Shaping the Future

Shaping the Future, From the Office of the CFO

Some CFOs and economists are predicting a recession in the next 12 months. Meanwhile, some other market professionals argue whether the U.S. economy is already in a recession.

As a result, we are seeing many economists split on how to react:

●       Many of those CFOs and economists are planning for a mild economic slowdown.

●       Others are planning more aggressively based on the assumption that we’re headed toward an economy similar to the 2008 downturn.

No matter what indicators are being used, almost everyone agrees that the US economy is facing headwinds on multiple fronts. We’re experiencing record fuel costs, rapid inflation, rising interest rates, global supply disruptions and geopolitical events such as the war in Ukraine. CFOs should be asking themselves: what does this mean for our economy, industry and company?

Planning ahead for negative economic conditions

In my career, there have been four recessions, dating back to 1990. In my experience, we never knew what the full impact would be until we were in the thick of it. I also believe that whatever we think the effect will be, it will be much different. So if you haven't worked on a strategy to address the various potential impacts, it’s time to start.

Getting a jump on the strategy and planning enables your business to take action before it is too late to mitigate the damage. But being proactive can also give you a competitive advantage. If you are well positioned relative to your competition, you stand to benefit from these coming economic changes — or at least weather the storm more smoothly than them.

What CFOs need to do

When the economy is shifting or facing headwinds, experienced CFOs start by defining the ways in which worsening economic conditions can affect their companies. At Turning Point, we call this process ‘shaping the future’. We want our CFOs to take their knowledge of the economic conditions, combined with the historical results of the company, and create models with a different set of future outcomes.

An effective CFO works proactively with the executive leadership team to analyze these scenarios and develop strategies to navigate through negative economic conditions. Then they take the available options based on these analyses and conduct ‘what-if scenario’ evaluations to choose the optimal paths for their companies. Forecasts like these need to be driver-based to monitor the performance of the plan, starting with the underlying profit drivers of the business. From there, these forecasts will roll up to the Income Statements and Balance Sheets to track margins and working capital. Ultimately, to properly guide a business through potential economic shifts or downturns, CFOs need to conduct re-forecasting quarterly — if not monthly — to use what they are learning to better shape the future.

A good analogy for the ‘shaping the future’ model is flying. On most cross-country trips, the plane can be on autopilot most of the time. The pilot and co-pilot periodically check the key indicators to ensure that things are going as expected. But in an economic downturn,  it’s like flying through inclement weather. Planes must come off of autopilot and the crew needs to have their hands on the instruments at all times to ensure they can react quickly and effectively to any sudden changes.

This is the value of having a CFO implement a robust process for ‘shaping the future’ for your company during times of economic uncertainty. 

Alan Chaffee