COVID 19: Practical Advice for PE-Backed CFOs (Part II)

On Thursday, March 26th, Accordion hosted our second virtual roundtable for CFOs to share their real-time COVID-19 perspectives and ongoing concerns. Here are a few of the most recent key insights and learnings:

On Scenario Planning:

If last week was about setting up the company infrastructure to respond to new COVID market realities (and trying to make sense of what those realities are), this week is about scenario planning. It’s about creating multiple scenarios with sensitivities for a whole spectrum of disruptions.

“We have the base case, which is what happens if the lockdown remains in April and May and then things go into recovery territory, although gradual. We have a severe case, if we are locked down for 4-6 months and there’s no recession on the other side of it. Then there’s a worst case, which is locked down for 6+ months and then we’re in a recession.”

That scenario exercise is often driven by the CFO, but just as frequently it’s also a mandate from the sponsors who are trying to gain cross portfolio clarity and perspective.

“They’re mandating this portfolio-wide. Trying to get a sense of scenarios by industry or type of business or size to see if they can aggregate and compartmentalize the forecasting to better inform the whole of their portfolio.”

CFOs are also examining the roots of their (now more frequent) reforecasting exercises, which in turn inform the likelihood of certain scenarios. They are seeking to identify the key internal metrics that are acting as blinking red lights for the business, whether that’s orders closing, leads drying, or various operational metrics.

“We are looking at understanding the important metrics that we need to be tracking that will let us get early warning signs that we have excess capacity building in various parts of our business. This helps us know which scenarios to execute on.”

But, there’s also the acknowledgment that clarity on Tuesday could still mean uncertainty on Wednesday – that’s how rapidly company and market realities are changing.

“We think of it as a very sort of dynamic process where each day or week you may have a different view on how this is going to play out.”

On Leading Indicators:

Outside of internal metrics, CFOs are looking to identify the most appropriate external leading indicators that will provide clarity on the timeline for (and extent of) market disruption. If CFOs are asking ‘What should we track to better understand when the economy will start to come out of this?’, the consensus answer has been the progression of the virus itself.

“The number of net new COVID-19 cases being reported – that’s the sort of thing that everyone should be watching because that is what will tell you whether the virus is under control and that will tell you whether the economy is ready to recover.”

 

“A lot of people are focused on the rate of new cases – whether it is doubling or tripling. Others are looking at hospitalizations to determine the severity of it.”

On the Workforce:

Last week CFOs wrestled with the possibility of employee-related implications. This week they are acknowledging those implications are inevitable. As a result, many are scenario staging specifically for the workforce:

“Step one – we’re not going to do a cost of living adjustment. Step two – we are not going to do merit increases. Step three – looking at some significant layoffs, and so we’re having our different department leaders pull together where they would make the cuts.”

As a whole, however, CFOs are reluctant to turn to companywide layoffs – for all the obvious reasons related to employee care and sensitivity, but also to ensure that they are not left flat footed during a recovery. CFOs are thinking through more creative ways to contain workforce spend.

“Obviously it’s an opportunity to look at poor performers. Outside of that, we’re looking at a mandated pay cut across the board, because having a job with a lower salary is better than not having one. Since we don’t know how long this is going to last, at least that gives us some flexibility for when this picks back up to still retain our people.”

 

“Instead of laying off 10% of our workforce, we are looking at having everyone in the organization take off one of every 10 days from top to bottom. So everybody experiences some of the pain, but collectively you end up at a better place if you have all the right people on the other side of that cycle.” 

 

“Looking at rotating and having people go to a four day work week so that we’ve always got coverage. We get the cash relief right away. We also get the expense relief on that. And it shows the partnership.”

CFOs are not only grappling with the what, but the when. Some companies have decided to make proactive decisions related to their workforce now, in anticipation of their eventuality.  Others are waiting for metric-based milestones to execute against needed workforce spending cuts.

 “What we are tracking is whether or not we would have two consecutive months of net reductions in our revenue stream. That for us would signal that this will have a permanent effect on our cashflow and we would need to take the next step in resourcing and organizational decisions.“

Others understand that making drastic workforce cuts now leaves very little room for further cuts -if necessary – later:

“We are being creative with employees now, because we also still need to save levers that we can pull during the middle of this if it gets really bad.”

On the Stimulus Package:

CFOs are optimistic that the recently unveiled stimulus package can provided immediate cash flow relief:

“It could be a game changer for us that could alleviate some of the cashflow crunch.”

But, just as many CFOs are unclear if the package would provide that relief to them, as a portfolio company.

“The stimulus may not apply to PE portfolio companies because of common ownership collectively having more than 500 employees. Frankly, I think we all don’t know the answer to that yet.”

On Accelerating Revenue Recognition:

CFOs have been focused on maintaining revenue streams, but have been equally focused on recognizing that revenue – getting cash in the door. They are looking at a number of ways to do that, from customer payment plans, to alternative methods of payment, to accelerating invoicing.

“Anything that we can do to get that cash in earlier, so we can harvest as much of it as we can and decide later what we want to do with it. On the collection side, it’s been a return to the dialing for dollars days – the squeaky wheel gets the grease.”

 

“We’ve even offered up customers to pay by Amex for those that are willing to, and then we’ll actually pick up the fee portion of it so that it’s a little bit more of a motivator on them.”

 

“We’ve been getting customers on payment plans to at least get some stream of cash rolling in. And then we’re also looking at some things with regard to invoicing to get it out another two days earlier. Anything that reduces that cash cycle is important.”

On Preparing for the Upside:

Here’s some good news. CFOs are aware of the reality of a prolonged down-cycle, but they are not letting that blind them to the importance of preparing for its eventual end. They are making choices conscious of the fact that there will be a new normal they will need to be ready to seize upon.

“We created a list of things we wanted to be able to protect during this process; things that when you come back out of the other side of the valley, you want to make sure are still accomplished or you still have that capability.”

 

“Everybody is saying we need to protect the upside because we do feel there will be an upside. So we have these models that are associated with key decisions or people and customers, but we don’t want to cut too deep because then you will delay the upside experience completely.”

And some also recognize the opportunities that they can act upon right now to better position the company for a post-COVID landscape.

“In our case we’re a large player in our space – are there opportunities to pick up some of our competitors that can’t survive this storm?”