How Strategic CFOs Navigate Turbulent Markets

Hint: It’s the same way they navigate stable markets.
Tom BoganAugust 15, 2016
How Strategic CFOs Navigate Turbulent Markets

In the business world, nothing is as certain as uncertainty. Markets spike and dip, venture capital flows and slows, and sales can fluctuate. Peaks and valleys are simply part of the game.

Tom Bogan

Tom Bogan, CEO, Adaptive Insights Data integration

For all CFOs, planning for these conditions is a critical part of the job. However, all too often multiple scenario planning is primarily done as a reaction to a bad quarter or down projections.

That approach must change. With an uncertain domestic and global outlook, a company’s ability to accurately model and adapt to market turbulence could mean the difference between growth and stagnation.

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As a CFO, your No. 1 priority is to guide the financial stability of your company — under any market conditions. That means understanding your company’s outlook in good and bad times. CFOs at both private and public companies feel that crunch, with internal and external stakeholders expecting to see accurate projections that consider factors well outside the influence of the C-suite.

For public companies, however, the markets’ quarterly reporting schedule has conditioned them to anticipate, plan, and adjust scenarios at least every 90 days.

On the other hand, because private companies are not always required to subscribe to that level of financial discipline, scenario planning often falls by the wayside, which can have serious side effects. Because of their small size, cash position, or sales pipeline, private companies are often more vulnerable to even small business changes. Scenario planning is therefore just as critical for private companies as it is for their larger, public counterparts.

Even in a stable economy, scenario planning can pose a challenge. But in an environment like today’s, where new challenges like election outcomes, international tensions, and drastic currency fluctuations are being added to the mix on a daily basis, how do strategic CFOs develop business projections that accurately capture every element? By relying on a combination of scenario planning, insights from big data, and analytics to explore their options, visualize the impact of their decisions, and optimize their performance, regardless of what the future may hold.

A recent global survey of more than 375 CFOs by Adaptive Insights, the CFO Indicator Q1 2016, found that although CFOs are worried about market volatility, they are confident about their forecasting capabilities and see scenario planning as critical to navigating turbulent and uncertain economic waters.

Nearly half of the CFOs surveyed said planning for multiple scenarios is the smartest way to deal with uncertainty. More than two-thirds of respondents cited economic instability as the greatest financial risk for their organization.

This uncertainty plays out when it comes to predicting likely market trends in 2016. For example, 30% expected sales to decrease, while 49% thought sales revenue would increase; only 25% saw valuations of private companies decreasing, but 45% predicted M&A activity would increase.

Best Practices for Scenario Planning

Be proactive and realistic. Every business faces rough patches, but it’s how you deal with them that defines your company. It’s important not to overreact. Consider the drivers — are they internal inefficiencies that can be addressed, or external factors beyond your control?

Scenario planning isn’t something that should be done on an ad-hoc basis, when you’re feeling anxious about the stock market, terrorism, or Brexit. Instead, every business should have flexible models that enable it to constantly engage in scenario analysis. That way, if your organization encounters unexpected performance results, it will be able to quickly respond and adjust.

Understand that not every trend will impact your company. A common mistake that companies make in scenario planning is assuming that every trend impacting the broader industry or marketplace also influences them. But not every macro-trend will affect a quarter.

While private companies are not immune to stock market ups and downs, they are less likely to be involved in international markets. That limits the potential bottom-line impacts of foreign elections, changes in currency values, or trade.

A publicly traded multinational company, on the other hand, may need to react to a litany of events across the globe, and will be susceptible to the broader stock market when it comes to creating value for shareholders. That’s a significant difference between the two when it comes to modeling the year ahead. When projecting out, CFOs must be sure to keep their specific market exposure in perspective.

Pair hard data with soft skills. For CFOs navigating these uncertain times, adopting agile planning processes and new data technologies will be essential not only to your success, but to the future success of the company.

When asked what business attributes were most beneficial to the performance of modern CFOs, 65% of survey respondents said technical and analytic skills were the most important. Additionally, 78% cited the ability to apply financial data analysis as providing the most strategic value to their organization.

Final Thoughts

It’s not enough to have the data in the dashboard to back up your scenario plan. To successfully survive and even thrive in this market, you — and your teams — must be able to effectively partner and collaborate across your organization. Strategic CFOs will be those that build cross-organizational alliances and up-level the finance organization’s image.

In fact, while 76% of surveyed finance chiefs said they look for team members proficient in Microsoft Excel, 75% cited interpersonal skills as being a critical attribute that they look for in new hires.

Ultimately, strategic CFOs are able to deploy technologies and strategies that enable multiple scenario planning. In doing so, you and your company will be empowered to make instantaneous, informed decisions regardless of the direction the markets take, introducing some certainty into a very uncertain world.

Tom Bogan is the CEO of Adaptive Insights. He has held executive-level positions in both private and publicly traded companies for over three decades, including having served as chairman at Citrix Systems. He began his career in finance and is also a former CFO.

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