Finding a niche where CFOs can grow companies during tough economic conditions

When the 2008 Global Financial Crisis hit the world, there was plenty of speculation that we were entering an era where the business environment was redefined.

Economic recessions are cyclical. However, economies must position themselves for growth during recessionary periods to prosper during bull runs. In economies outside of South Africa, where companies are the primary drivers of economic growth rather than State Owned Entities (SOEs), tough decisions must be made during recessionary periods that will enable growth.

How can CFOs thrive amid economic financial uncertainty?

Build resilience and agility with scenario analysis

The article points out that the business landscape in the current global economy remains difficult to decipher. Not only are there significant cross-country divergences, but even within each economy, sectors are not evolving at the same pace.

In the US, while economic data doesn’t point to a retrenchment in private sector activity, the economy started the year on a soft note with increased evidence of a generalized slowdown in activity.

The article adds that the combination of persistently elevated inflation, higher interest rates, and stringent credit conditions are dampening private sector spending power. Already, sectors sensitive to interest rates, such as housing and banking, have experienced a significant amount of stress. And, while generally healthy consumer and corporate balance sheets have provided some cushion until now, we can not underestimate the risks from nonlinear spending and investment decisions that could precipitate an economic slump.

CFOs looking to deploy agile strategies amid this environment of elevated uncertainty can look to develop forecasting and scenario analysis frameworks to inform consistent and objective decision-making supported by data-rich insights. Economic forecasts based on robust models and comprehensive scenario analysis help CFOs make informed strategic decisions to find new growth opportunities, adjust pricing strategies, manage talent costs and advise on the financials for new products or services suited for changing market conditions.

The article points out that CFOs can place emphasis on a dynamic and adaptable strategy. As such, simply pulling out the playbook from the 2008-09 financial crisis, or the pandemic shock will not suffice to navigate today’s unique business environment.

By leveraging macroeconomic forecasts and scenario planning, CFOs can manage risks effectively, communicate financial performance to stakeholders and help organizations gain a competitive advantage in a fluid economic and financial market environment. CFOs can leverage these macroeconomic insights in two distinct ways:

• They can build financial strength and resilience by ensuring readiness to rapidly adapt to shifting inflation dynamics, higher and variable costs of capital, fluctuating labor market dynamics, and heightened financial market volatility; and
• CFOs who have a practical understanding of the risks and opportunities associated with different potential economic developments can more easily manage the strategic narrative for their businesses and communicate it to the broader public.

Conduct regular portfolio reviews

The article points out that, supported by dynamic and pliable scenario examinations, CFOs can rapidly assess the strengths and gaps in the current business or product portfolio. Buying or selling is one part of the equation, but the other involves improving, refining, or repositioning the portfolio. Developing objective assessments of the portfolio creates a baseline for decision-making.

While the initial assessment is a critical component, we believe CFOs may want to push beyond it to assess the broader risks to the business and challenge the status quo via an examination of pro forma impacts, stranded cost allocation, financing needs, covenants, performance improvement, stakeholder analysis, talent and the redeployment of proceeds.

The article adds that, beyond ideation, planning, and execution, CFOs are increasingly being tasked with helping craft and articulate a clear and efficient communication strategy for internal and external constituents regarding strategic portfolio decisions. By conducting regular and robust portfolio reviews, CFOs can react quickly to drive long-term value creation in this tumultuous environment.

Optimize the balance sheet to support the go-forward strategy

The article points out that CFOs who enhance their balance sheets and establish agile capital allocation strategies can more easily shift capital to address fluid needs, seek attractive financing options, plan early for M&A, and mitigate risk.

Tighter financial pressures and elevated credit standards have led business executives to focus their investments on segments with the strongest growth opportunities. Capital costs and interest rates are unlikely to decline rapidly in the near term. As such, CFOs may need to remain focused on cash preservation and generation.

The article adds that CFOs may need to regularly review working capital trends, cost containment through process automation and improvement, appropriate and up-to-date tax strategies, and go-to-market tactics. Fresh perspectives need to be introduced, and previous ideas challenged and revisited. With the inherent efficiency of internally generated cash, CFOs can aggressively attack market opportunities to spur growth and drive returns on investment.

Should external capital be needed to support business objectives and growth desires, developing an independent view on financing alternatives is critical in volatile markets. CFOs can ensure the capital structure supports and enhances the strategic objectives rather than inhibiting or restricting them. Equally as important is driving competition among financing providers and maintaining multiple ways to win. Optionality allows for efficient maneuvering should markets move adversely.

The article adds that business leaders are still waiting for more reliable signs of recession or recovery, with those signs likely to vary by sector. In this fluid environment, CFOs who prioritize forecasting and scenario analysis, maintain agile capital allocation, and enhance existing portfolios can embrace alternate financing options as needed, reallocate capital efficiently and prepare for inevitable macroeconomic and financial market fluctuations.

Significant commitment

Corporate South Africa has made a significant commitment to increase economic growth. Some of the country’s top companies and CEOs have signed a pledge to this effect, paving the way for President Cyril Ramaphosa’s ambition of more involvement from the private sector. If companies inspired by CFOs can find growth in economically constrained markets, we can take a massive step towards growing this economy. Unfortunately, the other part of this equation is that the current SOE model is ending, and Government needs to rethink how to structure the future of its influence on economic growth and the role that these companies play in the future of South Africa.