Q&A with 3 CFOs: How to Guide Your Business Forward During Uncertainty
Wondering how CFOs think and act in uncertain times? I recently sat down with three of the best in the industry to learn just this. Below you will find the questions asked of Jeff Epstein (Former CFO of Oracle), Ron Gill (Former CFO of NetSuite), and Hope Cochran (Former CFO of King—Candy Crush) during our webinar’s robust Q&A.
What makes this crisis particularly more difficult than others in the past?
Ron: It’s important to look at the details of the 2007-2008 recession. This recession lasted six quarters, it was the worst downturn since the 1930s. 8-9 million jobs were lost, and the unemployment rate went to 10%.
The good news now is we’re going in at an unemployment rate of 3.5%, rather than the 4.5% we went in with then. We are therefore better off at the start. Now with this crisis, we’re looking at roughly 20% of the workforce (retail, restaurants, hotels, and airlines) losing jobs or having their jobs put on hold. It wouldn’t be a surprise if we lost 8-9 million jobs in the next few weeks (rather than the two years it took to lose that same amount before). This crisis will be demand-driven. It will be dramatic, sharp, and shocking.
How can the CFO and finance team act as a keel to steady the ship through these times?
Jeff: Some executives are shock-absorbers and some are shock-transmitters. Employees look to leaders and how they are reacting. It’s important to look at people’s health & safety first, and then to be realistic, straight forward, and don’t make promises you can’t keep. Daily communication is key.
Hope: Keep calm and carry-on. It is a time of action, keep a sense of control, keep the team focused with quick & clear communication of how you are getting things done.
Ron: Have a plan, do scenario planning at multiple levels, tier up decisions, and understand impacts.
What is the most relevant KPI to track your own performance at these times of crisis?
Hope: If cash lasts.
Ron: You only know it if you end looking back.
What’s too much data to share? How much data should be shared so people feel confident? How frequently do you communicate internally?
Ron: Communicate openly and calmly, keep the agonizing discussions that must be had to the executives.
Hope: Have a level of transparency and communication that creates action—what am I communicating to them that will give them things to do? Give a plan with tasks. In a time like now, communicating internally every day is prudent (and will normalize over time).
Jeff: Different companies are in different categories: (1) those that are profitable with capital, and this is not life-threatening. (2) Those that are losing money but have some cash, and will make it through and operate effectively. (3) Those that have a good product, would do well otherwise, but haven't raised money well in the last 6-12 months (they have a liquidity problem). (4) Those related to restaurants, ticketing for live events, and everything else obviously affected by this - the most serious. Let employees know what category you are in, and if you only have 6 months of cash left, share that. Treat your employees how you would want to be treated.
If you are projecting to be cash positive would you still drawdown on lines of credit?
Jeff: If you are certain you have enough cash for 24 months, then no. Look at worst-case scenario possibilities for your business, monitor daily, and don’t assume it will be available later.
If you are cash flow negative, you must ask, how long do you want to make sure you’re in business? If you have less than 24 months of cash available and a full line of credit, drawdown the full line immediately. The reason for this is because all of these lines of credit typically have a material adverse change clause in them.
In terms of modeling out worst-case scenarios, what are people doing? 50% reduction in sales?
Ron: It’s important to note, none of these scenarios will be the scenario. Every business will be different. Think about your own business, what if you don’t book anything in the next 3 months. Model a range, do so for retention and bookings.
Hope: All we know is that we’re wrong. Make quick and conservative estimates. Many companies are projecting for a return to normalcy, don’t plan that we will return to normalcy. Start thinking if we should be putting in marketing programs to get as close to ‘normalcy’ as we can.
If we’re looking at pre-crisis revenue trajectory, how many months of opex is dangerously low, and what is ideal or reasonable. 4-6 months? Or much more?
Ron: It’s not that simple. Cash in and out matter equally. It’s important to have levers on both.
What are you following to make a decision on which scenario to enact?
Ron: Follow the leading indicators of churn you already have been, but more frequently. DPO, or DSO for a SaaS company, is a very important one. Look at indicators of actual cash movement.
Hope: On the revenue side - what are the indications that there are troubles in your customer base? Churn, use of product, or product activity. From a sales perspective - pipeline, how long are things taking, and are things slowing down? Look at sales KPIs and my current customer activity/health KPIs. Tesorio is a great predictor of cash.
There are opportunities here. What opportunities have you seen that are surprising? That people can look out for?
Hope: It’s a moment to make a change. A time to focus, and quickly adjust and spend properly. This is a great time to build products. Out of recessions and creative difficulties come great products.
Ron: Reputations are built in hard times, everybody is struggling, so look for opportunities to be compassionate. If your balance sheet can take it, look at proactively extending billing terms to customers (build a loyalty relationship).
Jeff: Leveling exercise - how many levels are there from the CEO to the most junior person? In many cases, there are too many that make communication difficult. Also, mapping out the entire org structure often shows there are too many middle managers. It might even be a time to get people you wanted to hire that are now available.
What’s a good cash management/forecast tool that you recommend?
Hope: The best cash management tool that most of us can admit is excel...which is frustrating. It’s very easy to make a huge business error from a small typo within excel. We learn this from our burns. With a cash management tool, make sure it’s accurate in what’s constantly occurring. Tesorio does this very well.
For public companies, anything to re-evaluate guidance with your analyst?
Ron: At the end of Q1, everyone pulls their guidance and says ‘we don’t know.’
Jeff: If companies can’t make reasonable forecasts, they should pull their guidance. Software companies whose products are mission-critical may have confidence. People are worried about their jobs, not stock prices.
Hope: Maintaining integrity with analysts, and letting them know we don’t know. What we have with our analysts is our reputation. Preserve reputation and integrity. Stock price isn’t an indication of what is actually happening.
Would you recommend for companies to make technology or infrastructure investments at this point? If so, what investments would you recommend?
Hope: Every company will be different as far as their immediate needs around technology and infrastructure, it also depends where you are on cash while making these decisions. Firstly, look at what’s breaking. If anything is, replace it. If there is anywhere you need to save time, automate it. If you’re forecasting cash on a complicated spreadsheet right now, that’s where you want to automate and optimize.
Jeff: A great question to ask here is, how long does it take to benefit from the investment? Is it an immediate benefit or will it take 5 years or longer to see a return?
Ron: Whether it be technology or a new hire, if you can replace something and spend less, absolutely. If you can get something that specifically helps you manage and project cash like Tesorio, wonderful. Hiring will slow no matter what. It is important to keep commitments that have already been made.
Alternatively, how do you approach fundraising at this time?
Jeff: The way to look at this is once again to look at your 24-month position. If you’re not there and you can go to current investors to get you there, do it. As CFO it’s your job to make sure the company stays in business. You must raise capital as inexpensively as you can, but however you can in these times.
Do you recommend a short term salary reduction to managers and above to preserve cash?
Jeff: In any plan made around having more cash on hand, you must ask yourself, what expense structure do you need over the next 24 months to survive? Looking at software companies, the majority of their costs are people costs. That gives two options: cut people or cut salaries. Your employees will most likely prefer a salary cut to a layoff. For the more senior people that it’s clear they have savings and more benefits, give them higher salary cuts. Offer equity for the salary that employees are forgoing for that time period.
Lastly, ending on a potentially positive note, is it possible to promote career growth during this climate?
Ron: There will inevitably be career growth on the finance team due to there being more focus on this area than ever. When you level your business and eliminate or reduce any unnecessary headcount, there will be people left responsible for more than they were before.
For more insight on how to approach periods of unprecedented uncertainty, listen to our on-demand webinar.