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Crisis Planning for the Short and Long Term: Advice from Leading CFOs

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The COVID-19 pandemic has ignited a humanitarian crisis and impacted businesses worldwide. Government interventions in response to the virus have forced us to change how we work. And with every industry across the globe affected, the extent of change to consider can be overwhelming.

However, even amid all the uncertainty of the pandemic, change is not a novel concept for successful businesses. Throughout history, companies have had to transform to thrive. As the COVID-19 effects continue, producing new factors every hour, every day, business leaders must take this time to make significant differences for their employees, customers, suppliers, shareholders, and their future. Smart leadership is vital to address not only immediate fear concerning survival but also how to steady the business in the short term and position it for recovery and success long term.

As the leaders who provide their company’s financial and organizational health and resilience, Chief Financial Officers play a fundamental role in stabilizing the company and positioning it to prosper when conditions recover. Their experience in crisis management, both internally and externally, offers great insight into the actions that executive teams can take to get their company on a sound financial track as they navigate through the uncertainty of the crisis.

Industry-leading CFOs shared their ideas on April 16, 2020, during insightsoftware’s webinar, How to Navigate Your Business Through This Uncertainty.

Panelists included:

Led by Woodworth, the panelists offered their expert perspectives and tangible actions to take now to help with what’s to come. The following article summarizes their discussion and highlights the key points and learnings that you can apply to your business.

Crisis Planning: Address the immediate challenges without losing sight of the long-term

Visibility into Liquidity is Vital

Organizations across various industries must respond quickly in order to maintain continuity and de-risk their operations as their functions are drastically disrupted during a crisis. Therefore, a CFO’s top priority is to get visibility into liquidity.

Due to the uncertainty of the magnitude and the duration of the crisis, CFOs need to optimize cash reserves and liquidity preservation. “That is the very first step to make sure the company has enough cash to do what it needs to do,” advises Gary Michel. Understandably, even outside of a crisis, a higher cash balance is more desirable than low reserves. That money makes it possible for your business to support its debt load, purchase new inventory, and take advantage of profitable investment opportunities. Not having enough cash on hand makes it hard to keep your accounts payable under control and risks damaging relations with suppliers who help keep your business operational.

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The more liquid your business is, the better prepared it will be to respond to an emergency. You need to look at your debt, revolvers, covenants, receivables, and payables, and then put a plan together to manage that.

It’s important to consider what would happen to your operations during a downturn that could make it hard to pay loans or fund daily operating expenses. Calculating your liquidity is the best way to understand your business’s aptitude––at any time––to use its existing assets to meet its current liabilities. The insights can help you monitor your ability over the long term and help you avoid potential financial risks.

David Coles notes how the acute focus on distinguishing what is discretionary and nondiscretionary is essential to the cashflow conversation. “Businesses are looking at not just at cashflow but any of their activities today and determining whether or not it’s something they have to do during this period or is it something they can push off.”

Coles also states that some businesses have performed well over this period. The global essential food sector company he worked with relies on farmers who are often land-rich as opposed to cash-rich. Concerned about the product shortage risk, they ordered enough products ahead of the crisis. “Now they see their order book as really robust and had to add extra shifts to produce against that.”

CFOs have jumped into action to quantify their available cash and any liquidity they can access. But when conditions are changing daily and even hourly, a cash shortage is a real possibility, so it’s vital to assess the company’s liquidity and then develop a playbook based on potential scenarios.

Plan for Every Scenario

What do you think is really going to happen over the rest of the year?

It’s “the delicate balance of trying to make sure you plan for the immediate level of uncertainty. But also, not knowing how long it’s going to last and avoiding any sort of curtail of being able to accelerate and dive on growth on the backside of whatever this ultimate period of uncertainty is going to look like,” offers David Woodworth.

CFOs need real-time tracking of their company’s ability to recover from the decline once demand returns. The data gained from tracking KPIs helps companies create action plans against those scenarios and have those plans ready to go so companies can move quickly. Therefore, scenario analysis is more than just a financial planning tool that estimates cash flow and liquidity. It is an integrated approach that can assist enterprise-wide efforts in dealing with uncertainty.

Gary Michel affirms, “There are so many unknowns right now out there to duration and how deep an impact this pandemic will have. I have seen CFOs preparing anywhere from two to three scenarios––starting with one of an impact that might be moderate, to one that could be severe or catastrophic. Then, they are educating the company about those scenarios and getting input from leaders about those scenarios to make sure they are really thinking about it in a longer-term fashion.”

