During the CFO career you may face “crisis” situations in some companies you work for. I have passed through that myself, while leading Finance, including the “eye of the storm” of the banking crisis in 2008. This motivated me, in the last years, to focus my career in specialized interim management for critical situations. Based on the practical experiences, both lived and observed in companies that I worked for or clients, I would like to share some of the lessons learned.
Due to space limitations, this article will focus in three practical matters considered relevant: the cash management, the operations’ profitability and the positioning of the CFO in the face of the crisis and career opportunities.
Failures on cash management
Companies in crisis in the majority of the cases we observed, invariably, have cash issues. In a certain way this is expected, as any crisis tend to directly affect cash in most of the businesses.
Although, the real surprises many times came from the Finance area itself, which is supposed to be the guardian of cash. We identified medium and even large size companies lacking a daily cash flow integrated into the operations. This aggravates even more the crisis, as the cash is a mixture of both a thermometer (measuring the company’s health) and a compass (it’s direction), providing most of the visibility in the very short term, fundamental to navigate in troubled waters.
One of the most common mistakes is the lack of a cash flow with an escalated view: in the very short term (the next thirty days, with daily view), short term (for the next sixty days, with detailed weekly view) and medium term (for the remaining twelve months, if possible with a weekly view or at least monthly).
Astonishingly, there are companies with billions of (Real) revenues, which do not have such views, using only an Excel spreadsheet!
Less apparent but still a very common mistake is the lack of link between the company’s operations and cash projections. In other words, many times the Treasurer or CFO prepare plans based exclusively on their experience (or the lack off), without anchoring the main variables to the business. Another issue is the lack of use of tested models, which should reproduce the business production cycle and be linked to it.
This situation was witnessed both in national and multinational companies, medium or large size, which frequently require their cash flow to be completely reworked, both for internal cash management, and for a possible M&A transaction, which many times is part of the solution as a way out of the crisis.
These are relatively basic stuff, which a good CFO should be always caring for, especially in a moment of crisis. It is necessary to take the reins of the cash, elaborating a model with granularity of information, which is tested and reproduces the future behavior of the company with some level of precision.
The cash flow should attend the basics at first glance, but can and should evolve in sophistication along the time. The building of statistics models in sales and collections, especially in pulverized markets, and the integration to the ERP (and not only Excel!) on production expenditures are only some examples.
“Cash is king”, as commonly said.
The operation’s profitability: errors and opportunities
During a crisis it is normal for sales volume to be affected, requiring a higher level of operational efficiency to offset such effects and grant survival during tough times.
Besides the traditional cost reductions on SG&A, where companies normally start cutting the employees’ coffee, “cafezinho”, as an “important” measure, the modern CFO should concentrate on the core business, at the heart of the operation. In summary, they should analyze where the company in fact makes or loses money, improve the mechanisms and adjust them to the more severe market conditions in order to maximize results.
In a simplified way, there are two paths where the CFO could contribute to the improvement of the company’s profitability: in the revenues line, by improving pricing and margins; and at the cost line, by improving the costing methodology besides reducing costs.
Often, the CFOs focus on the last part, Costs, where they feel more comfortable and many times have the costing tools helping them in the analysis.
However, during a crisis period, they should go much, much beyond that. The crisis situation itself may open new doors to the CFO: many companies, as incredible as it looks like (and especially among the family owned ones in Brazil), have pricing areas under Products and even Sales areas, with low or even zero relevant involvement from the CFO.
In a medium sized multinational company attended by us, this was the case: the company was cashless and one of the reasons was the inadequate costing and wrong pricing, inducing the operations into error, by celebrating large contracts with bad margins and cash flows, draining the company’s cash.
The prior CFO had very limited access to the pricing area, and ended up accepting the situation as it was, which drove the company to large losses in projects, not recognized along the time.
In time of crisis “taboo” areas cannot exist for the CFO, which should conduct these matters with great ability and persistence to the top management.
The crisis could be the opportunity to break many of the cultural barriers and uncover the “sacred cows” of each company. Use the crisis as a way to justify magnifying glasses in obscure and less transparent areas of the business.
The CFO’s positioning during the crisis and career opportunities
As said above, the crisis is also a moment for great opportunities for good professionals. Especially for the CFOs, as they possess the unique power that comes from ample access to data, into the heart of the business.
The CFO should promptly act upon key issues, and find where the company makes or loses money (P&L and cash!), while simultaneously keeping the routine going on.
In order to do that, it is fundamental a good and united team. If you have not done yet the necessary adjustments in your team, the crisis is the time for doing so: to not only reduce people’s costs, but also to take the opportunity to keep the good talents.
In times of crisis, the CFO should lead the negotiation with the company in order to redirect part of the resources coming from headcount reduction to motivate the ones that will stay, and even bring more seasoned and or more adequate new talent to the new scenario.
The CFOs will face many barriers and will have to overcome them. However, if they successfully use their abilities to link part of the company’s turnaround to the actions from the Finance area, the due recognition and rewards should come as result.
But here is also one alert: we observed that in the great majority of turnaround projects completed, whenever the company looked for an outside consultant, the CFO was not capable to deal with the problems’ graveness. Even worse: the CFO was technically capable, but did not wanted to move outside the comfort zone and face the “sacred cows” in proper time; or passively accepted the first “NO’s” from the administration on the proposed changes.
Do not let the impression of being the “barking dog that never bites”. Along the time, your suggestions will tend to be systematically ignored. Be emphatic, but prepare yourself well and upfront.
We saw cases whereas the CFO knew very well and even mapped the problems, but was unable to sell the necessary changes to the top management or shareholders. Or when the last ones did not gave the necessary priority in the due time. Later on, it is no use “crying over the spilled milk”: nobody wants to hear “I told you so”.
As time passes by – and especially during crisis – these undesired problems may come back to haunt the company as skeletons hidden in the closet. At the end, when the problems surface back, there is often a search for culprits. Eventually, the CFO themselves may be blamed, despite all past efforts to alert the company.
In times of crisis, there is always a fight for keeping positions. Unfortunately, more frequently than desired, this game can be more unpleasant than one would enjoy, as observed so many times.
Therefore, the hint is: be proactive in the changes and, if the company consistently does not accept your recommendations, ask yourself whether it is worth the risk to continue there. Do not fall into temptation of retention plans, long term bonuses, fat fringes, etc., in exchange for a promising career.
Crisis is the time of opportunities, and hard decisions.
