Companies all over the world fight the headwinds of increasing costs and weakening demand, the role of a CFO in the current environment is like that of a mountaineer trying to labor his way up to the peak in turbulent weather. If the weather gets really bad, he has the option of returning to the base camp, but only if he still has his safety belt on. He may lose his compass along the way but he can still rely on his survival instincts turn to the North Star and then take the right decisions with “anticipation, agility and awareness”.
If the CFO had not anticipated a slow down and hadn’t prepared for it when the going was good then he would likely be stranded in the snowstorm. This wisdom is echoed by most of the CFOs to adapt and survive in an economic slowdown was foremost on people’s minds. The credit crisis may start hitting Asian companies that have seen nothing but strong growth runs in the last decade. The decoupling theory has been debunked; we must understand that what happens anywhere in the world affects us.
In a recent Duke University/CFO Asia Business Outlook Survey on how Asian bottom lines are being impacted by the credit crunch, 44% of its CFO respondents said they had been at least somewhat affected by the credit crunch, with 59% of those affected reporting higher cost of credit and 46% saying that loans are harder to secure.
For Indian companies, it seems high inflation is a bigger problem than slowing demand and companies are responding in different ways. The most common step taken by companies in response is to prepare a substantial cost-cutting program. Take the case of Steel business which is very vulnerable to rising raw material prices like coal and to combat that some CFOs pf the industry have identified areas of cost reduction like increasing captive power supply and shaving off excesses from administration overheads.
Even the cash-rich companies are planning their next budgets planning for more possible scenarios in a volatile environment. Earlier the focus naturally was more on the growth scenarios. This time around, preparing for the slowdown will be less theoretical and they will have to allow for more volatility.
MNCs too are resorting to some amount of belt-tightening to see them through turbulent times. PepsiCo India CFO says that while there is a cash crunch, the company will not cut down spends on core activities around its brands, including marketing and advertising spends. Non-core expenses are likely to see some degree of pruning.
The easiest cost remedy, some may say, is postponing investments. On the contrary there are actually unprecedented opportunities for companies in China and India to acquire assets which would not be available at such low prices for another generation. Should you expand or stall, that is the question. It is said that it is actually the best time for acquiring and the worst for divesting. One needs to exercise caution as sensibilities in the developed world are heightened and companies are likely to face protectionism and resistance from politicians.
The other dampener, of course, is higher financing costs. Raising debt today for M&A, can be at a high risk. Of course, a forward thinking CFO prepares for bad times in good. Bajaj Auto had started rationalising its business processes a few years ago, creating a culture for low cost. At that time, even the board questioned the decision, but that process is serving them well today. It is essential to create a buffer during the good times. Factoring in a margin of safety in good times might create pressure on return on capital but is essential.
In the midst of all this, what emerges is that the role of the CFO itself has undergone transformation. He is no longer seen as a bean-counter, but as a key strategic partner who takes decisions with those sitting in the operating environment. This has come to happen also because the CFO has a larger business outlook compared to functional heads that tend to think in silos. Driving strategy across functions is today just as important as setting governance standards.
Hard times or not, CFOs can ill afford to lose sight of their ultimate goal, and that is to continue to create shareholder value. The focus will shift from “growth at any cost” to “profitable growth”, it is equally important for companies to continue doing whatever they do during turbulent times even during the good times.
Business slowdown: A Checklist >
* Put in place a cost rationalisation program
* Revisit investment plans
* Re-engineer operations to sharply increase yield
* Innovate – some of the best innovations happen when you have your back against the wall
* Avoid raising debt for capital expenditure
*Form industry alliances to combat competitive pressures
* Keep general & administrative expenses to a minimum