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10 ways to prepare for the upswing

10 ways to prepare for the upswing

Tips from CFOs, CIOs and business experts on preparing organisations for the upswing we all hope is soon to come.

In defiance of the pessimists, the global financial crisis hasn’t caused our financial systems to collapse. Although a risk of relapse into a double-dip recession remains, there are some encouraging economic signs from around the globe. New Zealand CFOs face a range of geography-specific challenges; among them dollar exchange rates and access to capital, due to the small size of the market. We asked these chief financial officers, commentators and experts for their tips on preparing organisations for the upswing we all hope is soon to come:

Phil Allen, finance director, Hays Recruitment

Kevin Drinkwater, chief information officer, Mainfreight

Terry Lawrence, chief financial officer New Zealand, QBE Insurance International

Derek Locke, chief financial officer, FX Networks

Bill Payne, 2010 BNZ University of Auckland Business School Entrepreneur-in-Residence

Mark Yeoman, chief financial officer, New Zealand Post Group

  • Focus on core business and don’t be distracted by trivial change
  • Manage cash flow
  • Repay debt as fast as you can
  • Even when things look up, stay conservative
  • Address capital requirements
  • Examine your expenditure but don’t miss out on opportunities
  • Manage costs, but not at the expense of staff morale
  • Remain true to your corporate culture, but be consistent
  • Accept that your CEO may want you to play ‘bad cop’
  • Be rigorous about reporting and process improvement

1. Focus on core business and don’t be distracted by trivial change

Save rebranding and internal reorganisation for better, more stable times

Derek Locke of FX Networks warns that if you’re wasting time on restructuring you’re not managing your business. He has seen businesses get themselves into trouble. “Trouble meaning that you can’t meet your commitments, pay your creditors, fulfil contracts. It has an ongoing effect.”

Integration and rebranding are ‘nice to have’ activities that should be saved for the good times. “It’s very important to do what you do well,” he says. “Don’t get distracted by other things that are peripheral to your core business.”

Office refits, relocation and non-core infrastructure upgrades should be handed over to office managers. Then steer clear of any dialogue around these themes; when it comes to incremental change, everyone has an opinion and it probably isn’t going to help you do business better and more profitably. “You can get distracted by peripheral stuff that does not add one inch of value to your business,” says Locke. “The management team should be focused on business every day.”

2. Manage cash flow

This should be a high priority in the current conditions

Locke of FX Networks says managing cash flow is absolutely paramount because it’s at the centre of any organisation not rich in cash resources. “Your payroll affects your cash, and the capex affects the cash. In the market we’ve got, you have to understand immediately your cash position because things can change rapidly. We do it every day. It’s prudent to totally manage your cash on a daily basis, so you’re well aware of what’s happening now, next week and in the future.”

Meanwhile, NZ Post Group CFO Mark Yeoman says the crisis is teaching CFOs the importance of funding diversification: “In cash-flow management, and liquidity management particularly, having diversified sources of funding is really important — retaining flexibility.” Uncertainty is a symptom of the GFC, says Yeoman, and it’s placed a question mark over the current level of ‘normal’ in business. “When you’re faced with uncertainty, having more rather than less flexibility is desirable,” he says. In cash-flow management, for example, he recommends investigating multiple sources; not only a bond programme but commercial paper and different layers of debt instruments, providing flexibility and easing decision-making as circumstances change.

3. Repay debt as fast as you can

Deleveraging has become a watchword of the GFC

Locke of FX Networks says it’s vital to look at your entire balance sheet. “Having the right mix of debt plus equity is absolutely critical.”

Terry Lawrence of QBE Insurance says your credit control team must be vigilant in chasing up outstanding debts. “The squeaky wheel does get attention. You need a good accounts payable system to ensure legitimate payments are made on time — not too early and not too late. There is reputation risk here.”

Allen of Hays Recruitment urges CFOs to maintain a balance between protecting margins in the downturn and continuing investment to maximise the benefits of the upturn. But you need to stick to the basics when it comes to debts: “Management of debtors remains number one, and the basics means calls, calls and more calls. Understand your clients, get close to them, be the first person they pay.”

Assessing assumptions around future demand and revenues to support investment business cases is difficult in times of uncertainty, Yeoman of NZ Post admits. Make sure your investments have exits or sunset options based not on rosy futures but on realistic outcomes. “It’s a challenge for CFOs because any business needs to keep growing and changing, and one of the consequences of the global financial crisis is that people become more risk averse by nature,” says Yeoman. “It’s going to take courage to support growth initiatives, but they must be linked pretty clearly to sound strategy.”

Deleveraging (where businesses sell non-core assets to retire debts and reduce their debt burden at times when profitability is depressed by a fall-off in demands) has resulted in a market for potentially good assets at reasonable prices. “It takes good understanding of the fundamentals and recognising what’s a sound investment and what’s potentially a bit more risky,” says Yeoman.

4. Even when things look up, stay conservative

Preserving cash and controlling costs are critical until it’s clear your business is recovering

Bill Payne is author of the Definitive Guide — Raising Money From Angel Investors and NZ University of Auckland Business School Entrepreneur-in-Residence. Although it seems as though many markets have bottomed, he continues to recommend CFOs to be conservative. “It’s my opinion that it’s not CFOs’ role to push companies towards ramping up for rapid growth in revenues. On the contrary, I believe it’s CFOs’ responsibility to make sure any increase of expenses — increased marketing, hiring employees, expanding sales forces, etc. — is justified by real, not anticipated, revenues. Let others in the organisation be the optimists!” (Payne emphasises his responses are most relevant to startup companies funded by professional investors and venture capitalists.)

