Controlling input costs, revising pricing models, improving forecasting and managing risks are just some of the new demands placed on the finance function from challenges created by the pandemic and the resultant supply chain disruption, rampant inflation and now the threat of a recession. Companies frequently lack the resources and talent they need to address these constant and shifting demands, which require agile financial leadership that can pivot between profitable growth and cost-cutting strategies. Fortunately, there are highly effective options to address these shifting needs as well as help ensure the traditional daily transactional work and month-end reporting processes continue to run smoothly.
According to the U.S. Labor Department, annual inflation for 2021 and 2022 was 7.0% and 6.5%, respectively, and hit a high of 9.1% in June 2022. Driving factors included higher prices on consumer products like gasoline and groceries, and on industrial products, given the impacts of supply chain disruptions and a new COVID-19-related resurgence in China. Consequently, the Federal Reserve dramatically increased interest rates throughout 2022 to a level that could possibly trigger a recession despite their desire for a “soft landing”. Finance leaders have been in the hot seat all year, having to answer questions about the effects of inflation on margins as well as how they are readying their companies for a potential economic downturn.
Our private equity (PE) clients have learned a few lessons from past downturns as well as the recent pandemic. They typically have a deep talent bench which includes advisory partners who operate well during crisis situations. These groups help the PE portfolio company pivot smartly during a downturn, offering advice and resources to help guide them through strategic shifts and renegotiate loan terms and other liabilities to relieve financial stressors. By proactively managing their portfolio companies — which includes continual profitability and cash flow forecasting, working capital management, expense reductions and outsourced / surge talent usage — these private equity firms have exceeded public company financial performance in a downturn. The questions PE operating partners are asking their portfolio companies today include: Where are you spending your time? How do you identify waste and how are you addressing it? How closely are you managing cash? How effective is your ability to prioritize activities yielding the highest value?
These questions are complex and often require experienced and deep financial leadership that may be lacking at the portfolio company, especially as the talent bench previously mentioned dwindles amidst increasing demand for finance leaders who are both technicians and crisis leaders. When taken together with other stressful situations, including refinancing, restructuring, litigation, merger integration, major investments or divestments, a thinly managed portfolio company can quickly become overwhelmed. An unforeseen resignation or retirement of a senior finance professional, or the owners simply losing faith in their finance leadership will also require an urgent response.
How are these situations being addressed? Finding qualified financial leadership positions like the chief financial officer (CFO), controller or treasurer can take months of recruiting, interviewing, and onboarding. Many companies simply can’t wait that long to resolve financial management shortfalls. A relevant and current example is the CFO who proves incapable of understanding customer and product profitability and margin degradation given spiraling costs. How can that CFO assist the management team with identifying and implementing cost reduction or pricing initiatives? Interim Financial Management professionals can be valuable resources to employ in transactional or transitional situations but especially now, in times of economic uncertainty, when the current finance team likely lacks the experience or resources. Economic downturns or market uncertainties require the CFO to possess a combination of soft and hard skills to manage a broader set of finance and accounting issues. Other situations demanding strong CFO skills include:
Interim Financial Management professionals offer CEOs, boards and private equity sponsors the strong right arm and flexibility they need in times of transition or recession. They possess directly relevant experience (functional, situational, industry-related, etc.) while supporting management in their search for a permanent solution, and, importantly, they provide transition support and training to permanent replacements.
Availing of this skillset and service offering can be an effective strategy to minimize disruption, implement a smooth transition and establish a solid future course for the accounting and finance functions.
Written by Vic Datta and Pat Fodale. Copyright © 2023 BDO USA, LLP. All rights reserved. www.bdo.com