A CFO Strategy to Beat the Economy

Reports have it that the recession has technically ended, but ask most small business owners how they feel, and you will no doubt find it’s hardly time to celebrate yet. While the economy seems to have turned the corner, CFOs continue to navigate unknown territory and unexpected challenges. The good news, however, is that while this may seem like—and probably is—the most difficult time to be a CFO in decades, a reward may be waiting for CFOs who successfully usher their companies through to better times. With the down economy causing even the most experienced business owners to turn to their CFOs for sound financial guidance, CFOs find themselves in the spotlight. This trend could perhaps bring CFOs greater prominence in their companies and in the business world in general.

Whether or not co-leadership will become the norm certainly has yet to be seen, but CFOs who rise to the occasion with solid financial guidance will have an opportunity to be recognized for their abilities. Fortunately, as challenging as this economy is, the basic goals and principles of sound financial management remain the same. However, CFOs who want to shine will need to put greater emphasis in some areas, such as managing risks, building steady profit, and maintaining healthy cash flow. To help you identify new ways to adapt to the economy and shepherd your company, consider how you’re dealing with the following three areas.

Keep risk in check
Risk is always something a CFO must keep in balance, but the current economy creates an environment where risks are both greater and less predictable at every level, from big-picture industry issues to day-to-day collections and vendor relationships. In this environment, one of the greatest financial risks is to continue operating under existing business assumptions. Be wary of any assumptions you have made about the downturn and its duration. While optimism has its place, counting on a recovery too soon could lead to overstated revenue projections and overly large budgets, resulting in depleting reserves. The current recession has already outlasted its last two predecessors, so we’re in uncharted territory.

To keep risk under control, reassess your growth and earnings projections. For many companies, earnings and growth projections calculated on a yearly basis, for example, may prove to be too inaccurate over time, given the increased volatility of a down economy. Revisit projections made six months or more ago and assess how accurate they have been to date. If there are already considerable discrepancies between projections and reality, you may need to adjust current budgets to stave off losses. And for the future, you may want to consider the benefits of projections and budgets for shorter periods, potentially trading annual calculations for bi-annual or quarterly figures.

In addition to adjusting assumptions, developing contingency plans can also help reduce risk. In better times, conventional planning and budgeting serve well, but a volatile environment with multiple heightened risks requires multiple backup plans. Developing several worst-case scenarios can benefit any company by helping to avoid on-the-fly decisions if the worst does occur. One area to look at is the risk passed on by customers and vendors. Evaluate which of your customers and vendors are the most critical to your business, and take the initiative to learn about their solvency and overall financial strength. For new customers or vendors, exercise the option of doing a credit check through Dun & Bradstreet. You may also want to take the extra step of requesting trade references and bank references, which can provide detailed information about business dealings concerning the company in question.

For existing customers or vendors, take a look at their track record with your own company over the past six months. If a vendor’s delivery time has lengthened or reliability has slipped in any way, it’s safest to assume risk has also increased. Likewise, customers whose payment time has extended significantly may be greater risks. In addition, a loss of large accounts, increased market turbulence, lower stock prices, or rising raw materials costs for either customers or vendors all serve as warnings of elevated risk. Being aware of rising risks will allow you to plan accordingly, should a customer’s or vendor’s situation take a turn for the worse. By using simple tools like email alerts based on vendor names, you can stay abreast of industry news that affects your vendors and customers.

If customers appear to be rising credit risks, you will want to reassess any credit you extend as soon as possible. You may also simply want to encourage customers to pay by credit or charge card, so that you will be guaranteed timely payment and avoid the risk of slow payment or non-payment. Customers will still be able to delay payment and may also appreciate the benefits and rewards that a number of charge and credit cards offer.

Don’t overlook small but steady gains
Most companies build profitability in small steps, not through major high-profit opportunities, which tend to arrive sporadically even in the best of times. In a slow economy, profitability is more than ever likely to be the result of long-term discipline and small, consistent gains. Target predictable savings and discounts that will help boost profits in a time when profits are soft. For example, trade terms present one such opportunity.

With diligence, seemingly small advantages can be significant over the long term. While some terms will allow you to defer payment when cash is short, nearly all reward early payment with a discount. Delayed payment may present greater benefits depending on your organization’s cash flow, but when paying early is an option, the rewards are worthwhile. Although 1 or 2% seems like a small amount, it’s a deal since these are savings you can reinvest into your business. If you’re not able to take advantage of trade terms with some or all vendors, look for other options. For example, using credit and charge cards that offer cash-back rewards, miles, or other advantages, or those that offer trade-like terms, such as the Plum Card from American Express OPEN, can also prove efficient.

Opportunities for discounts may be less abundant in a down economy, but there is often room for negotiation. Identify or create additional opportunities by assessing vendor relationships across the board. If you provide steady business to a vendor but haven’t been able to negotiate better payment terms, discounted prices, or other advantages, then consider how you might better your standing, whether now or in the future. Consider whether it is worthwhile to formalize a standing order, instead of ordering on an as-needed basis, for example. You might also gain negotiating power by consolidating your business with one vendor.

Sync accounts payable and receivable
To create optimum cash flow, accounts payable and receivable have to be more than well managed; the two must work in lockstep. While accounts receivable will always present greater unpredictability, streamlining accounts payable can lend more focus to cash flow efforts. Assure that outflows are not continually due before receivables by standardizing payment dates whenever possible. Negotiate payment dates with vendors and creditors to streamline payments and better coordinate them with receivables cycles. This can also help reduce the distraction of dealing with payments in a scattered manner and will create more focus in areas of accounting that require greater attention and effort.

Also look at late payers to determine how you can help keep them on track. When a customer is past due, immediately open a dialogue to understand the situation. In addition to learning more about the customer’s situation, evaluate your own organization’s role in late payments. Spot checks in specific late-payer cases will help you determine whether your own accounting system is getting invoices to the customer promptly. Keep in mind that getting the invoice in the mail is not the last step. Invoices must reach the appropriate customer contact and must contain all essential information, such as purchase order and vendor numbers, so that the customer can process the invoice in a timely fashion.

While news of the recession ending has been encouraging, the most prudent CFOs will continue on the same course of diligence and discipline to maintain resilience through strong cash flow and appropriate liquidity. By taking into account the risks and challenges of the current economy, you will not only be working towards a recovery, you will be building long-term financial resilience that will help you get a jump on the competition when good times return. And if the trend of greater leadership for CFOs continues to progress, doing the right thing for your company will lead to greater professional rewards.

Richard Flynn is senior vice president and general manager for American Express OPEN, the nation’s leading issuer of card products for small business owners.