Locke of FX Networks seconds Payne’s note of caution. While he’d like to think there’s going to be an upswing, interest rates and the bear market in shares suggest it may be some way off. “It’s about managing cash very carefully. In my view the situation is going to go on for a while longer.”

While Phil Allen of Hays Recruitment predicts a number of CFO challenges in the near future — among them increased compliance burdens, heightened complexity and squeezed margins — he counsels CFOs to defy pessimism. “The worst thing is a couple of months of poorer profits, which is a fair trade for the risk of missing the upswing and playing catch-up.”

5. Address capital requirements

Raising capital in the current environment can be tricky

Payne of UoA Business School predicts the biggest challenge for CFOs over the coming decade will be that fundraising will be more challenging than it has been in the past. “The venture capital model seems to be challenged, if not broken,” he says. “Banks are facing increased regulation and have already demonstrated increasing conservativeness, especially in funding start-up ventures.”

Helping the CEO find financing to stay ahead of the cash needs of the company requires better planning and more preparation than it did in the past, says Payne. Furthermore, start-up ventures will have to cast a broader net in the future to find the capital necessary for growth. “Achieving early positive cash flow and growing organically, rather than with outside capital, will become even more important for start-up ventures in the future.”

6. Examine your expenditure but don’t miss out on opportunities

When investing in infrastructure, consider total cost of ownership

Kevin Drinkwater, Mainfreight’s CIO, comes from a finance background and reminds CFOs it’s important to think carefully about how the finance function treats IT expenditure in a challenging climate. “CFOs often cut these back to the bone and the business ends up regretting it.” As important as it is to curb extravagance, you should take advantage of the market conditions to negotiate better terms and make the most of supplier relationships. “There are also opportunities that can be had with vendors being very eager to play ball.”

Yeoman of New Zealand Post Group says CFOs often have to push back against the expectations of the CIO and those in IT. “It’s really about sweating the business case harder and understanding what the trade-offs are that are being represented and the options, and making sure the benefits realisation programme is being monitored after the initial assessment’s been made.”

7. Manage costs, but not at the expense of staff morale

Attack cost management from a process redesign perspective rather than just cutting costs

Lawrence of QBE Insurance says all staff must be aware that committing the company to expenditure must add value. “The comment I make to QBE staff is ‘If it were your money being spent would you spend it?’”

Communication with employees is a common failing of many companies, he says. Those responsible for the core business are sometimes treated with disdain by senior management when it comes to cost-cutting, but Lawrence says transparency and integrity are essential elements in gaining employee trust and support.

Yeoman of NZ Post agrees it’s essential to treat everyone in the organisation with respect. “Everyone recognises what it takes to manage those periods when times are tough. It’s often the employees who come up with the best initiatives and are able to spot wastage and areas where costs can be saved and processes improved. It’s a real mistake not to engage them in that.”

Look closely at areas such as travel where substantial savings can be made through the use of recent technologies. FX Networks has introduced video teleconferencing (VTC), for example. “Our Auckland regional manager has not been to Wellington for six months because we speak to him daily on the VTC,” says Locke. “That’s saving us untold travel costs.”

8. Remain true to your corporate culture, but be consistent

If in cost management mode, don’t confuse the messages you send to your colleagues

Payne of UoA Business School stresses it’s the CEO and not the CFO who should take a leadership role in defining organisational culture. “The CFO, as a team member, should make sure his or her organisation is fully integrated into this culture, especially in the CFO’s organisation’s relationships with the rest of the company.”

Allen of Hays Recruitment says it’s important for CFOs to ensure all stakeholders feel fairly treated, and this involves keeping an eye on things that might, in the short-term, seem trivial but that may later have a detrimental effect. “The small discretionary spend items — for example, staff entertainment, Christmas parties — won’t have any impact on your bottom line compared with the impact of the economic conditions. However, not having them has a huge impact on morale and on retention when the market picks up.”

On the other hand, when everyone is watching the bottom line it would be counterproductive to throw a big staff party. Consistency is crucial — ensure your employees can see that what is happening is consistent with your message.

9. Accept that your CEO may want you to play ‘bad cop’

Doing what CFOs and financial controllers generally do, you’re likely to have a negative impact on morale.

Some CEOs won’t object if the CFO gains a reputation as a stern gatekeeper when it comes to cutting costs; if somebody has to negatively impact morale it might as well be you. The CEO won’t want his or her image to suffer. But CFOs should think about the impact of cost control and denying spending that was approved in the budget. Payne urges CFOs to communicate broadly with their colleagues: “That is to say, those people at the same level, who are supervising the people or managing the people the CFO is going to impact with the decisions he’s making.”

If you’re expected to play ‘bad cop’, you’ll want to be conversant with both best and worst case scenarios in order to feel confident when planning. Lawrence of QBE Insurance says what-if analysis should be an integral part of every company’s risk management strategy. “This enables the CFO and management team help to prepare the company for any change in the business environment. Management needs to know the risks; both downside and upside.”

10. Be rigorous about reporting and process improvement

Stay on top of the numbers

Payne of UoA Business School says CFOs should communicate even more frequently with your CEO and board. “Anticipate their needs for financial reporting. Ratchet up the timing of reporting.”

Lawrence of QBE Insurance also reminds CFOs of the need to ensure records are up to date and reconciled. “Cash remains king,” he says, and continuous process improvement is a key principle that should be observed. “There are always better and more efficient ways of doing things. Get employee involvement in project teams; particularly those involved in doing the tasks.”

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Tags leadershipcio and ceoeconomic crisisstrategycio and cfo

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