How better data helps CFOs guide their companies through a recession

January 26, 2023 | 5 Mins Aoife Flynn, CMO

The next recession won’t catch many people by surprise.

Economists and business leaders spent the majority of 2022 warning people that a recession was coming, and most of those people agree that the recession will arrive in 2023.

“Whether it’s deep or shallow, long or short, is up for debate, but the idea that the economy is going into a period of contraction is pretty much the consensus view among economists,” CNBC Markets Editor Patti Domm writes.

During a recession, C-suite conversations tend to focus on cost pressures. CFOs need to bring solid data to those conversations.

By having clear, real-time visibility into the organization’s costs — labor costs, operating expenses, investment positions, everything — CFOs can help shape the company’s strategy for navigating the recession.

Outline the organization’s risk exposure

Insightful data and real-time reports are how a CFO earns their seat at the table.

“Recessions leave no room for assumptions,” writes the team at FD Capital, a CFO recruitment firm in the U.K. “Data should underpin every part of a CFO’s strategy.”

The FD Capital team recommends CFOs conduct an internal audit “to identify any company-specific risks that should be accounted for.” When those risks are identified, CFOs and their finance teams can use the data available to them to put a number to those risks.

In fact, McKinsey researchers Ankur Agrawal, Kevin Carmody, Kevin Laczkowski and Ishaan Seth write that a crisis means a financial planning and analysis team “must accelerate its budgeting and forecasting work.”

The McKinsey team was writing in the context of the COVID-19 pandemic’s onset, but the same applies to recession planning. In both cases, a CFO needs to have real-time projections and analyses available to guide decision-making.

Workforce planning: Manage your biggest expense strategically

Labor costs will comprise the biggest proportion of your company’s total spend. As such, CFOs have an important role in shaping their companies’ recession talent strategies.

Get a big-picture view of your labor costs

For companies with cross-border workforces, it’s important to understand where employees are, how much they cost and how those costs differ from country to country.

This kind of perspective is only possible when CFOs have global payroll data consolidated and right in front of them. That allows them to make apples-to-apples cost comparisons across countries while accounting for things like multiple currencies and local tax obligations.

That view can then zoom out to look at a regional picture — e.g. comparing workforces in Europe to workforces in South America — and even further up for a global perspective.

Align your hiring budget and your geographic footprints

For many companies, the past years have been a time of rapid growth. In the context of the pandemic, growth meant expanding beyond domestic borders, sometimes very early in the company’s lifecycle. It’s not uncommon for companies to grow quickly and require employees in more than 10 countries

A CFO needs to be able to unlock, standardize and reconcile payroll data across all locations to get a full perspective of a company’s labor costs. With that perspective, then, the company can begin to optimize its workforce around places where talent pools best fit the company’s skills needs, and the company can focus resources in locations where its money goes further.

By unlocking these kinds of analyses, CFOs help their companies not just survive an economic downturn but find new ways to thrive.

Look for ways to manage labor costs in Q1 2023

In late 2022, a couple of CFO surveys in the United States revealed that businesses are concerned about the costs and the productivity of their workforces:

- The CFO Survey by Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta reported that CFOs “anticipate continuing to hire at a moderate pace, despite concerns about labor quality and availability.”
- Grant Thornton’s 2022 Q3 CFO Survey found that nearly one-third (32 percent) of CFOs surveyed said their organizations “could potentially introduce layoffs or workforce reductions in the next six months.”

Enzo Santilli, chief transformation officer at Grant Thornton, says employees on the higher end of the pay scale “are at greatest risk of recessionary layoffs. We are already seeing this with the technology and financial sectors trimming their workforce.”

If layoffs and workforce reductions are indeed on the horizon, then those decisions must be supported by clear analyses of the organization’s labor costs.

2 numbers worth tracking every day

Depending on the organization, there will be a handful of figures worth tracking daily (or, better, in real time). For some organizations, it might make sense to have constant visibility into outstanding debts. For others, it might make sense to have to-the-minute measurements of customer churn.

For every organization, though, there are two numbers CFOs should always have immediate access to:

Total spend

CFOs have to understand how much their companies are spending.

From there, they can then begin to ask the more important question, Brian Prantil and Jake Wojcik at Insight Sourcing Group say at CFO.com: “How much should we be spending?”

“Once you go back to ground zero and determine what the organization can afford, you can challenge what to buy, including the need, specification, and service level,” they write. “Then, and only then, should the CFO and his or her staff focus on how much to pay for what it buys through sourcing and negotiations.”

Cash on hand

Liquidity is crucial during a recession. Knowing how much cash you have — and how much cash is coming in — will help any CFO make better decisions.

“Cash is king for almost any industry,” Domo CFO Bruce Felt wrote at the onset of the pandemic. “In making your worst-case assumptions, you need to look at cash on hand, cash flow, and how to optimize cash during a downturn.”

Make your numbers meaningful for everyone

Total spend, cash on hand and other figures are important, but on their own they don’t guide decision-making. They don’t answer the “So what?” question that other stakeholders will have.

Sergei Galperin, CFO at the Paris-based med tech company Alan, says much of his work involves translating financial figures into concepts that address this “So what?” question.

“I accompany our monthly financial report with a Loom video to walk the team through our performance, and point out where it puts us on our path,” he tells Spendesk. “That gives everyone a sense of ownership, which in turn keeps us all together.”

Here is where the conversations move toward scenario modeling. Better data means more precise models, and more precise models give CFOs the ammo they really need to guide decision-making. For 2023, scenario planning has become a top priority for financial executives, Shell CFO Sinead Gorman says.

In planning for a recession, these kinds of conversations center around outlining potential scenarios, and what steps the company can take to navigate through those scenarios.

Abdul Shroff, VP of Anaplan’s CFO practice and former CFO at Verizon, describes how this could work for a business in an industry where people are sensitive to economic cycles (e.g. hospitality). Collections could become an issue for such businesses, which means it might be worth incentivizing customers to pay quickly through something like an early payment discount.

Clarity and financial leadership

It’s this clarity — this ability to translate numbers into actual business impacts — that help CFOs lead their companies through recession planning.

“Clarity, in fact, may be the most effective weapon that CFOs can wield in a downturn,” write Deloitte’s Patricia Buckley, Greg Dickinson, Ira Kalish, Ajit Kambil, Ian Stewart and Sitao Xu. “As economic changes bear down on the business, a finance leader’s most potent parry may be the ability to deliver actionable insights in a timely fashion.

“While attempting to predict the precise schedule of any impending economic shift can sometimes seem futile, the consistent ability to make informed, future-facing strategic decisions should retain its value for a long time.”

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