The following is a survival guide. Not for the wilds of Africa, but for surviving the harsh realities of a recession. And similar to surviving in the wild, there are some things you need to do immediately (find temporary shelter, water, and food) and there are other things that need to be done to improve your survival odds and quality of life, but will take time (farming, more permanent shelter, medical care, sanitation, etc.)
There are two areas of focus that should become your immediate priority. Just as finding water would be your first priority if lost in the wilderness, managing cash flow needs to be your first priority if you are entering a recession. This starts with understanding where your current cash position is and where it is going to be. To that end, one of the first things you should do is review what analytics you currently have to inform your decisions.
Forward Analytics & Cash Flow
Start with a mini-SWOT review of your current analytics or reporting platform. First, can you get actionable information every day? While the old monthly reporting package is slowly dying, real-time analytic platforms such as Anaplan and Tableau allow you to refresh data as often as you want. Ask the question of your team how often the current platform is updated, and can it be refreshed more often if necessary. Establishing frequency is critical. Weekly reporting might be enough for a REIT who has a slow monthly rent cycle, but twice daily for CPG who rely on FTL shipping and store fill-rates is more likely to be required to gain the visibility needed in a recession. The idea is to achieve “right-time” analytics as opposed to assuming “real-time” requirements. Real-time may be necessary but comes with additional costs and burden to integration systems.
All of this point towards the quality and timeliness of your current analytics for making rapid decisions during a fluid economy. Data quality issues are not easily resolved quickly, so be aware of blind spots due to poor data quality. If your current process and platform do not result in getting timely and accurate information that is relevant to the survival of the company, start that project today. A number of these platforms can be implemented in weeks, not months, when you focus on the critical analytics required to steer the business.
After reviewing the process and platform, your current analytics are on, look at what analytics and reports are being produced and reviewed. Do they look forward (forecasts) or backward (P&L)? The forward-looking analytics need to be prioritized and reviewed daily. For those with experience in a highly levered organization, a great example of this is the 13-week cash flow forecast. It is like water. You may not survive more than three days without it. This simple report that has been around for a long time is one that should become part of your daily routine and will give you insight as to if and when you may run out of cash and allow you precious time to react. If you are not leveraged and your immediate cash position is not as much of a concern, then your focus should shift to forward-looking analytics related to the business.
While sales forecasts and pipeline reporting may not be the typical daily analytics for a CFO, during a recession, it needs to be. Along with the 13-week cash forecast, a CFO should become familiar with what is in the sales pipeline, any large changes to what business is going to close in the next 30, 60, and 90 days, and should serve as a check on the sales team. Additionally, making the sales team aware of customers who are behind on a payment and may come under credit hold can help the company avoid making mistakes by extending credit to those customers who are already not paying. This will undoubtedly create a certain amount of discomfort as sales teams typically do not like finance overseeing them, but knowing where the business is heading and reacting proactively is key.
Use these analytics as validation, but do not let them be your only guide. It is good to look down and track the footprints of a bear, but it is also a good idea to pick your head up and look around once in a while to make sure the bear is not running towards you. To that point, a recession should be a good time to reach out to other CFO’s and talk about what they see in their business, with their banks, with their boards, their employees. Additionally, as changes are made in other organizations, recessions can prove to be a good time to add talent that might not otherwise be available opportunistically.
This may seem like common sense: be as proactive as possible about reducing operating expenses as soon as possible. Hard decisions don’t get easier over time, and you will never regret reducing costs too soon. This should include both discretionary spend such as advertising and travel, but it is also essential to include headcount as well. Spaulding Ridge’s CIO recession playbook contains a guide to reviewing IT costs and contracts for savings. Any review should consist of a review of all non-direct costs, renegotiation of any contract that is coming due, rate and price concessions should be asked of every vendor, and a blanket ban on non-essential travel.
The focus on cost control should be maintained until it is clear that the recession is over. Do not set misleading expectations for the team that this will only be for “a couple of months” as that may lead to increased spending before the business is ready to absorb those costs. It is better to instill a new mindset of cost containment than create the perception that this is a one-off move. A mindset of cost containment will be an advantage when the economy rebounds.
Re-evaluate capital structure now while you have flexibility to make a move. The best time to borrow money or raise new lines of credit will be while the balance sheet is still in decent shape. A quarter or two of challenging times and underperforming business may result in the company being in a drastically different position as a borrower and subject to higher rates as a result of their riskthen. Furthermore, banks and private lenders may not have as much appetite for risk the longer the recession lasts. Also, look to vendors for financing options. As an example, Oracle will finance the implementation costs associated with their cloud applications, allowing customers to spread the upfront costs over the life of the software subscription. Lock in any flexibility you may have today.
