5 Secrets of Economically Wise CFOs

by Justin Cowan

Top finance leaders adopt the mantra of hoping for the best and planning for the worst.

©Crisfotolux/iStock/Getty Images Plus

Finance leaders aren’t sitting around passively waiting to see if everything goes the way they hope it will, especially when it comes to things we can’t control like the economy. Instead, they are continuously evaluating their business’s current and future financial health and focusing on insulating it from economic fluctuations. If a downturn does happen, the best CFOs find ways to cut costs and increase efficiency to bolster the bottom line.  

According to a recent survey from Oracle NetSuite, 92% of business leaders believe their finance department is fully prepared to handle a potential economic recession. If the last few years have taught us anything, it’s that CFOs are expected to shepherd businesses through the economy, no matter what it throws at us like a pandemic, inflation, supply chain issues and a tight labor market.  

Amid a potential downturn, here are five practices of economically-wise CFOs that you can adopt to help make your business more resilient.  

1. Scenario plan, scenario plan and scenario plan some more 

Planning for different scenarios starts with first understanding your current situation. Assess your working capital and keep a close eye on free cash flow. 

Once you have a handle on cash, implement a rolling forecast that you can update as the economy fluctuates and business priorities and expenditures change. When a recession is possible, it’s best to forecast for the next two quarters to get an accurate cash flow projection versus trying to accurately forecast for two years.

CFOs that aren’t excessively stressed have a slew of spending plans that consider various economic scenarios and their own cash flow realities. A good approach is to formulate tiered forecasts of 10%, 20%, and 30% revenue reductions that are specific enough to give confidence to stakeholders that the business can still operate and save money if those scenarios were to play out. Another benefit of the plan specificity is being able to act quickly and easily if the potential scenario were to become reality.  

2. Get to know your customer. 

Understanding your reality and potential scenarios is important, and it’s also just as critical to understand your customers’. How might customer demand change as the economy slows? What impact will that have on your supply availability? How should you adjust production and inventory levels for unknowns? 

Start first by doing individual analyses on your customers. An enterprise resource planning (ERP) system can generate insights to help gauge the financial health of your customers. Conduct customer business reviews and run numbers including current accounts receivable, return on sales/operating margin, and sales growth to identify changes in buying patterns that might indicate a change in demand for the customers’ products or services.

This exercise also helps you understand which customers could benefit from proactive outreach – whether that is upselling to those that could use more of your product or service or adjusting rates on an offering to prevent cost-weary buyers from canceling.

3. Exercise your supply chain options 

The last thing CFOs want is to be left with a massive surplus in some inventory while they have orders they can’t fulfill. To avoid this, CFOs must closely monitor their supply chains.  

As a first step, build a flowchart of all suppliers to help you flag duplicate and single-source suppliers. Then, come up with a list of risk factors for suppliers like past disruptions and susceptibility to recessionary pressure and assign each factor a score from 1-5 of weighted importance. This will help you understand which suppliers are high risk and help you evaluate whether it’s worth it to keep them.  

Rate the areas where you need to add diversity to your supplier network. These may be suppliers that are high risk or may be suppliers that provide your most critical inventory.  

If you have an ERP, supplier information might be in a central vendor management record. If so, you should put this to use by mining the information to understand if preferred suppliers could offer materials you purchase from one-off suppliers, helping to further cut costs and reduce supplier complexity.  

4. Understand your inventory, intimately

During the pandemic when supply chain disruptions were common and customers were frustrated with constant out-of-stock messages, businesses were hyper-focused on having enough stock on hand and were less concerned about financial management. In an economic downturn, tighter cash management needs to be emphasized more in your inventory planning. 

Inventory impacts cash flow, and the best finance leaders understand that demand planning is crucial. Information about the amount and location of products, their turnover rates, and exact status directly impacts reorder dates and influences future cash needs. 

To accurately predict demand, start with first identifying less popular, less profitable items. For excess items, turn to sales or volume discounters to remove stock from your warehouse. Then, make sure you have data and processes in place to pinpoint the minimum inventory needed to keep up with customer demand and potential supplier delays.

5. Automation is your friend, not your foe. 

With payroll still taking the cake as the top capital expenditure for most businesses, it’s important to remember that it’s less expensive to upskill existing staff than to onboard new workers, even if you can pay them less.

With these realities at play, investing in technology to help offset the busy work of your warehouse, finance, and customer service departments can help offset the need to fill empty positions while also freeing up your talent’s time to gain new skills and uplevel your business.  

How do you identify what technology will serve you best? Start by finding the three slowest and error-prone processes. For example, your accounting department might not enjoy three-way matching, invoice creation and sending customer payment reminders. The good news is that there is technology that can automate all three of those processes and allow your accountants to help tackle the practices in this article that can make your business more successful. 

There’s another saying CFOs abide by and that is to fix the roof while the sun is still shining. Most business leaders are feeling uncertain about the economy and no one can predict what the future will hold. CFOs must reevaluate current business practices and make changes now. These practices will help you prepare to ride out any potential storm and emerge stronger on the other side.

Justin Cowan is GVP of Strategy, Oracle NetSuite.