The CFO value in times of recession

The year of 2022 is called “The year the party ended”.  In the third quarter of 2022, VC funding totalled just $81 billion, according to Crunchbase. That’s 33 percent ($40 billion) less than the previous quarter, and 53 percent ($90 billion) less than in 2021.

Many startups experienced difficulties in raising follow-on investments. In addition, the economic downturn resulted in slower sales cycles and difficulties to accomplish sales and profitability targets. In such an environment, even the best performers should focus on their financials to ensure they have a clear strategy towards improved cash management, higher efficiency and sustainability.

Values of a CFO in Times of Recession

During a recession, businesses must make tough decisions to ensure their survival. The CFO's primary role is to ensure that the company's financial health remains stable and that it can weather the economic storm. To do this, a CFO must have several key values, including:

• Financial Expertise: A CFO must have a deep understanding of finance and accounting principles, which are essential to managing a company's finances. By ensuring your reporting is done right, you have higher value towards any third party, including investors.
• Strategic Thinking: A CFO must be able to think strategically about the business and its finances. They must be able to analyze financial data and use it to inform decisions about the company's direction, investments, and cost-optimization measures.
• Risk Management: A CFO must be able to identify and manage financial and operational risks, such as changes in interest rates, currency fluctuations, or slowdowns of sales cycles. They must also be able to develop contingency plans to mitigate these risks.
• Communication: A CFO must be able to communicate effectively with stakeholders, including investors, board members, and management. They must be able to present financial data in a clear and understandable manner and explain how financial decisions will impact the company's future.

Main Focuses of a startup CFO in Times of Recession

The primary focus of a CFO during a recession is to preserve the company's financial health. To achieve this, they must focus on several key areas, including:

• Cash Flow Management: A CFO must manage the company's cash flow carefully to ensure that it has enough cash on hand to cover expenses and investments, as well as to extend the runway until milestones are completed to raise a next round. They must also be able to suggest prioritizing of spending and cutting costs when necessary.
• Financial Planning: A CFO must develop and implement a financial plan that is aligned with the company's strategic goals. This plan should include forecasts and projections for revenue, expenses, and profitability and present several alternative scenarios.
• Cost Reduction: A CFO must identify areas where the company can reduce costs without sacrificing quality or productivity. This could include reducing staff, renegotiating contracts, or outsourcing certain functions.
• Investment Decisions: A CFO must provide basis for informed decisions about where to invest the company's financial resources. This could include investing in new products or services, expanding into new markets, or acquiring other companies. Focusing on the highest return on investment, leads the management to exploit opportunities that drive maximum value.

There are three key areas that should be owned by startup CFOs over the next 12 months.

Forecast for the uncertainty

Despite the clear evidence of slowing economic activity, increasing macro headwinds and expectations of an economic recession, a significant proportion of companies are still implicitly building their forecasts on the assumptions that the world would go back to Zero interest-rate policy (ZIRP) and that they would go back to top-of-the-cycle performance.

Following a decade of hypergrowth, many startups are now facing a recession for the first time. New CEOs have only operated in a growth at all cost environment and are now facing the harsh reality of modified expectations from investors and the market – the move towards a more efficient and sustainable growth. Founders should recognise this shift and CFOs must help in this transition by making sure that the business is more cost-effective and improved efficiency is seen across the whole organization.

 The companies should adopt a scenario approach more common in longer-term strategic planning and prepare two or three 12-month budget scenarios based on different macro environments, but also based on different company-specific factors. Having a contingency plan is very important, so that a company is flexible and nimble, and knows how to respond to different economic scenarios.

⇒ Evaluate the key revenue and cost factors, posing uncertainty and build alternative budget scenarios, allowing you to see the performance, runway and burn rate of the company. This would empower you to prepare with specific measures, triggered by events and establish a set of goals for your teams depending on what the future unfolds.

Monitor the uncertainty

Without clear targets and plan, any movement looks like progress. Founders and CFOs should make sure, the budget is adopted on a company level and set targets - both on a company level, as well as on individual level to monitor.

By having a reporting process in place, you will be able to take measures proactively by comparing your actual results to your plans, ensuring that you are following the direction for your business.

⇒ Establish a reporting process, based on reliable and regular data. Assign people with specific tasks and empower them to monitor and report back on any overperformance or underperformance in a timely manner. Evaluate the value of any cost incurred, either in terms of R&D development, sales generation, corporate support and make sure to reduce costs that are not bringing clear value to your company. Act on the information.

Aim for “default-live” definition of your business

Currently, investors are looking for “default-live” companies, i.e.

continuing cash burns without a path towards cash positive business operations acts as a barrier for next funding rounds. In essence, even if your startup is still pre-breakeven, now is the time to devise the clear strategy towards sustainability to be implemented over the next years.

⇒ Make sure that your pricing takes into account your actual direct costs, so that you are certain that any new sale generates profit on a gross level. With increase of the volume, positive gross margins lead to positive net margins and cash positive operations.

⇒ Focus on regular cash management and track your runway. Build detailed cash flow reports, allowing you to see the uses and sources of cash on a monthly basis. Slowdown in sales automatically reduces your runway and requires measures not patience.

Wrriten by Angel Atanasov

At CFO Insights, we have supported many companies to analyze their financial position and identify alternatives to achieve profitability. With the right combination of expertise, preparation, and actionable insights, managers can successfully direct their company through a crisis—and arise stronger. 

Contact us: office@insightscfo.com