In an economic downturn, it does not take rocket science to realize that a chief financial officer”™s first priority is to reprioritize projects to balance long-term goals with the realities of today”™s cash flow.
In the current environment, however, CFOs are scratching their heads simply trying to get a handle on forecasting sales in such an uncertain environment.
Business owners and financial executives today face nothing less than a “paradigm shift” in budgeting for the future, according to Charles Alsdorf, director of the financial advisory services division of Deloitte Inc., which is one of Fairfield County”™s larger employers with some 700 local workers. In a research note he co-authored with Ajit Kambil, who is director of Deloitte”™s CFO program, Alsdorf noted that the budget decisions companies make today could have a profound impact on their future results ”“ but that the current economic crisis trumps all.
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“The current climate calls for ”¦ juxtaposing the demands of both short-term cash needs and long-term capital planning,” Alsdorf said. “If we cut capital here, what does it do to cash, operating costs, long-term structure, and the ability to rebound when the economy recovers?”
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In the normal budgeting process, both front-line sales managers and senior executives attempt to forecast growth, reaching a consensus that will help drive decisions on spending, according to Bill Dillabough, a partner with KPMG, which also has a large Fairfield County practice. But the ongoing volatility in many markets has made that process more difficult than ever, particularly with regard to the availability and cost of credit both for normal business expenses and special projects.
And in a new wrinkle, CFOs must question the very capacity of their lenders and creditors to continue offering terms that they have enjoyed in the past, with obvious implications for cash on hand.
If that is not enough, businesses face continued uncertainty in the cost of fuel, with the price of oil fluctuating between $30 and nearly $150 a barrel during the past 14 months. Add to that the need to assess the risks faced by customers and suppliers and CFOs face headaches as they careen toward their upcoming fiscal year.
That has them questioning the underlying assumptions behind sales forecasts, Dillabough said, and whether their businesses are able to turn on a dime in case those assumptions do not hold water.
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In larger corporations during a recession, it is not uncommon for executives to issue blanket edicts to front-line managers to cut costs by a set percentage, a decentralized approach that empowers managers who best know their top performers, money pits and the status of the sales pipeline, but who lack peepholes into links between departments that can be exploited. The alternative is often to cut large capital projects.
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“Clean sheet” budgeting is a priority in a recession, according to Alsdorf ”“ performing triage on longer-term projects under way. Any new dollar spent needs to be assessed against its future return, and if the returns are not evident, that dollar should be put to another use ”“ a clean sheet.
Managers who might have previously gold-plated their project requests are better served by submitting stripped-down proposals at, say, 70 percent of the normal cost of a project when sales are healthy.
CFOs should also consider projects that not only represent the best return, but also those that perform in the quickest time period, and should be mindful of the perils of delaying some projects, particularly those that influence a company”™s standing with regulators or other outsiders with the ability to impose their will on a company”™s business.
