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Preparing for Economic Uncertainty with Fractional CFO

Preparing for Economic Uncertainty with Fractional CFO

Economic uncertainty is on everyone’s mind these days. A survey revealed that 98% of CEOs expect a recession in 2023, though they believe it will be “brief and shallow.” In response, they are battening down the hatches—taking steps to constrain costs and maximize revenue. If economic predictions have you feeling uncertain and overwhelmed about your own company’s future, there is no need to panic.

Reducing costs and growing revenue are fundamental business goals. Right now, though, it’s time to reassess, so you need to stay nimble.

Watch your Data for Warning Signals

Your business is most vulnerable going into a recession and coming out of a recession. Remember, cash is king. If you react too late going into a downturn, you'll burn excess cash and you will have less available to you as the economy turns around.

The key is to manage the risks within your control. There is no point in wasting time and energy on things you cannot control. To retain a flexible cost structure and business model, you must proactively devise an action plan for any potential slowing of sales and profits.

  • Update your accounting records. Focus on accounts receivable to improve cash flow and reduce debt. Write off past due receivables and take the tax break, and re-evaluate relationships with clients that are past due.
  • Explore risk-reduction strategies. If possible, stock up on production or operations supplies. With interest rates rising, lock in rates wherever you can right away.
  • Identify discretionary expenses and overhead you can reduce or defer. You want to maintain margins without sacrificing long-term growth plans, so if it’s not part of your long-term plan, it needs to go. Prepare to make tough decisions.
  • Companies should look internally at their staffing.  You should assess your needs, determine if people are in the right roles, and look at ways to optimize your human capital that align with your priorities.
  • Reconsider capital expenses. If something isn’t absolutely necessary right now, should it be put off?
  • Think about near-term adjustments to your strategy, pricing, or product mix that might help you weather the storm. Some products may do well during a recession if customers consider them necessities, so promote those instead of products less likely to sell. Discount slow-moving inventory to generate cash.
  • Consider negotiating agreements with strategic suppliers. You’re reassessing, and so are they, and you need to be sure they will be there for you. Get together with them—at least those most strategically vital to your organization—and discuss how you can support each other through tighter times. If you can avoid significant changes to your terms, you can avoid having to push those costs onto your customers, and they will appreciate that.
  • Explore outsourcing functions to a vendor to increase efficiency. Outsourcing is budget-friendly because you get specific, high-level expertise without paying ongoing salaries or benefits. Consider whether this is the time to bring in fractional CFO or Controller support to help you prepare for a downturn.
  • Use automation where possible. Automated tools and streamlined processes save time and money, so they can replace eliminated FTEs and help remaining personnel work more efficiently. If you need help evaluating what’s best for you, we can help.

Connect with your customers now, too, because they are also reassessing their position.

Maintain a Fortress Balance Sheet

Maintaining a financial bill of health that can withstand shocks is paramount in a recessionary environment. And, again, it is something that will put your business in a stronger position under any circumstances.

  • Focus on maintaining adequate liquidity to sustain your business through a downturn. Cash is king, as they say, especially now. You should always have enough strategic reserve to handle 60 days’ worth of sales and general operating expenses. If you’re short on that now, it is imperative to collect your receivables so you can manage cash on hand efficiently. Maybe you have relied on a line of credit to handle short-term cash needs, but that may not be available if recession becomes a reality.

On the other hand, increase your line of credit if possible. But before you ask, ensure you’ve done everything recommended here to be sure all your financials are in good shape.

For business owners, think about your personal liquidity, too. Consider pulling out cash now, you can hold that in reserve for when the business needs it.

  • Consider proactively refinancing debts coming due within the next one to two years. Can you stretch out your principal payments? That would free up more cash for other needs.
  • Maintain a dialogue with lenders. This is a time for full disclosure and transparency, with timely updates on business performance and cash management. If you try to hide problems with delayed financial reporting, you could permanently ruin your reputation with lenders.

Do All of These Things Right Away

It’s crucial to get your financials in order immediately so you are well-prepared—even if you have to hire a temporary bookkeeper or Controller to get the work done. It’s time to sharpen your projections, and an outsourced Controller or fractional CFO can help you test different future scenarios. With that, you’ll be in the best possible position no matter what happens. Simply getting a consultation can help you prioritize decision-making and see where you may need additional aid as you plan for tighter times.

It is recommended to do three levels of financial stress testing:

  1. Best case
  2. Basic operations
  3. Worst case (you’re upside-down)

Remember, economic uncertainty is not permanent. Business planning is an important mental process that focuses on the what-ifs more than the numbers. If the worst happens, how will you stay in business and meet your commitments? When you have a plan for that, you’ll be prepared to respond no matter what happens.

Sometimes an outside expert is just what you need to think through modeling and cash flow projections to help you get your accounting in order. Leveraging specific financial knowledge and insights now will strengthen your company in good times or bad.  

download the financial checklist for business leaders at this link

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