Episode 28: The recession scare is real- How can CFO offices prepare for it?

Madhurima Gupta:
Hi, welcome to the CFO circle podcast covered by HighRadius. I’m your host, Madhurima Gupta. And today we have with us, Steve Rosswell. Welcome to the show, Steve, how are you doing?
Steve Rosvold:
I’m doing great. And it’s a pleasure to be on your show. Madhurima
Madhurima Gupta:
I am so excited about talking to you today about understanding how CFO offices should move away from their worry about recession and how should they prepare well for it. So before we get started with the actual interview discussion, I actually wanted to share a little bit of information and backdrop on why we are talking about this particular session about recession and how to prepare for it. And if CFO office should worry about recession. So the global economic right now is entering in what could become a protracted period of feeble growth and elevated flight inflation. According to world banks, latest economic growth prospects report. The global growth is expected to slum from 5.7% in 2021 to 2.9% in 2022, which is slightly lower than 4.1% that was anticipated in January. And because of this, there has been talk around the dreaded R word, which is recession, and that is getting louder as inflation geopolitical tensions and site and supply chain disruptions have been hammering the global economic. So what does this really imply for businesses around the world to answer that Steve is here with us. He’s the founder of CFO university, a global professional development community de dedicated to growing finance leaders. He has honed his ability to drive change, improve profitability and ensure long term financial health for businesses. He founded KRM business solutions in 2004 to assist Pacific Northwest companies in developing knowledge, processes, systems, and tools that the need for success. So that’s a little bit about you, Steve, would you like to say, share something about your journey with our listeners?
Steve Rosvold:
Well, thank you for that. A nice introduction. Yeah. You know, about five years ago, we kind of converted into a consulting firm, advising CFOs and the boards and CEOs on finance matters to cfo.university, which is a platform to develop financial leaders and CFOs in the future. So that’s kind of what we’ve morphed into and we’re having a lot of fun meeting people like yourself at HighRadius on our journey. So we’re really excited to be here today.
Madhurima Gupta:
So without further ado, I wanna ask you the very first question that I have for you. And you know, we wanted to understand for young workers who didn’t experience the last major economic slowdown, that is the great recession between 2007 and 2009. The conception is an abstract one that doesn’t you know, cause as much anxiety. What was your experience like in you know, during the recession that lasted between 2007 to 2009?
Steve Rosvold:
Well, you know, it started through a whole different series events. There wasn’t a pandemic there wasn’t all the things that kind of are leading up to what we’re facing today, but there was a banking crisis. So there was a huge housing crisis and certainly from the United States. And I think, you know, generally around the world housing prices and building had was just ravaging, low-interest rates fuel that not dissimilar to what we have today, but the building was going crazy. And so, and what happened is it, all of a sudden the banking system failed people realized there was a lot of bad mortgages out there and things stock came to a halt very quickly. And so I think a difference in the, or one of the things people should be aware of who didn’t go through that is that it stopped on a dime. It was a banking crisis. So you could, you know, everyone was worried about banks failing. So I did a lot with my clients. It was like, is our bank gonna fail? How close are they? Are we gonna be able to, can get money from them? Should we put deposit? So it was a different, quite a different focus than we have today at this time, but it was all about banking and it was all led by this whole building crisis where things just stopped. And so what we saw around here for five or seven years after that, there’s, you know, partially built out lots of residential and large buildings that had just stopped. And they sat vacant basically for five or six years. And so that was a huge part, you know, housing prices plummeted. So people felt they were, their net worth declined. So personally people felt it very close. And I think we’re kind of, I’m not sure which way we’re gonna go, but we’re not in that frenzy yet of what 2000 and, you know, seven and 2009 created which, you know, there was banks that were failing. The governments were trying to keep the banking system going. So there’s a whole, there’s a little bit more panic around the banking system than I think we’ve seen so far. and anything close to that in the last you know, last 12 months.
Madhurima Gupta:
Got it. The Fed’s decision to raise interest rate by three fourths of a percent point is the most aggressive rate action the bank has taken since 1994. How do these high rate high interest rates impact businesses that run on credit or businesses that are looking to expand?
