Managing Your Team and Career Through Today’s ‘New’ Economic Realities – Part II
Introduction from Part I
Most of today’s business leaders are experiencing a convergence of economic events unprecedented during their careers.
Increasing interest rates, low unemployment, the most transient workforce in 50 years, a complete rethinking of where we work from, and a plethora of technology choices are overwhelming finance leaders and their teams. This comes on top of a rapid rise in inflation over the past 24 months, leaving margins compressed and SG&A expenses soaring for many businesses.
In this 3-part series we will share 6 topics that will help you navigate the new waters of today’s economy.
The topics include People, Leadership, Profitability/Cash Flow, Funding, Technology and Your Professional Growth. We will include actions finance leaders can take to thrive in an environment where others are trying to survive.
You can catch up with Part I here, Managing Your Team and Career Through Today’s ‘New’ Economic Realities
In Part II we cover Profitability/Cash Flow and Funding
A key responsibility of Finance leaders is to shed a bright light on business performance and the key drivers that are enabling or hindering meeting performance goals.
Profitability/Cash Flow:
We refer to this as the Reporting part of the CFO’s Accounting Pyramid.
Reporting is at the top of the Accounting pyramid. To be effective it must be preceded by a strong foundation of governance & internal controls and excellent recording capabilities. Read more about these core competencies in One of the Defining Attributes of a Successful CFO: Accounting
Assessing the talent, systems and processes (the “Golden Triangle”) for your Accounting Pyramid is a great place to start. An effective assessment will provide you with a roadmap to where future investment should be taking place in the accounting department to meet the needs of your business. An example you can use to get started is this People, Process System, Assessment Tool designed with the CFO and their teams in mind.
To prevent from getting lost in the weeds trying to identify where the light must be focused, we need to start at the strategic level.
What does the business need to measure the determine the effectiveness of its strategic plan?
A common method to do this is by developing Key Performance Indicators (KPIs), metrics specifically designed to help us understand if we are meeting our plan. Bernie Smith is a global expert who teaches business leaders how to determine and implement the right KPIs. In his CFO Talk, The Best Way to Choose Your KPIs, he shares the steps we should take to develop great KPIs
One specific method to explain period-over-period fluctuations in business performance is Flux Analysis, short for fluctuation analysis. It enables leaders to spot variations in trends quickly and act fast. Raghavendra Reddy explains the details of Flux analysis in his piece, Flux Analysis: Road to Observability and Integrity
Profits are important over the long haul, but cash flow can never be a second thought
Although we are getting mixed reviews, it appears there is some slowing in economic activity. Interest rates are stressing the size of corporate bank lines and the cash flow of highly levered businesses. Inflation is adding margin pressure and increasing operating costs to levels that are denting the bottom line of many companies and crippling others.
Having the reporting capability to make a reasonable cash forecast not only helps owners and business leaders sleep better, but it can also save the company and its stakeholders from unneeded stress and worse, a cash shortfall.
“Cash forecasting can significantly improve discipline and operational control. While it will not solve all problems for a fundamentally challenged business, it can improve business processes and functionality. Weekly forecasting leads to insights into the company as to where the business can save money, potentially increase revenues and increase cash flow. Even more importantly, if done properly with critical thinking and proper insight, it can help managers get ahead of any potential problems and plan appropriately.”
- Marty Mooney
Why Every Business Should Build Weekly Cash Flow Forecasts
Often a cash flow issue is disguised or hidden from easy view. David Safeerexplains this problem in The Problem With Your Cash Flow Isn’t What You Think It Is. He shares a 5-step approach he uses to resolve client cash flow problems.
1. Listen to the problem. (Describe the problem and listen for feedback.)
2. Ask probing questions.
3. Test hypotheses and observe.
4. Determine a course of action.
5. Implement the fix.
Having tools for managing cash flow is like a leash on a business. As the tools get better and more robust the leash gets stronger and longer.
In the short run turn to working capital and understanding your cash conversion cycle to find ‘hidden’ cash. One tool you can use to develop a working capital plan is the Cash Velocity Calculator. It estimates how long it takes on average to convert a dollar paid for inventory into a dollar received on sales. It also is perfect for teaching your executive team and staff about working capital and cash management.
For the long term you should have a capital plan in place as part of your business plan. A capital plan not only helps identify your demand for capital, it demonstrates to capital providers that management has a good grasp of the capital required to run the business.
Demand for capital arises for many reasons. Learn more about the reasons and how to approach funding sources in the first of our 3 part CFO Success Series: Treasury Part 1- Capital Planning.
If cash is the lifeblood of any business, funding is the accelerant that nourishes growth.
Funding:
The flip side is leverage can put a stranglehold on businesses that are facing higher interest rates and a tightening credit market. The situation we have today.
By now you have dusted off your capital plan or at least started one. You might be staring down the barrel of a tough refinancing or are just about to trip your fixed charges coverage bank covenant. If you have faced these situations in the past, you know it’s all about the relationship. A good capital plan won’t overcome a bad investor or banker relationship. That is Why Your Company Needs a Good Banking Relationship.
A study by the Federal Reserve Bank of New York concluded, “…firms with close bank relationships were less likely to be denied credit by banks, less likely to report that bank credit availability had worsened, and less likely to cite lack of bank finance as a cause of declining firm output. “
If your growth plan or current situation finds you capital poor, a well thought out approach to the capital markets is important. A key decision in this process is the form of capital you decide to raise. Debt is normally cheaper, won’t dilute the ownership interest and may have tax benefits in some countries. For more details on benefits & drawbacks of debt financing and the preparation required to seek it, read, CFO Success Series: Treasury Part 2 - Debt Financing.
Even though equity is typically more expensive and can dilute current shareholder’s interest there are reasons your business may prefer to issue equity vs debt. Equity investors may bring technology and other resources to your company that could be a catalyst for greater profits and/or growth. Another key reason for equity financing is when you can’t satisfy your capital need via the debt markets. Learn more about equity here, CFO Success Series: Treasury Part 3 - Equity.
Who you keep company with matters to your long-term success.
The rapid collapse of Silicon Valley Bank in early 2023 was a reminder that the counterparties we do business with ultimately define our success or failure. This includes key suppliers, like banks.
Rising interest rates, above normal inflation, commercial real estate and residential mortgage disasters, supply chain disruptions, pandemics and any number of other foreseeable and unforeseeable events can rock our businesses… and our bankers with them. When times are tough for your business how can you prevent being in double jeopardy with a troubled bank?
Choose banks that are well capitalized and interested in your business before requesting proposals. This article, Right Business Banking Decision Matters, describes how to find banks aligned with your business and how to approach them. It includes a 7-step checklist to make sure you are prepared to target the right banks for your funding.
If you feel like today’s economy is putting your operations in crisis visit The CFO’s Role in Times of Crisis for help
Focusing on Profitability/Cash Flow & Funding are a winning combination for finance leaders during this time of unprecedented change.
Here is Part III of Managing Your Team and Career Through Today’s ‘New’ Economic Realities
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