National and global economies inevitably go through downturns, and the resultant economic issues facing CFOs are numerous. CFOs are often called on to either anticipate those downturns in advance or react quickly in order to help mitigate any negative impacts, including lower consumer spending, slower revenue growth and pressure on operating results.
There are all kinds of economic variables that can affect an organization's bottom line. Many businesses, for instance, are affected by low oil and commodity prices or overall stock market volatility unrelated to their business performance. Government and regulatory oversight is increasing and may be an even bigger problem when financial performance declines during a downturn.
The American Institute of CPAs (AICPA) Quarterly Business and Industry Economic Outlook Survey polls its members holding executive positions, including CFOs, in publicly and privately owned organizations of all sizes and industries. In the AICPA 1Q 2016 survey, three of the top 10 challenges noted were related to economic downturn: domestic economic conditions (first), stagnant or declining markets (third) and developing new products, services and markets (number eight).
Michael Dinkins, EVP and CFO of Greatbatch, shared his view of how CFOs should address an economic downturn. "Deal with the economic challenge as early as possible, decide on the company's tactical and strategic responses to the downturn, and then share revised forecasts with shareholders and lenders at the appropriate time," he said.
Dinkins recommends that CFOs should evaluate early on whether a downturn will affect their business plans significantly, without being overly pessimistic. Taking actions, such as right-sizing production, changing timing of marketing and investing initiatives, and cutting certain discretionary spending are a few actions that can make a big difference. However, if CFOs are too late to notice, they may be faced with having to react to an emergency.
It is also Dinkins' recommendation that CFOs should bring their leadership teams together to assess the outlook and make timely strategic and tactical decisions — for example, continuing in the same line of business but reducing production, discontinuing a product line that is not doing well and/or moving more quickly into another that is a better prospect in the current economy.
Communicate and Obtain Support
It's critical for CFOs to involve company boards of directors in their planning to help educate them that a change in plans is the right course of action. CFOs must communicate with shareholders and investors about below-expectation financial performance and get their support for significant changes in business plans in response to economic downturn. The challenge, says Dinkins, is saying enough without saying too much; CFOs cannot divulge competitive information or make employees uneasy about potential layoffs.
If debt covenants are an issue and amendments to loan agreements are needed, CFOs should start the communication in advance in order to negotiate from a strong position. By sharing early warnings about forecast expectations, CFOs can help instill confidence in their effective management and build trust, which will give them more options if they need to amend loan agreements with current or potential lenders.
Certain economic issues facing CFOs can be mitigated by taking advantage of savings provided by tax credits. Tax credits can help reduce the amount of taxes owed, which can be a significant cash-flow savings. The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to businesses who hire and retain employees from eligible groups that have historically experienced employment barriers, such as veterans, food stamp recipients, Temporary Assistance for Needy Family recipients, ex-felons and summer youth employees.
In December 2015, the WOTC program was extended for five years (retroactively from 2015 through the end of 2019) , and a "long-term unemployed" category was added (individuals unemployed for more than 27 consecutive weeks who received federal or state unemployment compensation), effective for employees who start work on or after January 1, 2016. Employees must work at least 120 hours in the first year of employment for the employer to receive the tax credit. There is no limit on the number of employees an employer can hire to qualify for the credit. To apply, employers must screen job applicants for WOTC eligibility on or before the date on which the employer offers a job to the applicants, submit forms to the IRS and State Workforce Agency within 28 days of the employee's start date, wait for a determination and then file for a tax credit with the IRS. Additional information is available from the IRS and U.S. Department of Labor.
In addition to WOTC, there are other federal and state tax credits and incentives available for hiring and training. These can help offset costs for job retaining as workforce requirements may shift during a downturn.
As the economy naturally goes through its cyclical phases, it's inevitable to experience some downturns. It's vital to mitigate the business impact of these issues or — even better — prevent them entirely.
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