Watch this short video from McKinsey on financial strategies for economic downturn
According to recent survey of Gartner, CFOs are currently facing a challenging economic environment termed the “deadweight economy.” This economic climate presents five key challenges:
To overcome these challenges, Gartner recommends three strategies for CFOs:
Focus on Differentiation: CFOs should prioritize spending on areas that create unique capabilities distinguishing their organization from competitors.
Adopt a Capital Activist Posture: CFOs should approach capital allocation with an activist mindset, prioritizing strategic alignment.
Drive Digital Cohesion: CFOs can enhance productivity by assessing interdependencies between digital initiatives and using this insight to make informed funding and project decisions.
Gartner emphasizes that organizations adopting forward-thinking strategies can not only navigate these challenges but also gain a competitive advantage and improved performance trajectory.
However, in the face of these increasingly challenging operating conditions (or “dead-weight economy” as Gartner calls it), today’s CFOs can do more than just follow the three strategies suggested by Gartner. To truly demonstrate the robustness of their businesses to investors and a broader audience, the CFOs must craft a financial strategy that is not just well-articulated but also uniquely engaging, ready to weather the economic storm.
Preparing for a recession, if one is really to come, entails more than mere financial prudence. While bolstering cash flow and creating a budget to navigate unforeseen expenses are crucial steps, building a financial fortress involves a multifaceted approach. One key aspect is establishing an emergency fund with a cushion of at least six months’ worth of funds. This financial safety net ensures your business remains on solid ground, capable of weathering any unforeseen emergencies during the downturn. However, the journey to financial resilience involves further exploration. Let’s dive deeper into the some avenues that CFOs can explore.
In the world of finance, some businesses stick to the same set of metrics regardless of the prevailing economic conditions. Yet, when crafting a financial strategy tailored for an economic downturn, it’s imperative to scrutinize these metrics more closely. Every recession possesses its unique characteristics, rendering yesterday’s playbook ineffective in today’s uncertain terrain.
Economic downturns often unfurl opportunities for established companies to expand their market share, potentially eclipsing smaller competitors. This metric alone can serve as a litmus test for a business’s underlying strength, even if revenue growth stagnates. Armed with robust liquidity, businesses can seize the moment, concentrating on attracting new clients to offset reduced business from existing ones in the short term.
The evolving economic landscape has placed CFOs under growing pressure to provide regular performance insights. However, amidst the volatile conditions, articulating a reliable financial forecast for the next 12 months can prove challenging. Those CFOs who thrive in this climate are those who invest in tools capable of modeling various business scenarios, offering insights into different outcomes. By steering portions of the business in innovative directions, CFOs can not only achieve diverse financial results but also set their businesses apart as adaptive and forward-thinking during a period of slower growth.
Another vital financial strategy for navigating economic downturns revolves around reducing discretionary expenses. Discretionary spending forms a significant portion of a company’s cost structure and often emerges as the first target for cost-cutting measures when finances tighten.
For both small and large businesses, gaining a clear understanding of where funds are allocated can lead to smarter financial management. Creating a list of discretionary expenses, scrutinizing each line item, and prioritizing spending based on importance ensures prudent financial management.
It’s crucial to discern between essential and discretionary expenses, as the latter can fluctuate and be challenging to control. Implementing a centralized spend management system empowers companies to track and manage expenses comprehensively. Such systems not only identify spending trends but also facilitate real-time budget management and transaction approvals.
Regularly reviewing discretionary spending with the finance team and stakeholders allows for vigilant expense control, ensuring that expenditures align with the company’s growth objectives. Utilizing a centralized spend management solution, particularly for expanding businesses with multiple departments, streamlines expense monitoring and budget management.
One of the most powerful tools for addressing so-called “laziness” is to awaken intrinsic motivation. When people find personal meaning and value in their work, their drive and commitment naturally increase. Research by Deci and Ryan on Self-Determination Theory highlights that fostering intrinsic motivation involves supporting employees’ autonomy, competence, and relatedness.
Practical steps to awaken intrinsic motivation include:
In my years of leadership, I’ve encountered numerous employees who were unfairly labelled as lazy or disorganised. Many times, these individuals were balancing significant personal challenges alongside their professional responsibilities. Once their barriers were acknowledged and addressed, they began to thrive professionally.
In the business world, if an employee misses deadlines or struggles with productivity, it’s crucial to look beyond the surface. What unseen challenges are they facing? Is it a lack of clear instructions, overwhelming workload, or personal issues? Addressing these barriers can transform their performance and well-being.
Research from Gallup’s State of the Global Workplace report underscores the importance of a supportive work environment. The report found that employees who feel supported by their managers are significantly more engaged and productive. This support includes clear communication, empathy, and practical assistance in overcoming obstacles.
In conclusion, differentiation, capital activism that focuses on strategic alignment, driving digital initiatives, exploring unconventional metrics, conveying societal impact, prioritizing sustainability, and maintaining clear communication seem to be the key drivers of financial strategy under current “dead-weight” economy. Additionally, vigilant control of discretionary expenses is vital in ensuring financial resilience during uncertain times. By embracing these multifaceted approaches, businesses can navigate economic downturns with confidence and agility.
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