The CFO Leading in Times of Economic Turmoil

I had the opportunity to learn from the ‘Oracle’ economist  and regional legend John Mitchell earlier this week.  John spoke at  The Leadership and Economic Summit in Portland, Oregon.   John’s work focuses primarily on data from the United States, but I believe many of his statistics highlight global economic trends. 

This edition of the Future of Finance Leadership highlights key economic Statistics/Points John shared at the Summit, followed by brief Commentary and then a CFO Action Plan to help you navigate any rough waters you may be encountering on that topic

The goal of this edition is to help business managers, and especially finance leaders, to  improve our decision making and adjust our plans as these economic trends impact our businesses. 

Let’s get to it!

TALENT:   

Statistics/Points

• Every state in the United States has had growing employment in 2022 and the October 2022 unemployment rate remains historically low at 3.7%

• The Labor Participation Rate*  fell to 62.3% in October 2022 from 63.4% in Dec 2021
• Employed + vacancies greater than the total labor force… by nearly 4.5 million
• How many Tom Brady’s are out there (retired but willing to go back into the workforce)?

Commentary

The competition for talent is keen and we are feeling the impact in a number of ways.  First, finding talent takes longer, there are less candidates applying for jobs making the search process more expensive.  To rub salt in the wound, when we find the right fit, they often arrive with sticker shock, at a price we wouldn’t have considered even 12 months ago. Finally, salary inflation must be managed on a corporate not simply a new hire basis, or we risk creating a turnover cyclone that rips out the heart of our talent. 

If you aren’t having trouble retaining and attracting talent, count your blessings. If you are here are some resources to help you get ahead of the curve.

CFO Action Plan

Make your human resource function more effective by adopting pages out of the supply chain playbook.   Start with Dr. Solange Charas’ 2 part series, CFOs, Apply Supply Chain Logic To Human Capital Management

Kevyn Rustici connects the dots between the Human Resource Department and Finance in his  CFO Talk: People Focused Finance  . He talks in terms of ROI on retention and related investments like training and development.  One of the best ways to minimize our recruiting costs is to develop and retain our current team.  (tip, save 7 minutes by running the video at 1.5X normal speed)  

INFLATION:

Statistics/Points

• Prices – the way we create choices on what resources to consume
• The Consumer Price Index in September 8.2%  up from 4.7% in 2021 and 1.2% in 2020

• Unemployment at 3.5% impacts relatively few people but inflation is bad for everyone (Key reason the Fed is targeting high inflation at the expense of employment)

Commentary

Inventory Mindset …. From pre pandemic Just In Time/Lean management to today’s order more than we expect because of the unreliable supply chain.  

The US Federal Reserve is committed to returning inflation to 2% (John highly recommended reading the one page Federal Reserve issues FOMC statement issued after this week’s meeting)

Inflation like we haven’t experienced  in over 40 years is putting most business leaders in a position they have never experienced.   Outside of the highly volatile commodity markets, we’ve gone through a long period of price increases being the result of enhanced product utility.  Buyers in large retail organizations demand for year over year price declines from their vendors kept a cap on consumer prices and gave us a false sense of security that innovation and efficiencies would keep goods and services at stable prices.  

Whatever theories end up explaining the economy since March of 2020, business leaders will be guiding their organization through unfamiliar territory. The US Federal Reserve has targeted inflation as the number one threat to our economy, which means business leaders should be putting inflation high on their priority list.  Minimally, we recommend having a contingency plan for a prolonged period of high relative inflation. Maybe a soft landing is on the horizon but none of us should count on that. If the Fed’s moves are an overreaction and the economy hits a tailspin that could take care of our inflation and scarce talent issues while creating a revenue problem. 

CFO Action Plan

In the past inflation worries sent shivers up the spines of CFOs.  That makes sense, because in the past CFOs were primarily responsible for cost control and inflation takes the control out of costs. Today, with CFOs and their teams more integrated in above the margin activities like price setting, procurement, and supply chain management CFOs are recognizing inflation can also be an opportunity.  Learn how you can approach the inflation quandary here,   The CFO’s Fight For and Against Inflation

Rapidly rising input prices and salary costs are not only challenging the income statement, they are stressing out the balance sheet. The same unit volume of sales and inventory are taking up a larger portion of the balance sheet from larger receivable and inventory balances.  To make matters worse, these inflated numbers  are also gobbling up debt capacity on credit lines.   To learn how finance leaders are managing their balance sheets in today’s environment look here, With a Faltering Economy, What Area of The Balance Sheet Is Top of Mind For You?

INTEREST RATES:

Statistics/Points

• The US  Federal Reserve has hiked the Fed Funds rate  6 times in 2022, totaling 3.75%. The Fed Funds target rate started the year between 0 -.25%. (the graph below doesn't capture the most recent 75 bps hike on November 2.)

• Mortgage rates have more than doubled in 2022, 30 years mortgages at the beginning of the year were 3.1% and currently trade at 7.0%

Commentary

The implications for businesses and CFOs are significant 

First,  the cost of capital is going up.   This includes working capital funded by revolvers or other debt.   Immediate attention to your cash conversion cycle is warranted.   

