“I’ve never lived through 8-12 quarters of recession,” explains Bob Ellis, a PepTalks’ Honorary Member. “It is worrying, and it will affect all sectors. It’s a huge amount of time for there to be no growth overall in the economy. But there are steps we can and must take. And a CFOs role is more important than ever.”
We are experiencing an unusual confluence of events, or as the IMF puts it: “A confluence of lasting structural insecurities—geopolitical, economic, and existential—each reinforcing the other. We have entered a perfect long storm.” Covid-19, supply chain dislocation, the conflict in Ukraine, ensuing energy crisis, the cost-of-living crisis. Not to mention climate change. We don’t need to remind you of the gloom. And Bob Ellis, Chair of Stelrad Radiator Group, Whittan Group, Reconomy Group and Caylx, believes no sector is immune.
Read on to discover why a CFO will become a strategic linchpin of PE-backed CEOs – plus, five life rafts that’ll help keep you afloat in these choppy times.
1. Forecasting & knee-jerk pay increases
Future gazing about how long inflation in the UK will last is rife right now. Bob Ellis thinks it’s likely to run at or around 10% for a fair whack of time. Although the Bank of England is more optimistic: “We expect inflation in the UK to fall sharply from the middle of next year”. Either way, now is the time to be savvy when it comes to improving pay due to inflation.
“One of the questions you need to think about this year is: if you’re rewarding people and improving pay for inflation, are you going to have to do it again next year?” warns Bob Ellis. “If you pay 10% this year, are you going to have the same pressure next year to pay the same again? Are you rewarding people or incentivising people for past inflation or future inflation?”
“If you’re rewarding people and improving pay for inflation, are you going to have to do it again next year?”
Bob Ellis
In other words, if you’re improving pay this year as an expected, knee-jerk reaction to inflation, there may be expectations that you’ll to have to hike again next year. Can the business afford to do so when margins are more squeezed than ever? Rewards and incentives may be a better, more sustainable route to go down.
2. The devil is in the (cost) detail
As a PE-backed CEO, now is the time to be curious and lean on your CFO to understand the minutiae of detail in the costs. In the weeds, driving from above. From spending to rising costs and pricing, those with granular, microscopic focus may be more fortunate. Bob Ellis illustrates what this level of detail can look like:
“Can you explain your bill of materials in five minutes? You’ve got to get to that level of detail on your cost, on your bill of materials. And that’s not just manufacturing. All the way through from everything you do that goes into a product that you sell, the value. And if you don’t understand it, and if you don’t look at it on a regular basis and understand what drives it, then you won’t successfully survive a long recession, because you’re going to have to make hundreds of cuts.”
“Everything you do that goes into a product that you sell, the value…if you don’t look at it on a regular basis and understand what drives it, then you won’t successfully survive a long recession.”
Bob Ellis
This means looking strategically at your vertical value chains and thinking about products (costs) you can pasture. In other words, PE-backed CEOs, bolstered by their CFOs, need to be prepared to revaluate their economic models.
3. Cash is more important
Costs are going up, while your sales may be simultaneously going down. With these drains on cash, liquidity is more important than ever. While supply chain disruptions have had an impact on working capital; capEX costs are higher. Chris Schulze-Melander, CEO of WARP Snacks explains why, against this backdrop, cash is king:
“Cash is always really important, but even more so now – that cash visibility, and particularly the competing forces that we’re seeing for cash. There are liquidity challenges with supply chain disruption. We really can’t rely on a sort of just in time supply chain. So, we need to hold more raw materials and finished goods, as well. And obviously that has an impact on working capital. And then it’s more important than ever that we look at capEX that can reduce cost and drive competitiveness – because the cost of that capEX with inflation is also higher.”
“It’s more important than ever that we look at capEX that can reduce cost and drive competitiveness.”
Chris Schulze-Melander
It’s a pivotal moment to improve working capital – collecting debts quicker, selling assets that aren’t core – as a way of keeping your business buoyant.
4. Break glass actions vs no regret
In the Private Equity world, scenario planning is much talked about – and some argue, much needed in anticipation of and during crises. Yet when the crisis happens, there’s a lot of hard graft needed in response to the emergency. Is now the time to spend time planning, or should you just get on with it?
“What are the unknowns?” dissects Chris Schulze-Melander. “What is the impact and then what are the actions that we would take? Which would be the no regret scenarios, or the no regret moves – things you should just do whatever scenario comes out? And then, the break glass actions – looking at some early warning signs that would tell you what sort of scenario you’re heading into.”
While for Bob Ellis, reducing your cost base should also take centre stage: “I think for most businesses, if you look at the next year, you just need a plan, right? And then you need to be delivering that plan. And once you’re doing that, then you can think about, well, what happens if the plan doesn’t work? I would not spend the next three months scenario planning. I’d spend the next three months doing something to reduce your cost base, improve your stickability with customers, try and find new niches you can grow the business into, rather than thinking about what happens if the economy is in recession for another two quarters.”
“I’d spend the next three months doing something to reduce your cost base, rather than thinking about what happens if the economy is in recession for another two quarters.”
Bob Ellis
5. Over-communicate with shareholders
As with cash and liquidity, communication with your shareholders is always important. But now and for the foreseeable future, more so. Experts advise that when things are rocky, over-communication is key. You may need their support, and you will need them to act quickly – perhaps it’s a cash injection, value to add or the advice they can bring to the table, on top of the legal responsibility you have to do so.
Chris Schulze-Melander explains: “Constant communication with the shareholder is even more important. It’s really that right hand – commercially, operationally, and financially.”
“Constant communication with the shareholder is even more important.”
Chris Schulze-Melander
Managing the uncertainties of inflation is clearly no mean feat for PE-backed CEOs. But amid the doom and gloom, CFOs will provide the strategic backbone needed to stop the business from buckling during a recession.