In the best, most stable of times, the job of forecasting and responding to demand is difficult at best. These are not the most stable of times.
In a 30-year career, I’ve never seen a more uncertain, unstable economic situation than what we’re facing now, particularly for chief financial officers at private-equity-backed companies. The pandemic is lingering, inflation is rising, a recession is looming, the global supply chain is out of balance and worsening, labor shortages persist, and there’s a brutal war in Europe.
This instability all comes at a time when private-equity-backed companies’ valuations have soared. Last year, private-equity sector deal valuations reached nearly $1 trillion, more than doubling the 2020 mark of $474.5 billion, according to an analysis by White and Case. Compare that with $208 billion in 2019. The value of all M&A deals surpassed $2 trillion.
Those higher valuations put immense pressure on the CFO of any organization. How the CFO responds can mean the difference between a business thriving with its new capital infusion and growth targets, or falling behind — disappointing customers and investors. The top priorities for CFOs in this climate are adaptability, use of advanced analytics, collaboration, truth-seeking, and deliberate decision-making.
Demand forecasts that vary from actual results are a challenge for any company. That’s particularly true now as demand signals are constantly changing. CFOs need to continually revisit expected demand, sometimes by the day and week. I know it’s not easy. I have several clients that have struggled to complete their 2022 budgets, even though it is already April. CFOs are asking their crews to sail across the ocean without a map. Finance chiefs need to step up their focus on reliable demand forecasting.
Technology can be a major help. Has your company’s finance group started using digital tools such as predictive analytics and business visualization applications? These tools improve management’s understanding of business drivers and their impacts.
Finance teams should be working bidirectionally with the various functional areas of the company. In a manufacturing operation, for instance, the CFO should spend time on the factory floor with line workers and managers to understand their key issues and challenges. In this regard, the finance team can better understand and support each facet of the business. While that kind of alliance has been preached for years, we still see many finance executives who haven’t graduated from their historical roles as scorekeepers.
I have several clients that have struggled to complete their 2022 budgets, even though it is already April.
On the other end, CFOs need to be true partners to the CEO and the rest of the executive management team. Effective organizations foster a culture that encourages back-and-forth conversations among senior leaders. How are your meetings run? Does the management team have permission and guidance to respectfully challenge each other and the executive team?
Ultimately, CFOs need to recommend where to spend and, just as importantly, where to save. When they distill unfiltered feedback, gleaned from key leaders, they’re much more effective in moving the company toward its strategic vision. More importantly, their guidance becomes rooted in a complete understanding of changing market conditions.
The modern CFO should be grounded in all operational and performance elements of a company. With that underpinning, they are much better positioned to identify opportunities and shepherd value-creation plans.
CFOs can have more impact during this time, but it will require staying focused on some or all of the above priorities.