Scenario planning takes real-time analysis. “We are thinking about what kind of EBITDA we will hit or bookings or billings in a given quarter. We are also layering on changes to PSO and cash flow in a way that is constantly moving. Ultimately it is bringing all of those various backers and all those various inputs in and making decisions every week amongst an executive team. How exactly do we want to run the business? What are the decisions we want to make? What is the timing of when we want to make the changes? And accept that we do need to make changes,” states Brian Shaw.

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Scenario analysis provides a structured way to identify a range of potential outcomes and estimated impacts and then identify and evaluate possible actions. It reinforces the presence of uncertainty and increases readiness to deal with a variety of potential consequences. It also creates a sense of confidence by having a structured way to work through the challenge as it evolves. Being prepared for all possible scenarios encourages us to react to the critical factors we have identified and not overreact to extraneous reports.

Communication is Key

CFOs are also spending a lot of time on communication. Because, unlike during the great recession, this time people are working from home, so it’s all playing out in people’s spare bedrooms and basement offices, which makes teaming and focused whiteboarding for solutions a bit more challenging.

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Communication is vital to get consistent messages out regularly, especially ones that employees can rally behind. Communication that shows how your business will navigate its path forward is essential to a company’s well-being.

What is equally important is to keep open communication with CEOs, leadership teams, and boards about how the company is being impacted and the actions that are being taken to protect the business.

“Constant conversation helps keep the pulse on how senior leaders are feeling and how our sales teams are feeling. That information can help us predict which scenario we are more likely to experience in the next few months,” explains Brian Shaw.

Organizations that have healthy business crisis plans in place and who also have transparent and open communication channels within their company and with their customers will find themselves in a better position for when the climate stabilizes.

Improve the Future by Learning from the Past

As stated by Theodore Roosevelt, “The more you know about the past, the better prepared you are for the future.”1

It’s helpful to look back at a past crisis like the Great Recession to help formulate assumptions on how businesses will fare during the COVID-19 pandemic.

During the recession in 2008, Gary Michel saw first-hand how the hospitality industry took the hardest hit. And it’s no surprise, especially during a health crisis, that it would be similarly affected today. Michel adds that the damage to the hospitality industry is a leading indicator of the pain that is going to be inflicted in other areas. Yet, it is the first area that usually recovers. “So it is sort of a dual scenario. You can get hit the hardest, but you can recover the fastest.”

The difference, however, is now we have a complete stoppage of all activity. But, despite the stoppage, the way companies are quickly adapting and becoming virtual is a massive case test in disaster recovery planning.

“This is going to change the work environment fundamentally and how real estate is managed and how a lot of businesses operate. Because now we know, we can operate in a much different way and still succeed. Face-to-face interaction can never be replaced, but this fundamental change that occurred overnight, I think it is going to be a big positive for companies when we come out of this,” proclaims Gary Michel.

Conclusion: “It’s a marathon, not a sprint.”

It is unknown how long the pandemic will last and affect businesses, but CFOs are central to help ensure companies not only survive but succeed in unusual conditions.

“It doesn’t need to be all doom and gloom,” states Coles. “It becomes a self-fulfilling prophecy to believe this is just a short-term issue and that none of our well-thought out strategies that many hours of work have gone into, with many people, will make a difference.”

Woodworth explains at insightsoftware, “We are looking at this period of unknown more like a marathon than a sprint. We have thought about the different scenarios and timelines. This pandemic impacts every region, every industry. And being a global company that serves every industry, certainly we think about that from the customer’s perspective, and ultimately, what we need to be doing to make sure that we can continue to support them.”

In addition, your organization should not lose sight of the inevitable return to normal activity. You should take this time to get your company strategically positioned the way you want. “If you have been thinking about reorganizing your company, if you’ve been considering an area isn’t adding the value that it should have been adding, now is the time to do that and to do it smartly. There’s going to be a lot of opportunities in six or nine months,” states Michel.

While it may be challenging to focus on future events now, doing so will allow you to identify critical issues and actions that facilitate the restart. Michel confirms, “CFOs can help lead that charge to remind people that they want to come out of this and be the most robust company in their sector that comes out of it.”

For more insights and resources visit the insightsoftware COVID-19 Resource Center for Finance and Accounting Professionals.

1. https://www.theodorerooseveltcenter.org/Learn-About-TR/TR-Quotes