What Keeps a CFO Up at Night?
As the caretakers of their company’s balance sheet health, CFOs are also tasked with driving increased revenue and earnings growth. Financial leaders are keeping a close eye on the economic outlook for 2024, with many CFOs adopting a cautious stance, losing sleep ruminating over what lies ahead for their enterprise. Adding to that worry, today’s middle market CFOs are navigating an ever more complex landscape shaped by a variety of economic, technological, and operational challenges. Key concerns keeping them up at night include macroeconomic trends such as inflation, geopolitical unrest driving supply chain disruptions, tightening credit standards, increased cost of borrowing, and the gnawing threat of recession.
Recession
We have been hearing that the US economy is overdue for a downturn since 2019. However, for most industries, the opposite happened during and after the pandemic. The economy overheated, which resulted in the Fed stepping in to try to cool things off by raising interest rates. The media pundits then brought on experts to warn us that these actions would bring about the impending recession.
Although the economy has slowed down, the recession has not happened, yet. Operating in an environment of uncertainty, CFOs are focused on strategic cost-cutting, particularly in areas like headcount, travel, and technology investments. In addition, they are looking to AI and machine learning to automate tasks such as account reconciliations, data analytics, and predictive reporting to help find issues in forecasts and budgets. In a growth economy, a CFO’s focus is on improving accounting profits, but in times of uncertainty CFOs have to adopt a new approach to annual budgeting and planning focused on cash flows rather than accounting profits, and they have to prepare for multiple scenarios, from best case to worst case.
Supply Chain
Various challenges including COVID-19, geopolitical tensions, and extreme weather have significantly impacted supply chains over the years. CFOs today are worried about regaining control. Many are still sitting on 2022 inventory that was purchased during a period of high demand. A significant amount of that inventory arrived late because of shipping constraints and then sat because customers were unwilling to accept such lengthy delays in delivery. Due to the high cost of storage after the high cost of shipping, the landed cost of inventory for many companies soared in 2022 and early 2023.
CFOs today are looking for ways to convert accumulated inventory to cash while minimizing the impact on the income statement. They are also analyzing their supply chains end-to-end, engaging in joint demand planning with customers, and strengthening relationships with critical suppliers. Inventory woes have led to the need to strengthen processes to drive accuracy in the data, such as robust cycle counting and improving the accuracy of bills of material and item masters. These ongoing inventory challenges have impacted Fortune 100 companies as large as Walmart and Amazon, all the way down to small, local manufacturers and distributors. Very few companies with inventory requirements were left unscathed.
Increased Cost of Borrowing and Tightening Credit
With skepticism still lingering about the future of the economy in 2024, many lenders have kept credit tight as middle market banks face liquidity challenges of their own. The March 2023 failure of Silicon Valley Bank created a run on regional banks. Additionally, the pass-through of the Fed interest rate increases have also impacted corporate deposits. This situation has led to banks passing their higher costs onto borrowers and restricting credit by applying tighter loan approval criteria. As a result, CFOs are worried about their financing strategies, including finding the balance between bank loans, cash balances, working capital, and equity infusions. CFOs know that if a recession were to hit, cash and low debt leverage is crucial. It is important to have enough cash on hand or borrowing capacity to make up for possible losses. Fortunately, new technologies allow CFOs to get a snapshot of their cash position at any point in time, versus the typical weekly or monthly calculations of the past. The ability for continuous cash forecasting should be a priority for CFOs to balance their company’s cash position with debt.
Tight Labor Market and Shortage of Talent
Labor remains one of the scarcest resources today, with millions of job openings sitting unfilled. There has been a lack of finance and IT talent for a decade, but today’s labor shortages extend to operations, manufacturing, sales, and entry-level jobs across many industries. CFOs are focused on helping their company attract the right talent across the organization by developing competitive and compelling compensation and benefits packages, and career growth and skill development programs.
In a recent Vistage interview, Daniel Pink lays out that employees want to connect what they do to purpose. He emphasizes that there are two types of purpose in the workforce: a big, transcendent purpose (capital "P") and smaller, personal contributions to others (small "p"). He suggests that connecting work to a larger purpose enhances performance, but so does making a positive impact on individuals. Pink argues for recognizing both aspects of purpose to motivate and enhance employee satisfaction and retention. The best CFOs are furthering recruitment efforts by helping to create a culture where employees are connected to the mission and vision of the company and find purpose in their work, day in and day out.
Given the economics of the past few years, the concerns standing between a good night’s rest for CFOs are multifaceted. By remaining agile and proactive, CFOs can position their company to be ready to navigate uncertain times and conditions. By implementing sophisticated financial strategies, staying informed of regulatory developments, investing in accounting technology, and prioritizing talent acquisition and development, CFOs can help safeguard their company's financial stability, enhance operational resilience, and drive sustainable growth. And maybe then, can they get some sleep.