Steve Rosvold:
Yeah. You know, it, there’s a number of different ways. Number what the most obvious is money costs more. So it’s gonna hurt your P and L if you borrow a lot of money, you’re income, statement’s gonna get hurt because you’re gonna pay more interest. But there’s a few other subtle ways that it impacts us. Well, one is there’s, covenants in our banking covenants. So you’ll borrow money and there’ll be kind of triggers that happen. And around those banking covenants, one of them is a fixed charge ratio. And as your interest costs go up, a fixed charges has to do with your principal payments and your interest payments, and they will, the bank will only give you so much money in a coverage basis based on what your payments are. And so, as your interest costs go up, your borrowing capacity goes down. So, you know, it’s gonna make it harder for people to get as much money as they want to expand, or for working capital purposes or whatever. So there’s gonna be a limit a lower limit on what people can borrow. And then there’s currently there’s these covenants in place. So, you know, there’s a lot of deals that have been done in the last five and six years or three months for that matter that have these covenants in them, that this is gonna make it harder to make those covenants. So there’s a lot of implications besides just, we’re gonna pay more for money that I know CFOs are looking at very carefully right now, cuz you don’t want to trip a covenant. You don’t wanna have those problems and higher interest rates for those companies who are growing quickly and we’re leveraging to do that. You know, it could put a big herd on ’em and CFOs are really, you know, trying their best to stay on top of that.
Madhurima Gupta:
Many Ecommerces believe that recession is inevitable this year or even next. Do you agree with that? And if you do how can CFO offices prepare themselves for recession?
Steve Rosvold:
Yeah. You know, I don’t wanna be a Debbie downer on this, but you know, the US, we’ve gone through two quarters of you know, negative GDP growth and that is a common definition of a recession. So some people would say in the US for sure, we’re already at a recession. I know that there’s some upticks, the labor market strong there’s some other things that are kind of making us doubt, are we really in a recession yet? But I look at the high valuations that we’ve had from, you know, in the stock market, in the housing market, you know, look at our, you know, our cryptocurrencies, you look at all these assets that have kind of, you know, got really expanded in price over the past five years and even longer in some cases. And you say, how long can that run? So that’s one of my concerns that, you know, it’s good that we have a leveling off, I think that could actually keep us out of a recession. So I know the housing prices here, the us are kind of stabilizing and that, I think that’s a good thing. The stock market’s kind of been flat for a while actually come down almost. I mean, it’s almost come down 20% since the beginning of the year. So, you know, that’s another side of a recession. So I think we’re in a slow down and that’s, you know, after this hyper-growth we’ve had, you know, that could make for a softer landing. So, you know, I’m optimistic that the, you know, our business leaders or CFOs out there, you know, are gonna help make sure we’re properly managed. And then I hope that our politicians act responsibly in how much debt we take on and what we do there that we can kind of have a soft landing to this bump in the road.
Madhurima Gupta:
Absolutely. So, you know, recessions here almost, or at least the fears are growing. Inflation is running hot, stock market is turbulent. Yet workers continue to ditch their jobs, which is at record high. Why do you think is this happening?
Steve Rosvold:
You know, I would say in the US a big part of that is a lot of stimulus money. So the us kind of propped up propped up a lot of our economy through, you know the government issue, more bonds and special programs. So that one of the concerns is that’s kind of run its course. I, my number one concern on where we are today is that we haven’t really felt it yet. I mean, you know, $5, oh, in the us $5, a gallon gas prices is unprecedented. And that may be even low from the world standards, but it’s very high in the us. And yet there’s still people, you know, the roads are still full. So my I’m wondering whether it’s really felt it yet. So we’ve read a lot about it. We’ve seen the statistics. I don’t think our behavior is changing and that could, you know, there could be a brick wall yet to hit and that we just, we’re not there yet. You know, we see all the signals, but nobody’s really in the mindset of, I have to change my behavior. This is really gonna hurt some of that’s by, you know, what we did through the pandemic to kind of keep the economies going. We may still feel a little bit of benefit from that and that would be the downside. So that’s where I’m worried that, you know, our behavior, isn’t changing enough to really warrant, you know, soft landing on this. But you know, we are slowing down and that to me is a good thing, you know, for a little, for a bit.
Madhurima Gupta:
Absolutely. And how do you think the CFOs, or what would you recommend the CFOs to plan in order to retain and recruit the next generation of staff and leaders at their respective companies?
