Year-end planning is imperative for all businesses, especially as they navigate a changing and uncertain business environment. Over the last six months, rising inflation and a likely recession has created fear and panic for some companies as they look to 2023. While business leaders have little control over macroeconomic cycles, they do have the ability to truly understand the specific components of their business, adjust and be flexible in their goals and spending, and navigate uncertainty with greater confidence.
Ascent CFO Solutions’ Founder and Fractional CFO Dan DeGolier shares his insights on how businesses can take advantage of year-end planning and forecasting, how to handle financial uncertainty, and ways to elevate your business for greater success in 2023.
What is Ascent CFO Solutions seeing now as we enter the final month of the year?
“CEOs and companies are still reaching out to Ascent CFO Solutions for guidance and assistance with Fractional CFO needs to help them grow, but there is a level of uncertainty in the business environment now that wasn’t present a year ago.
With the threat of recession looming, increased uncertainty has led to a decrease in revenue growth and fundraising valuations. Some deals are taking longer to close, and there have been major layoffs in the tech space (by now we have all seen the news about Facebook).
While this could sound negative and worrisome for many, the uncertainty has pushed CEOs and leaders to look deeper into their businesses.
They are evaluating their company’s current financial standings, taking more time to really understand their cash flow, relying on us to help them set up robust forecasts, and using all of this knowledge to inform their 2023 goals.”
What can CEOs and founders do to address their concerns about financial uncertainty in the new year?
“First, understand that this is not the time to panic. It’s time to be in tune with your business and how it functions. I have seen many CEOs and companies come into the end of the year with a little extra stress on their plate, and sometimes ambivalence about the next steps to take. Rather than give into the fear, take the time to really double down and make space in your end-of-year planning to evaluate, assess, and develop an action plan.
Spend time understanding your cash flow cycles and finetune your visibility into your company’s cash flow for the upcoming quarters. Take time to understand your collection cycles and payable cycles, and assess your current debt and capital.
Companies need to be aware of how much cash they have and how fast they are burning it so they can understand how quickly they can grow. Even a company that is profitable must watch its cash flow closely, and that’s true in any economic environment. Cash flow determines how many new employees you can hire, how much you can increase base and incentive compensation, whether or not you need to adjust your marketing budget, and more.
Plugging your financial and operational data into one comprehensive data visualization solution can give you access to information and insights with greater visibility and efficiency. Ascent CFO Solutions is excited to be launching data visualization solutions for businesses–ask us about it if that’s something you’re interested in!
For business owners, having a really good forecast, encompassing financials and operational logistics, is key to setting your business up for success now and in the new year.”
What is forecasting and how can it be used to help your business?
“Forecasting gives you a month-by-month view of the likely scenarios of your cash flows. Most businesses use either Excel or a more modern visualization solution like Ascent CFO Solutions’ implements to create and view their financial forecasts. It allows a company and its team members to better assess their current financial situation and make key decisions for the future.”
Budgeting vs. Forecasting—When do you need one or the other?
”The annual budget is a static forecast at a particular point in time, with management and board members signing off on it annually.
For many companies, having a budget makes sense, but the reality is that it may become obsolete. As you enter 2023 and you see what’s happening with your revenue, your pipeline, and your client behavior, you and your team may decide that a rolling forecast is more useful. The rolling forecast considers the information and data you’ve learned as the year goes on and allows for adjustments accordingly. What makes a rolling forecast more ideal for some CEOs and companies is that it’s being updated periodically throughout the year as your business changes.
I’ve always considered a rolling financial model forecast to be one of the most valuable tools available to management. If revenue starts to go in a direction other than what you budgeted for, the rolling forecast can offer scenarios on where to cut costs, pause growth, and save cash. Updating your rolling forecast every quarter or even monthly with actual financial results gives you more visibility into what your future financial scenario is going to look like.”
How can you utilize your rolling forecast to preserve cash?
“For most companies, the two primary areas where you can make mid-year adjustments are headcount and discretionary spending such as marketing spending.
