CECL for Private Companies: What You Need to Know
Key Questions CFOs Should Ask in the Wake of COVID-19
CFOs always feel the heat, even under normal circumstances. But as we all know, these are anything but normal times, with the COVID-19 crisis ratcheting up the uncertainty to astronomical levels. And while the initial wave of shock and disbelief has come and gone, CFOs and their teams must now figure out what to do in its wake.
Of course, that’s not to say that there won’t be additional waves in the future as well, making a CFO’s job that much more difficult. However, this unprecedented uncertainty and disruption are in no way an extinction event for companies as long as leadership is strategic-minded and flexible.
So to help that process along, we’ve identified four broad questions and several follow-ups that every CFO should ask as they begin strategizing for the new normal, and whatever that might entail.
First Things First: A Different Perspective
Before we dive into the strategic questions, let’s get one thing out of the way. We understand that CFOs aren’t lacking for insights from the biggest names in the industry, most using vast amounts of digital ink on the current state of operations, the marketplace, and what CFOs must do to steer their teams and organizations through this maelstrom.
As you’ll see, while we cover many of those pertinent and pressing issues as well – including liquidity, remote working, and others – we wanted to provide a more strategic angle than most. Put another way, our goal is to help CFOs think creatively, and see the bigger picture beyond the transactional details of day-to-day operations in the short-term. Sure, it’s an exercise where one question might create two or three more, but that type of expansive thinking is what will propel organizations forward, even when uncertainty obscures the best path. So on that note, let’s dive right in.
1. Has Your Business Model Changed? How Are You Adapting to That Change?
This one is so broad in scope, it can almost veer down an existential path. However, leaving Kierkegaard out of it and sticking to business strategy, CFOs have some fundamental thoughts to ponder.
- You’ve likely refined your expense management – if not completely overhauled it – in recent weeks, becoming much more streamlined and disciplined. How much of that will you retain in the future? And what are your minimal working capital needs, both today and tomorrow?
- Dovetailing on the previous question, when should you develop a strategy around bringing back employees, and how quickly can you execute that strategy?
- Are you thinking about bringing everyone back with social distancing precautions? Or continuing remote working? Or a combination of both?
- If you continue using a remote working model, should you reduce your office footprint, thus, lowering your real estate costs?
- Likewise, if you return to a more traditional workforce and environment, will you need additional office space – and the higher real estate costs that go with it– should social distancing guidelines extend into the future?
- How willing have your vendors, creditors, and third parties been to work with you? Are these valuable partners going forward, in both good and bad times?
- What variances are you experiencing in your cash flow forecasting during your initial assessments from the COVID-19 outbreak? Are they controllable?
- Have you learned anything about age-old financial strategies that you should possibly reconsider? This could include everything from your go-to-market strategy and product offerings to hedging.
- From a big-picture point-of-view, what changes do you expect to be temporary, and what will most likely be permanent?
- Do you need to realign your organizational KPIs? In other words, are you still tracking the right metrics to accurately gauge performance and health across the enterprise?
2. What Are Your Competitors Doing and Why Are They Doing It?
Keep your friends close and enemies closer. As it turns out, Sun Tzu’s words are just as relevant during a pandemic as they are during “normal” times, if those even exist anymore. Regarding the competition, CFOs must peer over the corporate fence to cull specific insights, asking themselves pointed questions as a result.
- How are your competitors reacting to current circumstances? Have they dramatically shifted gears? For example, we’ve seen manufacturers move from automobiles and artisan vodka to ventilators and hand sanitizer.
- Maybe a dramatic shift in operations isn’t necessary for your company. But are you still adapting properly to the environment, competition, and marketplace as a whole?
- Are competitors furloughing or laying off staff?
- From a broad perspective, why are your competitors reacting the way they are? What drove those decisions, and are you missing a critical angle?
3. How Should Your Capital Structure and Allocation Look Going Forward?
Traditional ways aren’t necessarily the best ways. But how you look at your capital structure and allocation might be deeply ingrained, either with you personally as a CFO or how your organization has historically walked the debt & equity highwire. However, now is an opportune time to look at those old ways and see if it’s time to change them or even put them out to pasture altogether.
- Again emphasizing liquidity needs, what role do dividends and share buybacks play in your capital strategy a year from now? Or further in the future, assuming uncertainty subsides at some point?
- Going back to establishing your minimum working capital needs, is that a future baseline for your capital allocation decisions?
- Tangentially, how are you reevaluating treasury-related items? Are you maximizing your credit lines and restructuring or refinancing existing debt?
- If your debt structure has changed as a result of the COVID-19 crisis, have you factored those new data points into your FP&A?
4. How Has This Tidal Wave of Risk Impacted Your ERM? Or How Should It?
Waist-high fields of risk and uncertainty extend past the horizon, leaving every company vulnerable to some extent. For obvious reasons, your enterprise risk management (ERM) processes are under the microscope – or at least they should be. Now is the time to evaluate whether they’re up to the task or need some work.
- Have you updated your ERM to include risks of pandemics or similar business interruptions?
- Is your traditional reporting function responsive enough to address changes in your customers’ behavior? Or even the marketplace in general?
- As CFO, do you want or need to be the primary change agent for your organization? What role will you and your team play in driving change management across the enterprise?
- Focusing again on change management, who and what do you need to facilitate any required change? IT? HR?
- What lead indicators should you monitor to determine when uncertainty dissipates?
- Do you have adequate mitigation plans in place to drive down risk?
- How far along the digital transformation road are you, and is now the right time to accelerate your transformation efforts?
- Have recent events exposed gaps or shortfalls in your governance? If so, how can you remedy them? For instance, if you’re a smaller company with fewer members on your team, did layoffs or even remote working threaten your delegation of authority?
Other Considerations in Response to the COVID-19 Crisis
Of course, there are plenty of other considerations to keep in mind, either strategy-adjacent or for your daily operations. Some of these we’ve discussed in detail recently, while others we want to ensure remain in the conversation in some capacity.
- Are your tax planning strategies still appropriate?
- If there have been recent layoffs or furloughed workers, should you bring back the same employees with the same traditional skillsets?
- Are you left with knowledge gaps and skill deficiencies in critical accounting and finance roles? If so, do you have a trusted outside partner for staff augmentation to fill those gaps? Or to help with audit preparation, SEC reporting, and other key areas?
- Have you integrated the many accounting considerations resulting from this pandemic?
- There’s an ocean of impairment right now. Does it impact you? Is your team prepared to both plan and account for it?
- What does the future of your workforce look like? Is a remote model one that makes sense for you in the future, at least to some extent? If so, do you have the proper tools, policies, and procedures in place to maintain your productivity and culture with a remote working model?
- How did your first remote financial close go? What changes can you make to improve upon it in the future?
Sure, this is a lot to think about. But these are historically unique times and call for fresh perspectives. Going forward, it’s dangerous to assume that everything old will be new again, especially with so many distressed companies looking for any sort of lifeline. Fortunately, CFOs are in a prime position to provide invaluable, fresh insights to CEOs.
Remember, just because there are unexpected detours in the road ahead – even massive detours – doesn’t mean that the journey is suddenly unnavigable or the terrain impossible to traverse. That’s why CFOs plan ahead, strategize in the face of uncertainty, and lead their teams forward, even when each step feels precarious. And through it all, Embark will be here to lend our expertise and experience, whether you need a cane, crutch, or simply to aim yourself in the right direction.