In the current uncertain economic environment in which some economists are predicting an economic slowdown or even recession, it’s important for CFOs to carefully evaluate cost containment.
Consero recently hosted a virtual CFO Roundtable in which several CFOs discussed how they are doing this. Participating in the panel were Steve Isom, CFO of Bloomerang, a vertical SAS company; Jessica Hamilton, the CFO/COO of ActiveProspect, a marketing technology company; and David Dolmanet, the CFO of BryComm, a supplier to the commercial construction industry.
Preparing for a Downturn
In response to the question, “How can CFOs prepare for and predict the impact of a potential downturn?,” Steve Isom stated that “the era of free money is over and with it the mindset of growth at all cost. This doesn’t mean growth isn’t important, but efficient and durable growth is critical.”
Isom noted that there’s a lot of talk about softness in the market and negative signals. “I encourage CFOs to look closely at their own demand signals and understand what’s happening in their business,” he said. “For example, we manage and monitor top-of-funnel metrics daily to stay on top of what’s happening. It’s the old saying: Plan for the best but expect the worst.”
Scenario planning will be critical in 2023, said Isom. “You need to have a good handle on what happens if your business doesn’t hold up well in 2023,” he said. Isom cautioned against cutting too much. “Keep a firm handle on your own demand signals and keep an eye on macro trends.”
Balancing Growth and Investing in Operations
Jessica Hamilton was asked about how she sees the grow-at-all-cost strategy evolving and finding the right balance between growth and investing in operations. “Finding this balance is more important now than ever,” she said. “For us, it’s the balance between growing and investing capital in sales and marketing and product engineering.”
ActiveProspect has always operated with the Rule of 40 in mind, said Hamilton. The Rule of 40 is an indicator of the balance between revenue growth and profitability. It states that a company’s combined growth rate and profit margin should not exceed 40%. This helps ensure capital efficient growth and wise spending.
“When we have to cut back on some investment initiatives, we’re prepared,” Hamilton said. “We’re not cutting all the way back to hit the Rule of 40. Our plan for 2023 is Rule of 31 — we’re not comfortable making any more cuts than this.”
Lowering the Cost of Debt
In response to the question “How do you lower expenses when cost of debt is increasing each quarter?,” David Dolmanet noted that many people on his team have only experienced an economic environment in which interest rates have been at or near zero.
“In this environment you don’t have to make decisions regarding the time value of money,” he said. “Since our interest expense has more than doubled, I now manage my cash position much tighter in managing my line of credit balance. If I continue to use the line of credit while maintaining a high cash balance, we’re paying significantly more in interest than we were before.”
Dolmanet added that the company is trying to manage its line of credit and inventory more tightly and focus more on its cash cycle than it would during a grow-at-all-cost environment.
Winning the Talent and Wage Wars
Talent is one of the biggest costs companies face today and it isn’t going down anytime soon. Hamilton talked about her company’s strategy when it comes to hiring and retaining top talent.
“We decided we weren’t going to engage in the ‘wage wars’ when salaries started going up extraordinarily and lost a few employees who left for higher pay,” she said. “But we had done succession planning and had built a strong bench.”
The company took a hard look at the benefits and perks employees valued, eliminating perks they didn’t place value on and replacing them with perks they did value. “Happy hours and virtual games that were popular coming out of the pandemic were no longer valued,” she said. “What our employees do value is workplace flexibility and career development so we focus on these.” For example, the company is now 100 percent remote.
Isom said Bloomerang is focusing on high-impact employee perks. “Since we’re in the non-profit space, we gave each employee $100 to donate to the nonprofit of their choice on Giving Tuesday,” he said. “The amount of uplift we got from this really paid off for us.”
Dolmanet said that the tight labor market and rising inflation have made compensation strategies challenging. “Employees expect raises to keep pace with inflation,” he said. “We are focused on taking care of the employees who have the greatest impact on the business.” The company is also using variable compensation to grow overall compensation for more employees and recognize their contributions to the success of the company.
Outsourcing the Finance Function
In the current economic environment, some CFOs are considering outsourcing functions they might not have outsourced before, including all or part of the finance function. Isom says this depends on the specific circumstances of each company.
“One of the good things about outsourcing finance is that you can pick and choose which functions you outsource and which ones you keep in house,” he said. “For example, we kept FP&A in house and outsourced day-to-day accounting. This was a good balance for us.”
Consero Global offers outsourcing of the finance function via Finance as a Service (FaaS). To learn more about FaaS and how it can help you manage costs during an economic downturn, connect with us at https://conseroglobal.com/request-a-consultation/