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For the last seven years, successful chief financial officers (CFO) have positioned themselves at the forefront of corporate strategy, driving financial performance across all business entities. During this economic crisis the CFO must — now more than ever — be more than an accountant or a referee: he must actively manage the balance sheet and seek out opportunities to create value for the company.
In the Middle East and North Africa region, as elsewhere, the crisis is generating conditions that present unique challenges for the CFO. Lower business-to-business spending, and in some industries lower consumer spending, means declines in revenue. Restricted lending from banks results in potential cash-flow challenges. A drop in enterprises’ debt capacity leads to higher weighted average costs of capital. All of these factors drive lower capitalization multiples and lower terminal values, significantly reducing shareholder value.
During this turbulent time, cash is king and the CFO is the power behind the throne. The CFO’s challenges, however, will vary according to the financial strength of his company. In organizations with liquidity constraints, CFOs will have to cope with difficulties in raising capital: debt will become more costly, if it is available at all.
Floating more shares could prove ineffective in the current turmoil and would further send negative signals to stock markets. For companies that have more cash on the balance sheet, CFOs will still have to contend with threats to revenue. The crisis, however, is also likely to elevate cost consciousness and financial awareness among management. CFOs will need to leverage this exceptional trend in MENA management behavior to seek out opportunities to optimize costs, increase synergies across operations and rationalize capital expenditure spending.
Regardless of the organization’s financial status, almost every CFO has heard one or more of the following questions from the chief executive officer:
- How will the current economic crisis impact our financials in local, regional and international operations?
- How can we optimize our operations to create value despite the downturn?
- What level of investment and spending is appropriate to maintain profitability and sustainable growth?
- How can we ensure adequate cash to fund operations and growth aspirations, despite the credit crunch?
- How can we protect our share price from both decline and volatility despite the stock markets’ turmoil?
Few of the CFOs in the MENA region who are struggling with this economic crisis have ever experienced anything like it. Not many of them were in their jobs during the collapse of the dotcom bubble at the start of this decade. Despite some similarities to the last economic downturn, this crisis is significantly different in terms of its global nature, scope and scale. More CFOs than CEOs were laid off during the 2001 recession, and CFOs are once again under the spotlight.
The way through the crisis
In order for CFOs to weather the economic crisis, leverage any potential opportunities for their companies, and solidify their own positions, they should structure their agendas according to four key pillars:
CFOs should swiftly assume a strategic role in their organizations if they haven’t done so already. They need to quickly build capabilities, free themselves from daily operational tasks, and focus their efforts on the strategic dimension of their agendas with an outward perspective on contemporary business issues.
- Extract value from current operations — Look across the organization for ways to improve operational margins and generate cash flow. This may include optimizing operating expenditure, rationalizing capital expendiuture against value-based business cases, reevaluating fixed-asset utilization against opportunity cost to maximize return on investments (ROI), integrating or consolidating across global operations to capture synergies, and ensuring effective management of company resources to maximize value generation. In short, MENA CFOs should entrench a culture of value-based management across the organization. Companies should institute key performance indicators (KPIs) that measure economic profit rather than just revenue in order to align management behavior and actions with the creation of shareholder value.
- Regularly assess and assure enterprise financial health — Conduct dynamic financial planning and risk management activities to detect finance time-bombs before they explode. Timely management reporting and scenario planning are essential in this regard. The CFO perspective should be based on awareness of the relationship between actions and the enterprise’s financial results. Moreover, MENA CFOs could consider hedging international investments across various financial risks, such as currency fluctuations. Finally, CFOs should revise dividend policy and capital structure as necessary to maintain debt-to-equity ratio at controllable levels. An early risks alarm on the enterprise’s financial health to the CEO and board of directors is essential.
- Manage the corporate portfolio — Reassess the business’ portfolio, based on what assets create value and how they fit together strategically; consider selling assets with opportunity costs that are higher than the asset’s current market value. CFOs of financially strong corporations should continue to actively seek regional or international investments that are a good fit with the organization’s capabilities and strategies and that might currently be undervalued. The right moment to invest doesn’t depend on the market cycle, but rather on whether the investment will drive the operational strategy and whether there is access to necessary financing.
- Secure funding sources — Manage liquidity and ensure optimal funding sources for CapEx and M&A activities. The region has previously witnessed significant M&A activity that has consumed excess cash resources; nevertheless, cash might still be on the balance sheet in the form of working capital. While some enterprises fund their operations with a negative working capital (e.g. Amazon.com), many MENA enterprises suffer a highly positive value. Smarter management of receivables, payables and inventory could release the cash needed to recover liquidity. This could involve revising customer credit and vendor financing policies. Furthermore, CFOs should leverage any potentially slower deal-making period to negotiate and secure financing alternatives and revise the pecking order. This will speed the company’s ability to act when a target emerges. Finally, CFOs should also manage investor relations in capital markets to enable equity funding, and contain the turmoil around share prices. In fact, CFOs are best positioned to rebuild confidence among the community of investors in the MENA region via proper communication of their enterprise growth story based on business fundamentals.
Hadi Raad is senior associate at Booz & Company
