CFOs are on the corporate front line for business survival. Over the past week, Blackwood’s Financial Officers Practice has interviewed CFOs in Private Equity-backed businesses. In this paper, we explore some of the key challenges facing CFOs today and as they look towards the recovery phase. In these unprecedented times, it is clear that even the most seasoned CFO is having to learn at pace.
CASH CONTROL AND LIQUIDITY
As the crisis unfolded, cash management became the number one priority to ensure business continuity. Many CFOs were under intense pressure to deliver short-term solutions by working closely with their lenders – in some cases formulating creative or unusual arrangements to address this. Going forward, a granular focus on cash will be essential. Strong CFOs are having a positive effect in this area; their ability to negotiate (and, in many cases, reach a compromise) with both debtors and creditors will create breathing space to consider more severe measures. Many of the CFOs we have spoken with have mentioned the importance of sharing some of the operational pain across multiple parties: for example, multi-site businesses working with landlords on reducing or delaying lease payments whilst sites are closed; or asking suppliers to push payment deadlines back until revenues recover. Various ways of reducing headcount costs, through furloughing staff or reducing salaries temporarily, are being implemented but may have a negative impact during the recovery phase (more on this below). Whatever the situation, it is clear that appropriate cost cutting, having tight discipline on spending and taking a prudent approach is at the forefront of every CFO’s mind. Now, more than ever, cash is king.
As businesses start to look ahead to the point where they can return to some sort of normality, many have uncovered potential issues within their supply chain. The role of the CFO in this phase of planning should not be underestimated. Relationships with suppliers are hugely important and, with most struggling to the same degree as their own businesses, being supportive to a reasonable degree is important. These relationships, however, are being put to the test with both sides eager to ensure that negotiations result in compromise that works for everyone. Most CFOs are in regular contact with their supplier base but, where there is a high likelihood of a supplier being a casualty of the crisis, they are starting to develop relationships with potential replacement suppliers to ensure they can provide the same goods and services as pre-crisis.
Other issues which may not be solved in the short term, such as the complexity of moving products across borders which are currently shut, are being addressed and CFOs are accounting for these in their recovery phase planning. Whenever the various country lockdowns are lifted, businesses know they will not return to where things were at the start of the year straight away. An effective CFO can have a material impact on the speed of recovery in this phase.
EFFECTS ON WORKFORCE AND PRODUCTIVITY
For a CFO, the mounting cost pressures on their businesses have required them to engage in difficult discussions around furloughing or laying off staff. The CFOs and other business leaders acting responsibly have been thoughtful about how best to support their people during this challenging period. Assessing the ability to top up government relief schemes or to set up hardship funds for those most in need has, quite rightly, been an important item on the agenda. In comparison, the CFOs in companies that have decided to take a more dispassionate approach, are now concerned about appealing to their workforce once life returns to normal.
For those running low margin businesses, taking drastic decisions around staffing has been an interesting exercise in assessing if operating a leaner organisation is a possibility and if this could contribute to improved profitability in future. The more optimistic leaders are therefore wondering if the measures taken today might have a long lasting and positive effect on their business.
In addition to financial considerations, CFOs realise that addressing employees’ emotional needs during this period of uncertainty and fear is of paramount importance. Supporting mental well-being by re-assuring staff around job security, keeping a separated workforce engaged and ensuring staff safety have been top priorities. Investment in new areas to address this has taken precedence – whether that be new equipment or technology to enable working from home. These additional costs have become an essential consideration for CFOs to factor in - with investment elsewhere suffering as a consequence.
SCENARIO PLANNING AND STRESS TESTING
Assessing the financial impact of COVID-19 on businesses and the lasting effect on recovery has been an almost all-consuming exercise for CFOs. The far-reaching implications of COVID-19 are not yet clear and as such CFOs are having to model a variety of scenarios. While recovery in parts of the world has provided a glimpse of a post-COVID era, CFOs are still dealing with huge ambiguity and continually having to revise forecasts and predicted disruptions. Remaining agile and finessing these models on a regular basis is required; meaning there is pressure on CFOs to fully understand enterprise-wide risk and the appropriate response to a variety of situations. The most common factors considered as part of this have been a decrease in consumer consumption, supply chain disruptions and potential global recession concerns, but other related vulnerabilities exist such as cyber-attacks and physical security, which could emerge for a business already under threat.
THE RECOVERY PHASE
As the crisis has unfolded and deepened, CFOs have had to act with immediate effect to safeguard their businesses. The biggest question now facing CFOs is how to achieve a quick recovery timeframe when conditions allow. In seeking to address this, many are looking to strike the right balance – stripping the business back to provide financial stability while ensuring measures aren’t so drastic that they prohibit a quick bounce back. CFOs are also considering which aspects of the crisis might persist beyond lockdown; for example, altered consumer behaviours and engagement. One business talked of “an overnight fundamental shift in consumer behaviour” due to the unprecedented surge in customers switching to buying online. Failing effectively to respond to changing consumer trends like these will have long adverse lasting consequences. The strongest CFOs are discovering alternative routes to engage with customers as a means of improving or reinforcing the company’s position in the market. While the general outlook for the near to medium term future is very uncertain, the question of whether businesses could emerge stronger is a prospect which many CFOs are eager to consider.
LEARNINGS AND THINKING AHEAD
COVID-19 will continue to throw all manner of challenges at businesses and investors for many months, if not years to come, however private equity funds still need to hire great CFOs for their portfolio businesses. The nature of their remit means that CFOs find themselves firmly in the spotlight.
As businesses seek to navigate through ambiguity and uncertainty, now more than ever is a time to step up, respond and deliver above and beyond the expectations of stakeholders. As advisors on human capital and talent, the key question to address in our minds is how businesses come through this. The behaviours and competencies being displayed by CFOs (and all members of the executive leadership team for that matter) to ensure survival has quickly become – and will remain - an essential metric to consider when making hiring decisions. It is difficult to imagine any individual, irrespective of their role on a board, not being asked in interviews the question: “how did you contend with the COVID crisis?”.
In this regard, Blackwood Group has developed the AGILE index which identifies who the real standouts have been during the crisis and how leaders have responded. This process entails us working closely with investors, chairs and executive leadership teams to ascertain how individuals have responded to the crisis, what behaviours have presented themselves in the face of pressure and in what way the actions taken have had an impact on value. This exercise is equally applicable to all members of an executive leadership team, however at a time when cash management, forecasting, covenants and balance sheets have rarely been spoken of with such regularity, CFOs find themselves right at the nexus of the AGILE framework.
Blackwood Agility Index: Leadership Effectiveness During COVID-19