Steve Rosvold:
Yeah. You know, there’s been a big shift. I think the CFO role of the finance role in general, typically considered, you know, kind of numbers, crunchers, not people-oriented. I think over the last 15 to 20 years, that’s really been changing. We realized that you know, it, isn’t our ability to do a financial statement that kind of, you know, makes our careers it’s the ability to lead people. And so I think the finance leaders are recognizing that, and I think that all comes into play with how we develop and certainly our model is a development model. So one of the things that we feel is very important in the next steps is to develop people, have to see a path and to do that, you know, you have to spend time on sharing that path with them. And so development, I think is super important from a retention standpoint and from a recruiting standpoint and also from a, you know, performance enhancement standpoint. So we look at the, you know, giving really great development opportunities to our employees as an important attraction to them. And I think the idea that you know, that the, what quote, the soft skills are much becoming much more important than the technical skills. Now, I will say that if you don’t have the technical skills, you can’t, you don’t get in the starting gate. So you need to know a financial state, but you need to understand that piece, that isn’t less important, but for growth and the future, there’s very few jobs now that don’t take great communication skills. You know a creative thought innovation, a bunch of curiosity in what we do. Those jobs are getting, you know, taken over by the bots of the world and automation. And so, and that’s not gonna slow down, that’s gonna continue. So having, you know, you know, hiring people with great communication skills, hiring people that have a, you know, super intellectual curiosity, they wanna know more and more. I think that’s, where our focus is. And that’s, I think what business schools are developing now you know, really focusing on some of these other skills that, you know, 20 years ago, you think, well, a financial person, you know, they’re gonna crunch some numbers and, you know, they’ll throw something over the, cubicle to, you know, the rest of the team. And that is completely upside down. Now, that’s not a focus at all for any finance leader. It’s well-rounded individuals who can communicate well and have a curiosity that they can’t satisfy.
Madhurima Gupta:
And we just talked a little bit about skill you know, assessment and upskilling of the team members. So you know, as per and I’m just recollecting one research that I read through, I think it was by McKenzie and company wherein they said that about 87% of their executives were experiencing skill gaps in their B2B workforce. Right. and which makes reskilling and upskilling the need of the hour. Right. So what are some essential skills that you would recommend a finance professional to have so that they are upskilled and they’re able to make into new jobs, or they’re able to be selected for these new jobs that are currently hiring.
Steve Rosvold:
Yeah. You know we’ve talked about all the soft skills. So we kind of talked about that. I think quite a bit where, you know, really good communication skills, a good presence about yourself, you know, an insatiable curiosity. And I love that the people who just wanna know more and more, they ask that, why question a lot? So people who are gonna uncover things just because they just wanna learn more. That is that’s. That to me is one of the most valuable skills of any leader, not just a finance leader, but can have but then there’s also, there’s a, there’s a move away. I’m not a move away a growth in data analytics. And so I think understanding how to use data analytics and how to, you know, the, you know, what that means, what, and that means being able to assess what information is out there that we should be capturing, that we can do more with, and that’s a huge skill. So it isn’t you know, we can find the data scientists. I mean, they’re valuable and important to get paid a lot, but it’s that skill to be able to understand what’s important in, you know, in our business from an information standpoint and how do we capture that, and then how do we make data driven decisions? So I think the big push for the finance role, one of the huge opportunities besides this, you know, creating a more a skilled force with communication and those things that we discussed is, you know, using data in our life to make better decisions. And, you know, we’ve always done that from a historical standpoint and used analysis and things in historical, you know, records and trends. And now I think we’re trying to find that next level of, well, how do we get predictive? How do we get, you know, how do we understand what’s gonna happen and shape the future rather than report the future? So I think that whole area of, you know, future-focused rather than historical focused is a mindset shift for us. And it also is gonna take some technology, some capabilities, and some understanding of of, you know, data analytics and how we can make better decisions as a group with those.
Madhurima Gupta:
Absolutely talking about how to use analytics better you know, given inflation session, every CFO’s office today needs to improve their cash flow and lower their DSO. Right. How do you think a cloud-based analytics platform can help a CFO achieve this?
