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CFOs peer into a turbulent future

By Richard Milne
Financial Times
13 November 2008

The finance role is assuming a new importance as companies fight to survive. Richard Milne continues a series on managing in a downturn

Pierre-Jean Sivignon uses a sporting analogy to describe how his fellow chief financial officers should behave in a recession. "There is a tendency to make sure the rules of the game are being respected, to be a referee. In a crisis you almost have to stop being a referee and become a player," says the CFO at Dutch conglomerate Philips.

The financial crisis has thrust CFOs centre-stage. For many of them, trained as accountants and used to dealing with numbers, that could be an uncomfortable place to be. But now is not the time for CFOs to be timid observers: companies need them to move to the front line as they fight to survive the impending global recession.

"This actually puts the CFO in the driving seat of the business. The CFO is the custodian of the future and present health of the company," says Steve Frobisher, a senior strategy consultant at PA Consulting. "It is massive pressure, because it will demand skills and competencies that haven't come to the fore before."

The chief concern of any CFO at present should be cash. "Cash is king," says Charles Tilley, chief executive of the Chartered Institute of Management Accountants.

So where should the CFO start? An initial priority: set up a daily cash meeting with key lieutenants to keep liquidity levels closely monitored. Second, keep CEOs and boards up to date on the simplest of questions: do we have enough cash to survive a week, a month, a year or even two years? Even successful businesses such as Standard Chartered, the Asia-focused bank, have increased the frequency of liquidity meetings, according to CFO Richard Meddings.

Third, gain control over who your debtors are and their financial health. "You need to see how creditable your debtors are very quickly," says Feike Sijbesma, chief executive of Dutch life sciences company DSM. Maintaining a good relationship with your creditors and banks is also critical.

Mr Tilley advocates a back-to-basics approach: "Don't sell to people who can't afford to pay you back." But CFOs need to make sure that everybody in the company - not just in the finance department - is focused on cash.

That in turn means ensuring the right incentives for executives are in place. Some bonus schemes pay out when a contract is booked; others are weighted towards revenues or profits. The imperative today, however, should be to reward staff for generating cash. Mr Sivignon says that Philips, with interests from consumer electronics to healthcare and lighting, has dropped its growth incentives in the past six months: "We are explaining that if people want to cash their bonus to the maximum they need to focus on cash."

That can create tensions, particularly where sales staff are keen to offer looser terms to make a sale. Most CFOs will be ruthless in resisting such pressures in a global downturn - though they should offer employees a compelling justification for the strategy. Mr Sivignon, for instance, met Philips's top 60 operating managers recently to give them cashflow targets for the last quarter of this year.

The mood should not be entirely doom-laden, however: not, at least, outside the inner management circle. Mr Meddings of StanChart says: "It is important to remain confident as a CFO. How you behave and how you act is very important," before adding, "Keep smiling."

Within the finance department, staff should stress test the financial position against sufficiently gloomy forecasts. Consider that Allied Irish Bank's worst-case scenario in July became its central forecast in early November.

Mr Meddings says StanChart has always tested each country division separately to see if it could stand on its own as one way of strengthening the group overall.

But he adds that the bank has now toughened its stress tests. He cites the example of examining what would happen if the property market were to collapse by 50 per cent, the oil price were to fall below $40 or rise above $200 and the situation also involved strong inflation or deflation.

Mr Frobisher at PA Consulting says one way forward would be to plan for the worst then test on assumptions that are 15 and 25 per cent more pessimistic.

The CFO's role, however, is not just to run the numbers but also to question any predictions made by management. "In a world that is different from what it was three months ago it is important to challenge people on forecasts," says Mr Sivignon. Prioritising between competing demands such as where to invest will be increasingly important.

Surprisingly, perhaps, few CFOs are placing a particular emphasis on cost cutting, probably because well run companies have been cutting costs for some time. Some programmes can be intensified and recruitment slowed down but it may be unwise to initiate a large-scale review of processes in the middle of a crisis. Such large cost-cutting programmes can take three to five years to pay off.

The time is right, however, to take tough decisions on struggling businesses or those losing cash. Deutsche Post, for instance, recently moved to shut down most of its loss-making DHL parcels operations in the US. Simon Tennant, a finance specialist at PA Consulting, says: "You need to stop cash-destroying businesses, even if you take a hit." Some units previously seen as corporate favourites may need shutting; equally, some overlooked businesses may come back into favour if they generate regular cash.

CFOs and management consultants agree that for all the talk of a deep recession it is important to keep a cool head and be alert for the opportunities out there for cash rich companies.

Robert-Jan van de Kraats, CFO at recruitment agency Randstad, points out the dangers of overenthusiastic cuts: "If you take out the bones and nerves of the company then you won't be in a good position when the upside comes."

In spite of the high-pressure atmosphere, smart CFOs will use their centre-stage role to make a mark. David Haines, chief executive of German tap and shower maker Grohe, says: "It is the hour of the CFO."

A checklist for staying prosperous in troubled times

Cash is king

Monitor your cash positions day by day. Make sure everyone - not just finance staff - is focused on it. Can you press customers to pay quickly and take longer to pay your suppliers?

Be visible

CFOs need to raise their profiles in the company. If you cut costs, make sure some come from the finance department. Rapid communication with shareholders on strategic changes is recommended.

Rethink bonuses

Is your incentives scheme focused on cash generation? Change it if necessary, but don't alienate employees.

Stress test the business

Take your worst-case scenario and stress test it at even more pessimistic levels. Challenge every forecast you are given: why should oil prices stay low and the euro continue to fall against the dollar?

Strike the right balance

Be tough but don't overreact. Take time to think through the consequences for the business. And don't forget to look for opportunities. Is now a good time to buy companies on the cheap?


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