment terms and collect from customers faster, using as much leverage as you have to get your suppliers to share risk and provide favorable terms. Some suppliers may be fundamentally healthy but face a cash squeeze; extract better price terms by paying more quickly. On the customer side, consider steps to deal with an increase in nonpayment; change credit terms for riskier customers. Assess customer profitability and consider walking away from unprofitable business.
Keep the Future in Sight
Despite pressures your business may face, your leadership team must remain forward looking. Reaching that goal requires strategies for higher productivity and competitive advantage such as acquiring a footprint in a new market, ramping up innovation and not squandering your company’s brand and reputation in a pursuit of lower costs. In tough times, risk runs rampant and leadership becomes more important. As your leaders focus on adapting to current realities and generating short-term profits, it’s crucial to balance between the present and the future. When you weigh the facts and plan creatively, your organization can emerge from this recession stronger than you entered it.
Cynthia Jamison, national director of CFO Services for Tatum LLC, has served as CFO of seven companies and currently chairs the audit committees of two publicly traded companies. For more information call 888.TATUM11.