It is being mentioned on the news, among coworkers in team chats, and over dinner with family day after day. It is keeping Americans (especially business leaders) up at night. In fact, every client meeting we have these days has some discussion around it. What is it? Uncertainty.
Today’s culture is wrought with uncertainty that is absolutely sweeping through every industry. Rising inflation, COVID surges, interest rate hikes, a dramatic increase in the cost of living, the war in Ukraine, and a potential recession all have business leadership mired in a constant state of uncertainty. From professional services and hospitality to tech and manufacturing, uncertainty is taking a toll. And unfortunately, it does not show any signs of dissipating any time soon.
In response, many organizations have begun leaning even more heavily on their CEOs and CFOs to guide them through these tumultuous waters. Consumption patterns have changed, new buying trends have emerged, and supply chains have become murky, reducing confidence levels in business forecasts. And amid it all, CFOs are being asked to manage cash flow, oversee new business priorities, and aid in constantly shifting strategic planning initiatives.
Subsequently, it is important to understand that a culture of uncertainty puts added pressure on a CFO, requiring deeper financial acumen, intuition, and business savvy to succeed in the role as it relates to the following areas:
Uncertainty in the supply chain drives prices up because companies must tap new suppliers to source raw materials, components, and packaging – potentially incurring additional shipping costs and losing quantity discounts along the way. In these scenarios new sales and distribution channels typically must be evaluated as well to determine their cost effectiveness. And these are just some of the “today” pricing aspects for a CFO to consider during times of uncertainty.
There are “tomorrow” pricing decisions that CFOs will evaluate as well. Volatility in inflation rates often drives businesses to preemptively increase their prices to combat their own rising costs. Political policy speculation can also influence future pricing decisions if changes are in the works that are likely to affect business operations and sales channels. Bill Palmer summarizes this well when talking about how to overcome supply chain difficulties. He says,
“The Fed’s expansive policies have created record-buying power, so both businesses and consumers are more focused on availability than price. This allows you to raise prices selectively. How much and in which products and services are different for every business. Your CFO can help with this by doing an updated cost study of all your major offerings. You need to know which products and services are still genuinely profitable and which ones are not. Target price increases to maintain your overall firm profitability, recognizing that some offerings may be naturally more or less profitable than others. Recognizing that your costs will likely be rising over the next several quarters, you should have a strategy to pass those cost increases to your customers in ways that they will find acceptable.”
How much will your company increase prices by and when will prices increase? These kinds of decisions roll up to a CFO, requiring that they evaluate elements like:
- Projected shipping costs
- Anticipated delivery timeframes
- The cost of onshoring to bypass international supply chain disruptions
- Where vertical integration is feasible
- How competitors’ prices are responding to the same challenges
When the ability to receive inventory is uncertain, an organization’s future is precarious. It is easy to understand – without inventory to sell, a company cannot generate revenue. So, CFOs must decide what kinds of strategic decisions to make when inventory is delayed, unavailable, or increasing in cost. They will look at things like:
- How much it costs to get inventory more quickly
- Which orders should be canceled because the company can no longer fulfill them
- Whether stagnant products can be moved more quickly to generate cash flow
- The cost of holding onto inventory
CFOs will rely even more heavily on data in these areas to look at sales cycles, inventory turn, solvency, and other metrics to get a true picture of where the company’s inventory stands during a time of uncertainty and determine how to remedy a less-than ideal position.
When discussing how CFOs handle supplier uncertainties, Bill Palmer explains,
“You may have to think creatively and take what supplies you can get, adjusting your offerings accordingly. Looking to pay the lowest price isn’t necessarily the best strategy in times like this. Instead, focus on who can deliver consistently and reliably. Ask your vendors where they get their materials and how reliable those sources are. You might have to probe a couple of levels deep to find out where the real constraints are.”
When evaluating suppliers, a CFO will look at the financial impact of diversifying, utilizing vendors in new regions, and exploring online options. Their data analysis will work together with an evaluation of softer elements like customer satisfaction and brand perception to determine which suppliers the company will use moving forward to get through uncertain times.
Labor uncertainties create an additional layer of complexity. A labor shortage puts employees (especially those in skilled roles) in higher demand, giving them more bargaining power with their employers. CFOs aid in financial decisions related to not only hiring staff but also managing the ongoing costs of in-office and remote employees. Within the parameters of the budget CFOs will oversee all employment-related financial decisions, including:
- Benefits packages
- Bonuses and raises
- Plan contributions
- Severance packages
And when employees need to be laid off for the financial health of the company during a downturn or period of uncertainty, CFOs will be closely involved with HR in the discussions around who to let go, keeping in mind both financial implications and legal repercussions of doing so.
As Jeff Dunn reminds us, when discussing how CFOs manage operational risk,
“From the way that a company operates to its strategic planning choices, risk should be identified and assessed at every turn. For example, there may be more risk involved in keeping a certain manufacturing process in-house than outsourcing it. With the help of those most familiar with these processes, the CFO can be involved in managing and mitigating these risks.”
When there is considerable uncertainty in the business landscape or economy CFOs must draw on their strategic plan to guide their efforts. Their risk mitigation strategy should include an analysis of which processes must be changed to withstand the uncertainty at hand. Furthermore, it should identify and assess future risk in this area. For instance, in today’s tight labor market operational risk management should include an assessment of where human-driven processes can be replaced with technology to combat shortages of skilled workers and where outsourced solutions can reduce rising labor costs.
If you are looking for a fractional CFO or accounting and finance executive recruiting services, please reach out to us. We would love to discuss your needs and talk to you about how we can meet them. Our top-level CFOs and CFO recruiters are here to help your organization find the kind of financial leadership you need to weather any kind of uncertainty ahead.