A Recession is Coming. Is Your Company Prepared?
6 Things Every CFO Can Do Now to Prepare for Recession
Whether it’s the inverted yield curve, the trade war with China, the recent drop in non-defense capital goods or disappointing retail numbers from December, many economists are predicting that our 10-year expansion will end soon… so what should CFOs and finance executives be doing right now to prepare?
We live in unpredictable times. So while a recession is not inevitable, prudent CFOs are beginning to take action behind the scenes to prepare their companies if and when a downturn happens. While no CFO wants to stop all investment or lose out on a great acquisition opportunity, no one also wants to be the one without a chair if the music stops.
So here are some quiet, behind-the-scenes preparations financial executives can take to get ready, without alarming their employees or prematurely freezing investment:
1: Don’t over-leverage & maintain liquidity
While it’s true that the cost of capital is likely lower now than it would be in a recession, the cost of servicing additional debt could tie up cash flows in the future. The key goal is to maintain liquidity in whatever way you can in order to have the most options available to you in a downturn. Anything that ties up your cash flow over the next few years should be evaluated conservatively. So if your CEO is on an acquisition spree, keep a conservative debt-to-EBITDA ratio in mind.
2: Watch your company’s leading indicator – and have a clear plan
Each company has a leading indicator where they will first be able to detect a downturn. In construction, it might be meetings with architects, whose work will decline before yours does for example. When you see this KPI drop, take action immediately with a plan you’ve already put in place; trim risky clients who take a long time to pay or are highly leveraged with low liquidity. Tell your managers it’s time to draft a list of their bottom-performing 5% of employees – but don’t pull the trigger yet… This heads up will allow managers to shift their mindset for what lies ahead. But be ready to take action.
3: Change comp structures of salespeople
Shifting your sales teams to a higher percentage of compensation in commission or bonuses may cost more in the short term but it will do two things to prepare you for recession. First, it will incentivize them to hustle more to get more clients and increase that pressure as the market drops and competition for business increases. Secondly, though, it puts the business at less risk if sales drop, allowing you to keep your sales teams at a lower cost through the trough.
4: Slow down hiring and investment
Sort of an obvious one, but we’d be remiss to not mention it. If liquidity is king, using contract labor to plug holes in your workforce provides more flexibility than hiring full-time employees. In fact, you should delay any kind of capital outlay, as both new hires and long-term contracts will be hard to remove or wind down later if your business begins to take on losses.
5: Lock in higher leases on real estate or equipment that you own
If you own property, equipment or other durable goods that you lease to others, try to lock in longer contracts now to hedge against likely drops in what you can charge during a recession. Even a small discount offered now to secure a 3-5 year contract could act a recession-proof annuity to keep cashflow in your business during rough times.
6: Reduce the easiest-to-reduce ops costs
This is the easiest one. Most CFOs are not aware that they can cut administrative costs, reduce paperwork, labor and actually generate new revenues in the form of rebates from altering how they process their accounts payables. By converting paper payments to digital payments, Finexio typically saves its clients around $300,000 in costs straight to the bottom line – and it’s free. Finexio is only paid when the business receives a rebate. It’s a great way to reduce costs without any disruption to operations. Learn More