Additionally, technical default or breach of covenants may limit options further into the recession. If you do not have a list of all covenants that the company’s borrowing contains, a detailed review of all borrowing agreements should be performed as soon as possible and all covenants documented, including whether they are point in time covenants (e.g. working capital at the end of a quarter) or anytime covenants. Related to the analytics recommendations above, any covenants which can be measured and reported on should be implemented in your analytics platform and, to the extent possible, done so with a forward-looking perspective. Do this today.
Board Member Management
Near Term (Next 60 days)
According to McKinsey, there are four essentials to building a stronger board of directors: 1) Broaden the scope beyond the fiduciary duty to include strategy, M&A, technology, and brand development. 2) Clarify responsibilities and find the right mix of experience and know-how. 3) Deepen commitment with more time and a dynamic agenda. 4) Create trust with effective board conversations that balance collaboration with challenging conversations.
Reviewing each one of these essentials, it is easy to see why studying the current members of the board and working with the chairperson of the board to make potential changes needs to be amongst your priorities heading into a recession. During a recession, every business should have an “all hands on deck” perspective from the janitor to the chair of the board. If there are current board members who are not bringing expertise beyond what is already present in the organization, you should review potential candidates for board members who can.
To the first point from McKinsey, if there is not a board member who has deep experience with strategy or M&A, consider adding one at this time, especially one who has had experience with carve-outs or acquiring distressed assets.
To the second point, having board members who have the right mix of experience and know-how, review the board for members who have had experience leading organizations through a recession, or were at least on the board of a company during the great financial crisis of 2008-2009. Understand that every recession is different, but that experience working through the challenges of a recession at the board level is invaluable.
To the third point, the board chair should set expectations with the board that more time will be required, not less, during the recession and that they will need to be more available for meetings to make time-sensitive decisions quickly to take advantage of opportunities. More may be asked of individual members regarding specific strategies that are too be put in place as discussed below.
Finally, to the fourth point around productive board conversations, this may be the time to remove board members who are not collaborative. These are not easy decisions and require difficult conversations, but it is about positioning the entire company for survival through the recession and for thriving beyond it.
This may seem counterintuitive, but every organization should evaluate asset-intensive capital expenditures for ROI with the lower rates that are typically available during a recession. This may not seem as attractive in 2020 as it did in 2009 given that recent interest rates have already been in the lower band from a historical perspective; however, with potential tax incentives for new investment from the federal government such as we saw in 2009, having capital projects at the ready can prepare you to take advantage of a higher ROI in the short-term due to both a lower cost of capital and attractive tax policy. This is not to say organizations can just throw caution to the wind and start anything with a positive ROI, some capital expenditures may prove too much to take on. However, the organization should have a prioritized list that has been updated to account for the ROI, which may be improved with lower rates or tax incentives.
Longer Term (60 days and Beyond)
Exit Low & Unprofitable Business
Recessions offer a unique time to manage your portfolio of products, services, and customers. Given the need to keep focused on cost containment and preserving cash flow, any underperforming lines of business, or even specific products, services, or perhaps even less profitable customers, should be the on table as options for reduction. Going beyond a review of profitability for any one of these, consideration should be given to the hidden costs of maintaining these parts of the portfolio.
For example, one customer may have a very high gross margin from a sales perspective, but if the cost to service that customer after the sale is significantly higher than other customers, that becomes a candidate for a customer you walk away from. This is a time to review those hidden costs and trim accordingly. By focusing on high-value customers, products, and services and exiting the ones that cost more to sell, service, and maintain, you are pruning the lower branches of the tree to feed the ones on the top. Existing some of these products, services, or customers may be as simple as shutting them down. For others, there may be an opportunity to divest that part of the business and recoup some amount of enterprise value.
Practice Selective M&A
If your capital structure allows it, selectively look for new acquisitions that are “on sale.” As other businesses review their portfolios, there may be opportunities to make acquisitions that are more accretive under your operating model than the selling company. This needs to be done cautiously as the last thing you want to do is acquire a liability that is not accretive.
To ensure that is not the case, and while due diligence is always important in an acquisition, it is especially important during a recession to understand what you are acquiring, what does the integration timeline look like, and what is the worst case scenario. Evaluating the quality of earnings and the operational fit of an acquisition target should be done with a heightened degree of skepticism, and you should consider doing it with a lower level of materiality than would be done during normal economic conditions. Additional areas of diligence, such as legal, technology, and human resources, should be completed with a view on how a recession might impact those areas of operations and the resulting impact on business performance.
Treat everything on this list as one giant program and assign a single person on your team to manage the execution of each. In your business continuity plan, you should have a chain of command with primary and secondary responsibilities for who is going to execute which tasks. Similar to that, you need to have accountability to make sure everything is executed. If you don’t have the right person to lead something across the business, bring in a consultant to do it. While it may cost more in the short run, it will cost far less than bringing in a restructuring firm if you don’t make it through the recession.