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How outsourced CFO services can help your business navigate a downturn

Posted by Shivali Anand

July 12, 2022    |     5-minute read (905 words)

In a June survey conducted by The Conference Board, 60% of CEOs said they expect the U.S. to hit a recession by 2023’s end and 55% expect inflation to persist into 2023, as reported in Fortune.

While that is not great news for any business, research has found that businesses that succeed through a recession and afterward are those prepared. For example, a Bain & Company analysis found that the top 10% of companies that flourished through the Great Recession had created solid contingency plans before the slowdown hit.

On the other hand, the worst-performing companies tended to be those that reacted to the downturn defensively, causing them to lose steam and struggle even once the recovery came.

Amid the current economic uncertainty, an outsourced CFO can play an important role in advising startups on decision-making and strategies. In recent years, the role of CFO has shifted far beyond that of creating financial reports and ensuring regulatory compliance.

A CFO’s acumen at assessing and integrating financial data plays an increasingly high-profile role at many modern companies. Fortunately, the availability of outsourced CFOs means these skills are now available to new businesses who might not otherwise be able to justify the salary of an in-house CFO.

The right outsourced CFO can quickly help you get on the right footing by analyzing your cash burn rate and runway for different scenarios. They can also assist your startup with updating your forecast and business plan on an ongoing basis.

Indicators of an economic downturn



Although it may seem like it’s all bad news, some economists maintain that a recession is not inevitable. The New York Times recently surveyed a group of economic experts on the chance of recession and their forecasts were far from unanimous. Meanwhile, venture capitalist Chris DeVore told GeekWire that while the days of “easy money” may be over, there is still a lot of VC money floating around, particularly in the smaller check category.

Despite this swirl of opinions, the shared reality of most of us today is that the economy is in a scary place. So, what can you do to proactively help your business? In addition to considering the services of an outsourced CFO, keep an eye on the indicators that forecasters are watching now:

• Consumer confidence.
• Retail sales.
• Startup investments.
• The housing market.
• The stock market.
• The bond market.
• Oil prices.

Six strategies to prepare your business for a downturn



1. Set aside money for emergencies.



Aim to have at least three to six months' worth of operational expenditures stashed in an emergency fund. This will give you a buffer if revenues take a hit. An outsourced CFO can also help you develop a plan so you don’t resort to making hasty decisions concerning business finances.

2. Play offense and diversify your lineup.



If your business has strong cash reserves, with the guidance of an outsourced CFO, you may be able to tap into areas you hadn’t considered, such as buying vulnerable firms. Also, consider that many businesses are still struggling with a lack of qualified employees. If you want your organization to be recession-proof, boost retention with measures such as professional development opportunities.

3. Assess spending.



An outsourced CFO can help create a budget that triggers expense modifications for different scenarios. For instance, you could set up a trigger that tells you how much you need to reduce payments if revenue falls by 10% to preserve your operating margins.

4. Be thoughtful in your spending cuts.



Outsource to a third-party CFO for professional insights on downturn-preparation measures such as switching from fixed to variable costs, automating repetitive processes to free up employees’ time for business development and analyzing the monthly cost of recurring charges.

5. Make inventory management more efficient.



There are times when it's necessary to acquire inventory to keep up with demand for the next month. Consider a scenario where you typically have $2 million in goods. In the event of an economic downturn, you've overspent and had $1 million in goods that you can't use. In a recession, cash is what you need, and an outsourced CFO can help ensure your business is positioned accordingly.

6. Check the interest rates that apply to your debts.



Stagflation is a term economists use to describe a situation where sales and demand decline as interest rates rise. Businesses with a tremendous amount of debt are the most prone to this situation. Varying interest rates on your loan can hit hard during a recession, especially if your sales are down. Set up your business for an economic downturn by preparing for this situation.

Set up an effective finance system



For most businesses, safeguarding cash flow and profit margin is the primary goal during a recession. When a significant shift in cash flow occurs, an outsourced CFO will work to ensure you stay on top of it. The CFO can run various scenarios and identify which should trigger your recession strategy to be implemented.

Conclusion 



Businesses need to get ready now if they want to withstand a recession and come out ahead of their competitors. Every business is different, so the holistic perspective of an outsourced CFO can be a decided advantage. Businesses that outsource CFO services gain access to a pool of financial experts with a range of experience and a commitment to staying up to date and following the best practices in multiple sectors.

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