While many financial leaders may not expect an actual recession, it is fair to say there is heightened uncertainty about the Australian economy going into 2020. This begs the question, what strategies can you enlist now to proactively protect your business?First, it’s critical that CFOs or the executive leadership monitor market trends closely. You should be aware of any key changes ahead of any general market news or reporting.

“It’s easy for a business to become inwardly focused during tough times, but it’s key to look outside – both globally and locally – in order to make sure you’re prepared for a downturn,” says Richard Moore CA, CFO at MYOB.

Managing cash flow, working capital and technology are fundamental responsibilities for a CFO in any phase of the economic cycle, but Moore says if you don’t start these activities until you see things slowing down, you’re already too late.

Harness a tech advantage

Picture: Richard Moore CA, CFO at MYOB.

“You must have reliable, timely data feeding into your business from multiple sources, and comparisons beyond your plan are key when it comes to analysing your revenue. It’s important to manage your business to a plan but, in a downturn, the plan may not be entirely relevant. Look at your year-on-year trends, as this helps reveal the true direction of the business.”

Staff turnover is another useful forward indicator as to how the broader economy is performing. “Remember to check in on your team to get a sense of how they feel about your business’s prospects and their personal prospects and appetite to knuckle down,” Moore advises.

A robust technology investment strategy is a competitive advantage in a climate of growth, but it can also assist you to navigate an economic contraction. However, during a downturn, any new investments in technology will need a strong return on investment behind them or they are likely to be delayed. This can put your business in a weaker long-term position.

MYOB’s latest research, the Enterprise Insights Report, shows that CFOs who have invested in technology are more positive about their business’s ability to navigate any potential downturn.

“A good CFO will proactively invest in technology when times are good. When performance is strong, consider the opportunities to invest pre-emptively,” says Moore. He believes CFOs should be one of the strongest advocates for technology investments.

“Tech provides the real-time data insights that allow businesses to stay ahead of market trends and early internal indicators. It also helps you to improve efficiencies and lower the cost base should the economy deteriorate, so you can run amore efficient, cash-lean business.”

CFOs, in particular, can leverage technology such as MYOB’s ERP software to run sophisticated financial scenarios.

“Robust data helps you run critical scenarios to test worst-case outcomes, allowing better visibility of early signs in the market and in your numbers.

“For example, what would happen if your materials become more expensive due to tariffs or a supplier goes out of business? If your revenue drops by 20%, how long do you have before you run out of cash?

“The more information at your disposal, the better informed and more accurate your decision-making,” Moore explains.

How can businesses survive a downturn?

Many businesses rely purely on historical reporting to inform their current state and their future. They are constantly looking in the rear-vision mirror at a view of their business that’s already happened.

In contrast, software that links each part of your operation back to the finance function can enable strong financial insights, not only for planning and forecasting but for real-time visibility into performance.

Moore says that with MYOB ERP software, “We run an annual planning process, then reforecast quarterly and also run scenario modelling on key variables. Planning shouldn’t be set and forget – it requires regular updates and scenario testing.”

If you have conducted extensive scenario planning and have action plans in place, you’re well on your way to navigating the onset of an economic downturn. But then what? How can you best weather the storm?

The CFO is a crucial leader in this scenario, driving decisions to reduce costs (for example, by reducing labour costs and renegotiating rates with suppliers or retailers) and to continue boosting sales and growth.

“The CFO has to support the CEO and leadership team in setting the longer term strategy, but they also need to roll up their sleeves to be across working capital and driving efficiencies in capital management. They must work with banks and financiers to negotiate and provide the capital necessary to drive the business’s growth,” says Moore.

“It’s very easy for a business to become inwardly focused during tough times, but it’s key to look outside – both globally and locally – in order to make sure you’re prepared for a downturn.”

Debt is not a four-letter word

In Australia at the moment, the availability of low-cost financing is at a level that we’ve rarely seen before.

“A CFO shouldn’t be afraid of borrowing to make sure the business has enough cash through the downturn. There is a stigma around debt, but it is a useful tool in the short term,” says Moore.

“A good CFO can bring cash into the business when times are tight to create a stronger cash position, knowing that when they come out of that economic cycle, they’ll be able to move into a lower debt position. Don’t be afraid of an appropriate amount of debt; it’s a great way to manage growth when times are tough.”

Good leadership is another essential during periods of uncertainty.

“It’s important to be confident and visible, but also authentic,” says Moore. “Don’t be confident for the sake of it or tell your team it’s good when it isn’t. Never portray a misplaced confidence, but if you’re scenario planning and preparing accordingly, you can definitely provide focus and clarity for your team.”

Managing through an economic downturn is seen as an acid test for leadership. Remaining in control and ensuring employees don’t experience low morale, high attrition or decreased productivity are all challenges to be met head on and with timely communication.

Experienced CFOs will exercise their financial acumen, use all the resources, numbers and trends available, then take decisive action. Don’t let fear or uncertainty prevent you from pursuing your goals.

“It all comes back to preparation,” Moore insists. “Do the groundwork before it happens. If you start this conversation in the middle of a downturn, it may already be too late.”

How to pre-empt a downturn

• Monitor trends closely – well in advance of general market news.
• Monitor internal early indicators such as cash flow, working capital and employee engagement and retention data.
• Invest in technology to improve efficiencies and lower the cost base.
• Diversify low-performing divisions, both to improve margins and to increase liquidity.
• Conduct scenario planning.

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