How CFOs Can Spot A Recession Before It Begins

Innovation How CFOs Can Spot A Recession Before It Begins Isaac Heller Forbes Councils Member Forbes Technology Council COUNCIL POST Expertise from Forbes Councils members, operated under license. Opinions expressed are those of the author. | Membership (fee-based) Nov 1, 2022, 07:00am EDT | Share to Facebook Share to Twitter Share to Linkedin CEO & Co-founder of Trullion , AI-Powered Accounting Software that automates accounting workflows for CFOs, Controllers & Auditors.

getty The world economy, while expanding overall, is still vulnerable to cycles of recession and growth. Identifying these early and planning accordingly can enable individuals and organizations to truly maximize opportunities. The CFO is uniquely placed to spot the signs of a recession before anyone else.

We’ll look at how and why this is the case and key takeaways for CFOs and company leadership. Recessions: A Part Of Economic Life The well-known saying made famous by Benjamin Franklin, notes that the only certainties in this life are “death and taxes. ” For better or worse, “recessions” can be added to that list.

While the global economy has been growing overall over the past centuries, this hasn’t been a smooth journey. Every few years, a recession hits, the economy cools down, markets drop and the consequences that flow from this are enormous: from a reduction in production and layoffs to full-scale war. Recent recessions include the Covid-19 recession of mid-2020, the subprime crisis of 2008 and the dot-com bubble burst of the early 2000s.

MORE FOR YOU Why The Rock’s Social Media Muscle Made Him Hollywood’s Highest-Paid Actor Amazon Underperformed The Revenue Consensus In Q3, What’s Next? Relooking At The Value Of Large In-Person Meetings In Culture-Building In hindsight, it’s always possible to identify the causes of a recession; however, in real time, it’s not always so obvious. Even if a recession is predicted, the timing of such a drop is extremely difficult to pinpoint. Maximizing Opportunities With A Recession Ahead If you were able to identify a coming recession early, there would be many opportunities to make the most of this knowledge.

From a defensive point of view, you could look at taking actions now to protect your company in the future. Much like a biblical Joseph, for example, you could use the times of plenty to take cash reserves into a leaner period. You could cut down on carrying excess inventory, cut costs early or renegotiate burdensome contracts.

From an opportunity and expansion perspective, you could use the drop in the markets to pick up assets at a significant discount. You could also ensure your company is strategically positioned to make the most of the next expansionary period. Again, if everyone was to do this, there would be no advantage or benefit.

The key is identifying the coming recession early and acting upon this knowledge accordingly. Identifying Recessions Early The first tremors of a recession are usually felt in the form of macroeconomic factors, including negative changes to: • GDP • Employment figures • Income • Production • Sales (wholesale and retail) • Home sales While these don’t always lead to a recession, they are almost always present before a recession takes place. Many of these are only reported on weeks—if not months—after the actual transactions have taken place, making it all the more difficult to spot the incoming tsunami of a recessionary period.

The CFO’s Unique Perspective Not many people are exposed to the kind of data mentioned above. Yes, analysts of various types are crunching this data constantly, but most don’t see the full picture and focus on a specific area of expertise. The CFO, on the other hand, sees a richer, more holistic view than most.

This is just a natural consequence of identifying the risks and opportunities facing a business, being familiar with day-to-day operations and analyzing results. Background And Training CFOs generally have a background in accounting and finance—if they’re a CPA, they have undergone many studies and rigorous training, including countless examples of real-life events. They understand every element of a company’s financial situation, including of course income statement, balance sheet and cash flow items.

In reporting a company’s financial results, CFOs have to address the risks facing the business and how those risks are mitigated and managed. This knowledge, while often taken for granted by those with a solid financial background, is unique in a world where many of these concepts are completely foreign to those without a financial education or significant experience. Internal Metrics The CFO is constantly reviewing internal company metrics.

Every line item is available to the CFO, including data from past periods. And while increases or decreases can be spotted immediately, the CFO is able to spot nuances . For example, sales are increasing, but at a decreasing rate, or inventory is building up faster than in previous periods.

External Metrics The CFO is constantly monitoring external metrics such as prices of key commodities, interest rates and so on. Small changes here are taken into account when formulating the company’s financial strategy going forward. Hiring Is the company net increasing or decreasing its headcount? What are competitors doing? What is the job market like? Is there upward pressure on salaries? These are key quotations that impact the way a CFO contemplates what the future will look like.

Most importantly, the CFO experiences this in real time and is thus able to make key decisions before it’s too late. The CFO: A Critical Role The CFO has a critical role to play in ensuring a company stays competitive no matter what the external economic environment is. When leveraged correctly, a CFO is worth their weight in gold in terms of the strategic insights they possess, their skill sets and their ability to sense market shifts.

For company leadership, the lesson here is that a CFO offers more than reporting and compliance; rather, this role should be expanded and appreciated as one of the most important executive positions within the organization. And for CFOs themselves, it’s important to “think big” in terms of what you’re capable of and the incredible value you can offer. Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives.

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