Examine your marketing budget–are you getting ROI from your marketing partners? If your business frequents trade shows, perhaps you send fewer people or opt for a smaller booth size.
You can also freeze hiring and salary increases or even let employees go to preserve cash. Although letting go of employees can be emotional and often difficult, sometimes it may be necessary to maintain a positive cash flow or decrease your monthly burn rate. If you’re a capital-intensive company, like a manufacturer, then capital expenditures (CapEx) are another lever you can pull.
Since companies cannot easily make significant changes to things like benefits packages or real estate occupancy, cutting these discretionary areas is often the fastest way to make an impact on your bottom line.
It is very worthwhile to get lean and efficient with costs when you are trying to preserve cash. See if you can renegotiate your real estate lease(s) to get a price break. The pandemic showed us a perfect example of this in the real estate market as individuals advocated for and obtained lease cuts. Look at your spending. Review your recurring subscriptions to see if you can cut your fixed monthly costs. I highly recommend Cledara as a tool to help companies evaluate and manage their spending on SaaS subscriptions.
Every business is different, and you should have a firm understanding of your current financial situation before making these changes. Stay agile in your finance and accounting operations and rely on your rolling forecast to help guide you.”
What does agility look like in finance and accounting?
“Agility in finance and accounting is about having visibility into your business so you know when to act. It’s about managing your balance sheet, managing your payables, not letting receivables fall too far behind, managing credit limits and policies, and keeping up with client communication to make sure you’re getting paid.
Stay on top of bank debt or bank covenants if you have them. If you think you might miss a bank covenant, alert the bank in advance. The key is don’t surprise your board, investors, or bankers! The better your forecasting, the better visibility in your future balance sheet, and that will help you ask forgiveness before you’ve already fallen into default.
It’s important to take a hard look at your business and where you can make adjustments or cuts. Review your company’s sales organization and cost structure—are you pricing things appropriately? Can you increase certain offerings to customers to increase revenue?
Truly the best advice I can give is to have a good plan and a good forecast to help shape it.”
How can a Fractional CFO help you stay agile and effectively navigate change?
“Many companies can benefit from bringing on a Fractional CFO either part-time or interim full-time. This individual is highly experienced, has likely been through a recession before, and is prepared to make difficult choices.
A Fractional CFO can help you answer questions like:
How much cash do we need to execute on our plan?
Do I have enough cash to grow?
Is our line of credit big enough?
Am I paying people appropriately, and am I going to be able to retain them?
Am I incentivizing my team properly?
If you have a Controller in your company who wants to level up, it may be beneficial to bring on a Fractional CFO as a coach and mentor. A Fractional CFO may be able to provide oversight and mentorship, as well as handle aspects like negotiating with banks or KPI reporting that your current employee may not know how to do.
I encourage CEOs and upper management to consider bringing on a Fractional CFO to streamline their processes and create more efficiency in their day-to-day operations. This could be a game changer for your business in 2023.”
What opportunities can businesses look to take advantage of in 2023?
“There are ripe opportunities for growth for businesses who are prepared to take advantage of them. The recent decline in real estate costs could present an opportunity to buy a building for your company (of course, consult your tax advisor). There may be circumstances to acquire new businesses as competitors may be more motivated to sell. This may lead to a better valuation or a better deal in a merger and acquisition situation. It may also be a good time to accelerate buying equipment because vendors might be offering discounts.”
The Big Takeaway for How to Prepare for 2023
“I urge any CEO or company leader to pay attention to the numbers to really know your business. Have a plan B and be ready for a slowdown, so if you need to cut costs, you’re ready to pivot. Pay attention to your sales pipeline, and make sure your team is properly motivated and compensated. And be sure to have good visibility into your future cash flows via a robust rolling forecast.
Be really in tune with your business. Know when to pump the brakes or push forward into new opportunities in 2023.”
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About the Author:
Dan DeGolier is the founder of Ascent CFO Solutions and a Fractional CFO with nearly 30 years of experience. He is passionate about working alongside leaders of companies to help them “upward” to their highest potential. Read more