7 minute read
Accounting Corner: CFO Ultimate Stress
cfo ultimAte StreSS teSt
Recently, my conversations with clients have centered on one topic: What the heck is going on with this economy?
On the one hand, you have a technology darling like Tesla announcing layoffs of 10% of their staff. But just try ordering one of their cars, and you will have to wait 3-6 months to take delivery.
America’s businesses currently have over 11 million job openings — more than twice the number of people seeking jobs. Yet, venture capitalists are telling their companies they need to take a scalpel to staff because “winter is coming.”
CFOs who honed their craft over the past decade are facing raging inflation, global commodity shocks, and rising interest rates. Most “old hands” who have experienced this kind of macro environment retired decades ago.
The message sending a chill up the spine of senior management: “The 1970s are calling, and they say everything you ever learned is irrelevant.”
To survive this stress test, CFOs must learn and adapt at lightning speed. Here are a few lessons to keep in mind.
capiTaL HaS a coST.
Since the global financial crisis in 2008, we have been living through an unprecedented experiment in monetary policy that, over time, skewed corporate decision-making. “Quantitative easing,” or QE, flooded financial institutions with more liquidity than they could deploy through traditional channels. At the same time, the Fed has held interest rates close to zero to support the fragile recovery from the GFC and the subsequent pandemic.
What was the result? Investors piled into a range of speculative assets and businesses whose economics were unproven but had the lure of potentially high returns. Growth was privileged over profits. And “story stocks” tapped a geyser of capital at nominal cost.
Today, the Federal Reserve has made it clear we are in for a series of painful rate hikes. Yields are soaring. We have gone from QE forever to QE cold turkey. In other words, capital again has a cost.
In this environment, companies need to be much more strategic about how they invest in growth, when they tap the capital markets, and what they say to investors about capital allocation.
CFOs can expect a barrage of questions about how the company will manage its liquidity and the thresholds applied to capital expenditure, marketing expense, and M & A decisions. Companies must also present a clear runway to transition from growthat-any-cost to profitable growth. Or, as Uber’s CEO, Dara Khosrowshahi, put it, “We have to make sure our unit economics work before we go big.”
In an environment of capital scarcity, going big and blind means going under. But companies that can clearly explain how they plan to earn their cost of capital will enjoy a substantial competitive advantage.
STay niMBLE.
The past twelve months have underscored the importance of remaining flexible within a clear strategic framework.
Producer price index (PPI) inflation is running at double digits. Energy costs spiked by 60% in just a year. Rolling lockdowns have roiled supply chains as China seeks to maintain “zero COVID” against new strains bent on spreading COVID everywhere.
A five-year plan may become irrelevant in this environment before the ink is dry. Companies must constantly evaluate pricing, sourcing strategies, and supply contracts to maintain their margins and keep revenues flowing. Fail to adjust or employ the wrong hedging strategy, and your P&L can turn upside down in a heartbeat.
CFOs need to embrace this turbulence as a test of their mettle. Labor shortages can spur accelerated product and service automation or reengineering to reduce labor content. The resiliency of supply chains now must be given equal weight with efficiency and cost considerations.
CFOs need to be able to create dynamic forecasts and supply senior leaders with real-time data required to pivot on a dime as market conditions change. How do we protect our margins while ensuring continuity with suppliers? How do we create a business plan able to thrive under multiple scenarios?
CFOs need to step into the role of a master tactician, laying out a range of options to traverse market storms and bring the company safely to port.
FocUS on TaLEnT.
Over the past twelve months, management has had to contend with what the media dubbed “the Great Resignation,” in which many employees reconsidered their previous relationships to work. Remote work, flexible hours, job hopping, and bidding wars for top talent were the order of the day.
Fast forward a few months, the media is sounding the war drums of an impending recession, employees are bracing for potential layoffs, and CEOs are talking about getting lean.
If the current bout of monetary tightening and asset deflation devolves into a full-blown recession, CFOs may be tempted to look at employees as cost items on a spreadsheet that need to be shed. This would be a huge mistake.
Even if the business environment softens, demographics are not on employers’ side, as a declining working age population and restricted immigration make skilled labor in short supply. Rather than slashing indiscriminately, CFOs need to partner with HR to align short-term staffing adjustments to the business’s strategic needs.
Who are the top contributors of value in our business? What talent will be most difficult to replace as demand recovers? How can we increase the stickiness of employees’ relationship with the company and our strategic goals?
The primary business of every business is to generate, nurture, and sustain the talent required to be the best in the industry. Just as you will never forget how friends and family react during a crisis, your company’s response to a downturn will send lasting messages to your team.
Just as CFOs need to gird themselves for the ultimate stress test, investors should be watching the companies they follow for signals about management’s ability to weather the storm that may be just over the horizon. Are they calm, determined, and able to articulate a clear action plan? Or are their communications jittery, reactive, verging on panic? The answer to that question reveals much about the companies on which you want to bet.
Drew Bernstein, Co-Managing Partner Marcum Bernstein & Pinchuk (MBP)– a leader in SEC audit, accounting and consulting services to Chinese companies seeking access to capital markets.
In 1983, Drew Bernstein co-founded Bernstein & Pinchuk. Additionally, he co-founded MarcumBP, which is a member of the Marcum Group and an affiliate of Marcum LLP, a leading U.S. accounting and advisory firm. Both firms have multiple offices within the United States and Asia.
Bernstein is a distinguished expert with deep knowledge of the China and U.S. financial ecosystem with experience extending across Asia, Europe and Africa. Industry experience encompasses technology, retail, manufacturing, hospitality, pharmaceutical and real estate. Bernstein directs a global team, featuring highly trained PCAOB and SEC accounting experts and financial consultants working in New York as well as Beijing, Tianjin, Shanghai, Shenzhen, Hangzhou, and Guangzhou. Additionally, Bernstein is considered a valuable thought leader and news commentator. He has published articles for Forbes.com and China Daily and is a frequently called upon source by prominent media such as China Global Television Network, CNBC, Bloomberg TV, The Financial Times, The South China Morning Post, The Wall Street Journal, Yahoo! Finance, and more regarding Chinese IPOs, China’s economic growth, investment appetite, innovation trends, corporate governance, SEC regulations and more.
Bernstein graduated from the University of Maryland with a B.S. in Accounting. Currently, he resides in New York City with his wife and children. About MBP
Marcum Bernstein & Pinchuk LLP (MBP) offers specialized audit and advisory services to support SPAC sponsors and SPAC targets in Asia. MBP and its parent company, Marcum LLP, have been involved in more SPAC transactions than any other audit firm. MBP is the only audit firm to have a dedicated SPAC team for Asia. MBP performs all audits for Marcum in Greater China, and MBP is a top-five auditor for Chinese companies listed in the United States.
The dedicated SPAC team has worked with SPAC sponsors, underwriters, and targets. MBP draws on wide-ranging experience with the initial public offerings and subsequent business transactions forged by such companies. MBP has designed its audit platform to deliver the technical expertise, efficiency, and urgency required by SPAC IPOs. This includes high-quality, PCAOB-compliant audits for private Asian companies that are contemplating entering a SPAC merger.
Website: U.S.: https://www.marcumbp.com; China: https://cn.marcumbp.com
