The CFO’s Role in Times of Crisis
Companies find themselves in “crisis” more often than we like to admit. Some crises are specific to our company. Some are specific to our industry. Others to the geography we operate in. And, some, like the recent pandemic or current banking crisis, are global in nature. It doesn’t matter how specific or how broad the crisis, I believe CFOs have a critical role in navigating their company through the rough waters caused by the disruption.
Here are some thoughts on what CFOs should be attending to when a crisis hits. Please consider contributing your additions and improvements. The first and second steps below may seem out of order. The order is intentional to keep us focused on what is most important.
1. People come first. The safety and health of our company’s stakeholders and our personal relationships are the number one priority. Securing a plan to protect them is not only the most humane approach, it’s also the most practical. These are the resources with the brainpower, muscle and drive that will prevent a collapse during the crisis and rebuild the business when the crisis has passed. The answers to these questions are a big step in making sure we keep people first in our crisis management plan.
- How are different stakeholders likely to be affected?
- What can we do to protect each group of stakeholders?
- How to implement and communicate the stakeholder protections ?
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2. Lead the risk management and mitigation of the crisis at hand. A CFOs deep understanding of the business and ability to convert that understanding into financial outcomes sets us apart when it comes to assessing the potential business impact of a crisis. This is not an exercise to be conducted in a vacuum. Expertise that can assess the impact to sales, the supply chain, procurement, production and our stakeholders must be consulted to understand the risks and develop an effective mitigation plan.
- What has changed?
- How do we expect those changes to impact the company?
- See 1. above
- Go to 3. below
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3. Ensure liquidity is available for the worst case scenario. This can be a difficult exercise to begin after the crisis has started. Back up lines of credit, cash reserves and contract terms with customers, suppliers and unions can all play a role in maintaining corporate liquidity. A 13-week cash flow forecast is good to have as a standard report and essential during a crisis. Prepare an asset liquidation schedule that highlights the most liquid unencumbered assets, their expected liquidation value and time frame to convert to cash.
- Have a 13-week “crisis” cash flow report prepared for review
- What sources of cash can we quickly tap into?
- Prepare a cash “waterfall” –order of priority and amount of cash to be raised
4. Once a liquidity strategy is in place, a margin management plan using the current supply and demand expectations is an essential component of the CFO’s role. An updated earnings forecast incorporating new volumes, prices, cost of goods and overheads will help the team get their arms around the impact of the crisis and identify the levers that need to be pulled for business sustainability.
- Have a “crisis” earnings forecast prepared for review
i. Volume
ii. Prices
iii. Cost of Goods
iv. Overheads
- Review with CEO and leadership team
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5. After liquidity is secured, including a 13 week cash forecast, and the new earnings reality is made transparent incorporate the balance sheet into your forecast. Once complete compare the forecasts to the financial commitments made to shareholders, lenders and other stakeholders and take appropriate action.
- Have a “crisis” balance sheet forecast prepared for review
- Prepare a list of financial commitments by stakeholder
i. Prepare a list of tripped or near tripped commitments
- Review with CEO and leadership team
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“Deep within every crisis is an opportunity for something beautiful.”
― Kate McGahan
Given the fast changing dynamics that frequently accompany a crisis, having a 3 way (cash flow, earnings and balance sheet) model that can be easily amended and includes a sensitivity analysis or multi scenario capabilities is invaluable to quickly assessing the impact of different decisions or incorporating new information about the crisis.
Obviously, having these tools built and in use before the crisis hits will save time, angst and money when the crisis hits. Regardless, to properly support the business in crisis these tools must be available to assist the leadership team in making the best decisions under the circumstances.
Depending upon the corporate governance process a final step may include:
- Reviewing the reports and recommendations with the CEO and Board
- Implement the approved recommendations
By addressing the needs of our most capable resources, using our commercial understanding combined with analytic insight CFOs have a critical role in leading their companies through crisis.
Please add your thoughts to this time sensitive topic by emailing me at Steve.Rosvold@CFO.University
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