Financial crisis lessons for an uncertain economy

Financial crisis lessons

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By Tim Cooper

27 September 2019

https://www.fm-magazine.com/news/2019/sep/financial-crisis-lessons-uncertain-economy-201922121.html

Finance leaders around the world are recession-proofing their organisations as fears of a global economic downturn grow. Many learned valuable lessons from the financial crisis about 10 years ago.

Escalating trade wars and a weakening global outlook have led some economists to believe that the United States will tip into recession by 2021, according to a survey by the National Association for Business Economics.

Similar fears exist for other countries around the world. Germany is one of several other major economies that is on the brink of a recession, according to several measures.

Finance leaders are ramping up efforts to ensure their companies can survive another financial slump. They are applying a wide range of measures, many of which have been learned and honed since the global financial crisis.

Recession-proofing activities include credit and cash flow management; relationship building with customers, partners, and staff; diversifying business portfolios; and improving communication and transparency.

Rigorous cost control

Anita Karppi, managing director and founder, K&K Global Consulting, said, essentially, it's a matter of when, not if when it comes to a recession and that guarding against a global downturn should be a priority for finance leaders in all businesses, from SMEs to large conglomerates.

Recession-proofing should start with rigorous cost-control measures, she said. Finance leaders should meet regularly with business's department heads to review costs regularly.

"There are many ways to keep costs down, and reviewing all spend on a quarterly basis will help," Karppi said. "Recurring cost-control meetings should be planned and prioritised."

The more finance leaders, in co-operation with all staff, can reduce costs, the more chance the company will have of surviving a recession. Cost-cutting can also improve an organisation's long-term financial health.

"In today's technology-savvy world, many fixed-term office costs can be scrutinised," Karppi said. "Flexible working practices for staff and offices should be considered, as these are large overheads for all companies. Working from home, hot desking, and job shares should be considered, and staff may welcome them. Zero-hour contracts may also be an option for some companies, and there will be an increasing trend towards them."

Cost management is one area in which management accountants can help organisations, according to consultant and trainer Aubrey Joachim, FCMA, CGMA, the owner of Leading Edge Change, a firm in Australia. "Some important aspects of Australia's economy, such as mining, would certainly be affected by a global recession," Joachim said. "During recessionary times, the role of a finance professional is to manage an organisation's expenditure in a way that will keep it afloat until things get better. Management accountants especially should explore every opportunity to identify cost-avoidance scenarios.

"From a financial management perspective, balance sheet management is key. Working capital must be monitored closely — that includes cash flow management and reviewing debtors for risk exposures."

UK-based Gabriela Butler, ACMA, CGMA, is procurement finance business partner at facilities services firm Interserve.

Her role involves many recession-proofing activities, including working closely with the CFO, chief procurement officer, finance directors, and other colleagues to find additional third-party spend savings and support profit margin and cash flow improvements.

Customer and partner relationships

While finance leaders should focus on cost savings on all levels, they should also ensure the customer remains the key focus, Karppi said. Butler agreed, pointing out that her company's industries, facilities management, and construction historically have low profit margins.

"We are working continuously to build strong and long-lasting relationships with clients and suppliers," she said. "The culture of looking after clients is deeply embedded. We need to ensure our clients get value for money, and we respond quickly to their requests, which helps Interserve when contracts are due for renewal. In a way, we are always behaving as if we face a recession."

Keeping good relations with staff is also vital, Butler said. "The company allows for flexible working hours, working from home, prioritises health and safety, and takes seriously the feedback from employee surveys," she said. "Employees are encouraged to reduce their travel time and use the latest technology to hold meetings."

Netherlands-based Amrish Shah, FCMA, CGMA, is interim head of FP&A at media production company Endemol Shine Group.

Shah said media and entertainment tend to be recession-proof as people often stay in and watch TV, movies, and online entertainment during an economic downturn.

However, broadcaster budgets can also be squeezed, which can have a knock-on effect on producers. One key aspect of recession-proofing in such companies is focusing on customer value, which has become more prevalent and embedded since the financial crisis 10 years ago, he said.

"For example, having the foresight and ability to support customers during a recession, when they themselves may have some issues, can be a way to build strong relationships, which will help you weather the storm together," Shah said.

Finding new markets

Recession-proofing is "something we always do," regardless of economic conditions, said Gordon Grant, FCMA, CGMA, the Scotland-based CFO at engineering software company DEM Solutions.

For Grant, the most important activity has been improving access to financial support. His role also involves identifying expansion opportunities by analysing market needs and building products to satisfy them. That can result in the need to hire additional staff, which in turn can require access to finance, he said.

Grant said his firm's experience of the last major economic downturn has helped it become much more robust should another recession hit.

"In 2010, we allowed our focus to dwell on solutions concentrating on the mining sector," he said. "That sector subsequently experienced a global downtown which, in turn, impacted our revenue. Since then, we have adopted a strategy of collaborating with partners to address a wider portfolio of different industries, some of which are new to us. This geographic and industrial diversity within our customer portfolio helps protect us against adverse economic cycles. In fact, we now experience sustained annual run rates of revenue growth with increasing recurring revenue."

Shah said Endemol had also learned lessons from the previous recession.

"During the financial crisis, we invested significantly in stronger credit management capability and processes, given our exposure to the retail sector and our reliance on markets that can be more impacted by a crisis.

"We also de-risked the chance that stock that might not be sold or would have to be sold at heavily discounted prices. In hindsight, this was arguably a risk-averse approach, but, given our exposure and the uncertainty in the retail sector, the best option to prevent liquidity issues was to generate more certainty in our business at that time, even if it came at an opportunity loss."

Stress-testing

Being well prepared and avoiding the need to act out of survival is the most important role a finance leader can play, Shah said. This means stress-testing business and financial plans against recession scenarios and making sure that clear contingency plans are built and committed to by the leadership team.

Probably the next most important role is to focus on strengthening and improving the quality of the balance sheet, he said. In many cases, this requires tough decisions to, for example, release capital through portfolio disposals; and cleaning up balance sheets by managing bad quality assets and liabilities. Getting into this position creates greater financial flexibility.

Another recession-proofing measure is to make sure cash flow management and planning processes are "extremely transparent, simple, and managed superbly", Shah said. While this does not guarantee liquidity or solvency issues — that is ultimately driven by customers — it will provide more comfort to those parties, particularly lenders, who may be required to help in a recession.

Communication and trust

Finally, a critical role of a finance leader is to bring transparency and visibility to the performance of the business, Shah said.

"Talking openly about where the business is and its direction can only build respect and trust with employees — especially when a recession may be around the corner, with all the uncertainties that may bring for them," he said.

"One way to recession-proof an organisation is to have the confidence to retain key people and the goodwill of employees during the tough times to come — as opposed to employees deserting what they think may be a sinking ship."

Shah concluded by saying that modern business and supply chains have become so global that it is impossible to control all factors and guarantee that your business is recession-proof. But there is much that finance leaders can do to prepare.

https://www.fm-magazine.com/news/2019/sep/financial-crisis-lessons-uncertain-economy-201922121.html

— Tim Cooper is a freelance writer based in the UK.

To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.

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