Steve Rosvold:
Well, we just went over the data that having that data to understand, I look at it as, and DSO is one piece it’s the whole working capital. In fact, one of our number one areas that CFOs, we took a poll not long ago and working capital of which DSO is a big part of was the number one concern to raise money and to understand, you know, how to manage our working capital better. And by the way, it wasn’t just people reducing working capital. Some of them that were having inventory problems actually said, how do we afford working capital to fund inventory? But from a standpoint of technologies they’re invaluable, right? Because they give us that data that we don’t have to search for, or guess at. And that gives you the opportunity to model of different scenarios and what I look at working capital, the biggest role for the CFO and the finance team and working capital is educating our peers. You know, the other executives and the people who are impacting working capital to understand how their actions impact DSO, for example. So if the salesperson’s out there selling, you know, 45-day terms and our, you know, DSO goals are set at 30 day terms, we’ve gotta disconnect. And so helping people understand what they’re, you know, what, how they’re impacting our whole working capital piece, that education is where I think these systems can be so valuable and things like systems also real, a really good automation system can help us flag, you know, you can use that for bad customers. So all of a sudden you have a credit, well, how do you recognize that? Well, we get no, when they don’t pay us. Well, that’s a little bit late. If we can find out earlier, you know, what triggers in that customer might put them in default of a payment, if we can anticipate that we can do more. And that’s what these systems allow us to do. We can do a lot more data analysis on customers on their payment histories when, when we can expect something, a bad event to happen and be more predictive on that than being kind of after the fact.
Madhurima Gupta:
Absolutely. And you know, we kind of come to the conclusion of the episode but before we do that, there is one thing I wanna talk to you about. And this is from a Deloitte report which is you know, called boosting resilience, working with like-minded partners to orchestrate, critical supply chains, right? And according to this report, one of more recent approaches to supply chain is friend shoring, wherein you know, it is recommended that companies develop relationship with key suppliers around the world to prevent supply chain disruption that a lot of companies have faced recently. What is your take on friend shoring?
Steve Rosvold:
I think that’s another tool to use, to prevent supply chain disruption. You know, we went through a whole phase and the whole, the eighties and the nineties, and even the early part of this century were spent on just-in-time inventory, lean manufacturing, six Sigma, that was meant to take cost out of our value chain or out of our supply chains. And in doing that, we went to one supplier, a preferred supplier. We went to the cheapest supplier. We tried and we found out that system did not work in a pandemic in a supply chain disruption when, you know, it just didn’t work. And so I think this idea of friend shoring makes a lot of sense as an option, you know? So I, whether it’s the only tool people could use, I don’t believe that, but I think it sure makes a lot of sense from a protection standpoint. So when you look at risk management, you look at your supply chain from a risk management standpoint, having more than one option is always a value. And you know, how you maintain that friend shoring piece you know, that’ll be contractual, it’ll be how you maintain that relationship. And I think suppliers are still, you know, wanna be a preferred supplier. So that’s the battle. I think people are gonna fight is how do we have, you know, how do we develop, you know, what does that friend showing look like? Is it five suppliers for one product? Is it two suppliers? Is it, how is it geographic? So I there’s some things to work on big, but it makes a lot of sense given, you know, what we’ve gone through and this whole craze that we went through to be so efficient in our supply chain, that if we had one hiccup, it shut our business down. And that’s kind of what happened in the last, the last couple years is that you know, one part, you know, you couldn’t get one tool that you had one nut that you needed to finish your product and you couldn’t manufacture anything. So I think people realized that was a whole, we kind of overdid it on the lead manufacturing side. And there’s a finer balance of which friends shoring certainly fits in as a way to fix that.
Madhurima Gupta:
Absolutely. And do you think friend shoring is gonna help with recession or managing recession better at CFO’s office?
Steve Rosvold:
You know, I think any way that we can, and I’m a big fan by the way, the CFO being involved in the supply chain. I think that is absolutely critical, but I think any ways that we can take risk out of our supply chain without adding a bunch of cost, I think that is value add. So I think that’s what we’ve learned that CFOs have learned that, you know, we can be too tight with the supply chain and that can shut down our businesses. So having flexibility. So I look at it as a risk management issue, you know, and really understanding where, where, where can things, where can we get shut down? And that includes the whole supply chain. So people with complex supply chains have a, you know, have a big risk management opportunity to make sure that their supply chain and friend shoring can certainly be a part of that in improving the supply chain, which will improve the, you know, our ability to get goods to people which will improve the economy.
Madhurima Gupta:
Perfect. thank you so much for sharing these insights on whether CPO offices should worry about recession or not. I hope that you enjoyed having this discussion as much as I did Steve really appreciate your time.
Steve Rosvold:
I sure did. It was really fun talking to you, you know, moderating. I really appreciate the time and and it was fun. So we’ll have to do this again.
Madhurima Gupta:
Absolutely. I look forward to doing it again with you as well. And for our listeners out there, I hope this was an exciting conversation for you, and this helped you out in one way or the other, please stay tune. We’ll be back with.