The CFO'S Perspective

In 2018 we published an article titled “How a CFO Will prepare Your Business for Unexpected Events.” In it we outlined 19 types of unanticipated events that could negatively affect your business and provided advice on how to develop a contingency strategy that would help your company prepare for any kind of disaster or disruption it might encounter.

Do you know what was not included in that list? A pandemic.

This was not simply an oversight. It was an indication that a global health issue was not on anyone’s radar. It was unthinkable in 2018 that one highly contagious illness could sweep through country after country, shutting down economies and causing destruction. No one was preparing for a global pandemic.

And yet, another interesting observation stands out to us. While the word “pandemic” was never used to address that specific kind of business disruption, the many outcomes of the pandemic were addressed. Loss of a business owner, financial hardship, loss of customers, new government regulations, political unrest, supply chain disruptions, loss of salespeople, and transportation issues were all named as possible unexpected events that could have a significant impact on a company.

With so much economic uncertainty the employment landscape in 2022 will likely remain tumultuous. Information about how many people are employed, where, and for how much is going to continue to dominate the business news headlines. And much like last year, compensation will be at the forefront of many employees’ minds as they watch their cost of living increase and worry whether their pay will keep pace.

Of course, for the nation’s unemployed, discussions about how compensation may fluctuate this year remain inconsequential. And for small businesses that have been doing their best to absorb rising costs without laying people off or shutting down, the idea of giving raises this year is likely going to be a moot point. But for middle management, executive leadership, and HR personnel at mid-sized to large companies, the question of what to expect in the way of raises remains critical to business planning.

So, what should you plan for a raise this year?

Downsizing is never a light topic to broach, but for businesses that are financially compromised or experiencing a reduction in demand, it is important to fully understand before any strategic planning can begin.

Downsizing is often tied to a reduction in headcount. Headcount is more than just a number, which is why downsizing should be approached with the utmost care and consideration. Knowing why a company should downsize, what kind of risk is associated with doing so, and how to avoid common mistakes is key to increasing the likelihood that your reduction efforts will be successful.

Use this guide to get a better understanding of the implications of downsizing and help inform your strategic planning as it relates to both maintaining your business and preparing it for sale.

Companies that understand how finance and HR overlap and foster a relationship between the two are better poised for long-term growth than their less informed counterparts. The reason behind this is simple – knowing when and how to leverage your CFO to assist with hiring and employee retention can improve profit margins, encouraging sustainable long-term growth. Additionally, encouraging collaboration between these two vital areas of the business improves workplace culture across the entire organization.

Budgeting and strategic forecasting creates a business roadmap to maintain stability and achieve growth. However, for forecasting to be accurate it needs to be modified when significant changes occur either internally or externally. This is especially important to consider this year, as supply chain disruptions and changing business regulations have drastically changed corporate outlooks across the country.

If you understand now that there is a high likelihood of needing to undergo reforecasting next year, you will be better equipped to do so when the time comes. Kory Wagner explains, “Expecting your assumptions to last through an entire year is at best naïve and at worst detrimental to your business. Incorporating reforecasting into your regular budget process, as needed, will keep you on track and help you roll with the punches.”

Some companies are reforecasting-averse, so they shorten their budgeting cycles from annual or semi-annual to quarterly or monthly to reduce their chances of needing to do so. But if 2020 has taught us anything it is that every company should be prepared to reforecast as needed because it could become a necessity at any time.

So, this year as you finalize budgets and forecasts, take the approach of “planning to re-plan.”

Financial projections are a critical component of a sound business plan. These projections (or “financial forecasts”) are used externally to obtain funding as well as internally to create a strategic growth roadmap with key milestones.

At the core of these projections are logical assumptions for revenue, COGS (cost of goods sold), SG&A (sales, general, and administrative) expenses, capital investments, and cash flow that serve as building blocks for the final figures that result. Because your financial projections rely on these pillars, it is crucial to find a balance with these inputs. Being too conservative or too aggressive with your assumptions will skew the resulting projections, damaging their overall credibility. The goal is to inspire confidence externally as well as internally while maintaining high ethical standards, which requires a balanced approach toward creating assumptions for financial projections.

Use existing financial information, even if it is limited by the newness of your business, to justify these assumptions and inform your financial forecasting process. Your resulting financial projections should include a P&L statement, cash flow statement, balance sheet, capitalization table, and strategic investment plan.

Being prepared for an economic downturn is fundamentally good advice. The economy is cyclical and eventually there will be a downturn of some sort. Preparation ultimately boils down to two basic business disciplines.

Most of us believe we are prepared for the everyday kind of disaster at work:  We carry extra cash, safety pins, and a cell phone.  We keep a granola bar (or five) in our desk.  In Seattle, we never, ever, let the coffee pot run out. But while all these things are good (especially the coffee pot), most of us never think about what we would do if a true disaster struck during the time we are at work -- the place/s where we spend more waking hours than anywhere else.   

Let's take the case of an earthquake, since that's our most likely Puget Sound area disaster, and the basic things to prepare for if one occurs during our workday apply to many other scenarios as well.