Second, as rates go up, it’s likely your debt capacity will shrink.  Covenants like the Fixed-Charge Coverage Ratio make debt capacity a formula linked to interest payments.  As rates go up your capacity for debt declines.   If you don’t have a good idea of your debt capacity today, now is good time to find out.

Finally, as mortgage rates rise and housing prices retreat from their double digit appreciation rate during the past several years,  B2C companies will find many of their customers more frugal.   What this means for sales volume and product pricing may be the difference in success and failure for some companies and their leaders

CFO Action Plan

Use the Cash Velocity Calculator to analyze and improve your cash conversion cycle. It's also an excellent tool to use with your executive colleagues and Board to help them get their arms around working capital management.

  These two articles can help guide you in your funding efforts and and related capital investment analysis,   CFO Success Series: Treasury Part 2 - Debt Financing and How to Ration Capital in an Idea Rich Environment. 

See the next section for how to address a general reduction in household wealth.

GDP and HOUSEHOLD WEALTH:

Statistics/Points

• Real Gross Domestic Product grew 2.6% in Q3 after 2 Quarters of negative growth 

• Is the Q3 result a ‘dead cat bounce’ or the beginning of a turnaround?
• Household Net Worth down $6.1 Trillion in Q2 (4.1%) tumbling from housing and financial asset price declines
• Housing boom over with home prices falling 2.6% nationally over the summer and inventory growing
• S&P 500 down 21% YTD
• Can strong consumer spending continue in the face of declining savings rates

Commentary

This section focuses the willingness and ability for consumers to continue spending and driving demand in the economy.   Is your product a staple or a luxury? Is its demand elastic or inelastic.  Other key questions that should be answered to address consumers concerns about wealth declines include:

How will a slowdown impact our customer base? 

How do our products or services create value for our customers? 

The first question will help you forecast the demand decline (or possibly increase) from a troubled general economy. The second gets to the pricing equation and how much leverage you have in changing sale prices. 

CFO Action Plan

Use the steps listed in Preparing for a Downturn in the Economy and the video exercise included in the article to identify the leading indicators for a downturn in your customers business and begin crafting an profit improving response.

If your pricing model is a cost plus formula to set prices, we strongly urge you to read Mark Stiving,'s articles and watch the video in Mark Stiving’s library.  Mark is a global leader in the value pricing arena. We understand value pricing is a difficult journey whose destination is very allusive.  But we believe the goal, to fully understand the value our products deliver to our customers, will make businesses better, even if you can only make incremental advances toward the final objective.  

Paul Barnhurst’s piece, The Role of Finance in Pricing is also an excellent piece to help finance leaders get more actively involved in pricing analysis and leadership.

DOLLAR STRENGTHENING:

Statistics/Points

• Dollar strengthening – up 14% since the summer of 2021

Commentary

For US companies importing raw materials it will help keep costs down, while the products sold by US exporters will become less price competitive in the international markets.  This trend has the opposite impact for US dollar business vs non US dollar businesses.

CFO Action Plan

The following suggestion might be a challenge for you (at least it was for me, initially). Consider foreign currency as another product input in your supply chain – both your procure to pay and order to cash.  Once you have this mindset, foreign currency simply becomes another input to manage. And we have some ideas on how to manage inputs,    In a Volatile Economy, Purchasing Practices Need to Change  and create a better margin management system, Why Your Procurement Staff and Sales Department Must Work Together

Covid’s Long Shadow

This is a list of items John shared whose impact may not be known for years but certainly are worth keeping an eye on. All will have a significant impact on our economies in the future.

• Is the labor force participation rate decline permanent?
• Are supply issues and world discourse replacing the ‘global’ trade trend of the past 40 years with ‘allied’  trade?
• Is a more transient, selective workforce permanent?
• Has government relief in terms of forbearance, deferrals, rent holidays and payment suspensions   reduced the effectiveness and enforcement of ‘legal’ agreements?  
• How will the income without work, unemployment compensation greater than earnings, reduced work, PPP programs, etc  impact the mindset of workers and employers in the future?
• How will these factors and programs impact the public policy response to  the next economic shock?
• What is the long term educational impact to learn from home experiment to our economy and the lifetime earnings potential of impacted students?  

It sure nice to have resource like John Mitchell to help us make sense of what is happening in the economy. 🙏🏼🙏🏼 

For a  list of resources to help you confidently navigate your business through an economic or other business crisis visit CFO.University’s Crisis Resource Center for CFOs

Thank you to Columbia Bank, Xenium HR, Perkins & Co and Brown & Brown Insurance for putting on what has turned in to a "Don't Miss!" event in the Portland/Southwest Washington area. Also, deep appreciation to business leaders and friends, Joe Connors, Brandon Laws and Dave Sullivan for being such great hosts and collaborative partners.  

* The percentage of the population that is either working or actively looking for work.

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