The CFO’s Response to Coronavirus Uncertainty

The coronavirus could ...

The coronavirus can …

The coronavirus may …

Could. Can. May.

Projections about the spread of the virus (now at the edge of pandemic proportions), about its long-term implications on the global economy and on U.S. markets, are, in a word, uncertain. And if there’s one thing the business world hates, it’s uncertainty. (Recent stock market declines are the most tangible example of this hard and fast rule.)

Private equity, in particular, has an acute allergy to uncertainty. Due diligence, detailed market projections, investment theses — they’re all designed to strip deals of uncertainty given the significant sums of money in play.

Now, all CFOs must prepare for the short-, medium- and long-term effects of the virus on their companies. Full stop. But, PE-backed CFOs, who live in an environment where cash and EBITDA are kings, shoulder an extra burden to do so, immediately and well. They must do so to understand and mitigate risks on their company’s fiscal outlook.

But, they must also do so because sponsors hate surprises. Effective and transparent communication with the PE team has always been a core competency of the most successful (and longest-tenured) portfolio company CFOs. Given the extraordinary uncertainly surrounding the coronavirus, it’s, perhaps, more critical now than ever.

Of course, to do the latter, CFOs must begin the former. But, how? What can PE-backed CFOs do now to insulate their companies from the financial risks of the virus? Or, if they can’t insulate from, how do they prepare and plan for them?  There are several to-do’s (and some critical don’ts), but they generally fall into four buckets:

1. Expose Exposure. This is the “what do we know” phase. What portions of the business are, or have the potential to be, impacted by the virus? Do we have delayed close cycles on sales orders? What is the (almost) inevitable impact on the supply chain — and what are all the potential ranges of that impact based on global manufacturing regions and customer location? With respect to customers, how have buying habits changed by region, by product category? Will we or can we transition to a remote workforce, and if we can’t, how will disruptions to workforce availability impact our ability to make, sell, and supply our products and services? All these questions have significant implications on the all-important acronyms: COGS, SG&A, A/P, A/R, G&A. To understand that impact, CFOs need to undertake a significant exposure exercise. But they can’t do that alone. If the primary question is, “what do we know?” the critical follow up is “and who knows it?” CFOs should proactively engage business partners within the organization who can shine a light on exposure from their unique lens into the business.

2. Unlock the Budget. It’s early March. Chances are the corporate budget has just been locked. Time to unlock it. (But not undo it — though we’ll get to that later.) The budgeting process is a laborious and time-intensive exercise that painstakingly projects and addresses business outlook based on market conditions, accounting for a certain number of reasonable variables. Coronavirus is not a reasonable variable, and for that reason, the budget must be revisited with an eye toward the major “puts and takes.” CFOs must address the risks and opportunities posed by a range of virus scenarios, building high-level models of business cases to quantify the impact to P&L, cash flow, and balance sheet. Revising should address driver-based scenarios (customer regions, units, and pricing, quarterly phasing/timing, gross domestic product vs. secular impacts). It should account for implications on productivity (buying, investment and capex decisions, travel-related impact to closing deals). It should include an assessment of hidden costs (delay in buying and hiring decisions, lost productivity, remote work, and the associated investment in technology to enable that work). And, of course, in a PE-backed environment where cash is critical, it must address liquidity planning and the balance sheet (sensitizing covenant scenarios, payroll viability, setting aside emergency cash). But all these do’s come with one critical don’t: don’t launch a full re-forecast … yet. While scenario planning is key, the uncertainty of virus spread and long-term impact makes any substantive attempt at accurate forecasting, at this point, a fool’s errand.
   

   Sanjeev Parlikar

3. Learn the Levers. CFOs who have developed a robust understanding of the possible short-, medium-, and long-term virus implications and who have conducted best case/worst case assessments, must then seek to understand the available levers to pull in each case. What are my liquidity levers? How can I raise more cash? How can I collect faster? Do I have inventory management levers I can pull in case of a surplus, in the form of additional markets or inventory fire sales? What are my supplier levers in case of potential supply chain issues? Are there other manufacturers I can use to ensure product flow even at higher premiums that impact margin? Are there capital purchases that can be delayed until the market stabilizes? What areas of discretionary spend can I adjust, pause, or altogether cancel? Finally, CFOs should consider workforce-related levers including hiring freezes or adjusted staffing levels. Learning the levers now will mean they can be deployed more quickly, more effectively, and more successfully later.

4. Speak to the Financial Sponsors. As with all business disruptions, particularly those with serious health consequences, communication is key. The CFO must play a two-fold communications role. He or she should take the lead in articulating to employees any substantive changes to business operations. But, the CFO’s primary audience must be the sponsor, because (one more time with feeling) sponsors hate surprises. CFOs must seek to eliminate those surprises by proactively communicating the exercises finance is undertaking to understand exposure, budgeting implications, and lever identification. And then, they must communicate the results from that undertaking, being transparent about risks and the impact to the business, and updating those projections based on real-time data. The really smart CFO, however, will do more than lean-in to sponsor communication, He or she will lean on sponsors for guidance. PE firms have a portfolio-wide view of corporate response to coronavirus. They have unique insight into emerging best practices. The CFO must be a student of those, asking their sponsor (when it’s not already offered) about portfolio-wide preparedness planning and benchmarking.

The coronavirus will have an impact on business. Just what that impact is and how long the implications last remain to be seen due to the uncertainty of further virus spread and containment efforts. The PE-backed CFO could/can/may play a critical role to help the company weather and withstand the fiscal threats during both the short- and long-term. The prepared PE-backed CFO will play that role.

Rajan Raval and Sanjeev Parlikar are managing directors at Accordion, the private equity-focused financial consulting and technology firm.

Accordion, budgeting, cashflow, contributor, coronavirus, Supply Chain