Episode 31: CFO’s Biggest Concern – Recession or Inflation?

Madhurima Gupta:
Welcome to the Mid-Market CFO Circle, our podcast Powered by HighRadius. I’m your host, Madhurima Gupta. We hear you mid-market CFOs, and we have got your back. We understand the challenges that you face, and every Thursday we bring you conversations with your peers to understand the challenges that are faced at CFO’s office can be solved and how should they be solved with emerging technology. And today we have with us Christopher Rashida and we’re gonna call him Yosh. That’s what he prefers who is an entrepreneur executive and comes with more than 20 years of experience as a global finance leader. He’s deeply invested in understanding financial markets and has a passion for building dynamic successful teams. He’s currently the president and chief financial officer of Northern Data, Europe’s leading high-performance commuting company. He’s also a board member of McLaren Technology Acquisition Corp. Welcome to the show. Yosh, how are you doing?

Christopher Yoshida:
I’m very well, thank you. And thank you for having me. I’m excited to be here.

Madhurima Gupta:
I’m equally excited to host you today. Now, before we get started you know, I would like to hear a little bit about you from yourself and how has your journey been as a finance leader?

Christopher Yoshida:
Thank you for that. And it’s, it’s a leading question. And, and I think it’s a hopefully a refreshing answer. You know, I’ve been in the industry of finance for over 20 years. I am a crisis baby as I often refer to myself. Having started my career in the beginning of the.com crisis suffered through the global financial crisis you know, I would say excelled, but equally suffered through the European credit crisis. And so, you know, I’ve only known crisis. And so I think actually as a finance leader, understanding the fragility of that reality has armed me well for the conversations we have today with both our investors and then one we’ll have today on this podcast. So I’m very excited to be here.

Madhurima Gupta:
Absolutely, Yosh. So, you know, before we get started I wanna, you know, set a little bit of context. So we are gonna talk today about what should a CFO’s biggest concern today be? Should it be recession or should it be inflation? You know, both of them are like the hottest topics in financial industry right now and almost 46% of CFOs expect north American economy to be in recession by 2023 and they’re preparing by controlling hiring, limiting head counts, boosting productivity, and a brand new term for potential recession has also been coined, which is called the pass the ball recession if you might have you know, come across it. And as the name suggests what it essentially means is that do will go into recession. It’ll probably you know, a reasonably longer duration of time, but will be mild. Right? So setting that context in, since, you know, you might have yourself faced different kind of economic uncertainties, how is this one different from the others that you’ve seen before?

Christopher Yoshida:
Well, you know, it’s now upon reflection of sort of my introduction and myself description of crisis. Maybe I’ll give you a little bit more backdrop. You know, I’m a banker in a markets practitioner by background, so I’m not an actuary. I wasn’t an auditor. My path through finance has been driven through investment banking at Goldman Sachs, Morgan Stanley and Carlisle, as well as you know, into the broader finance world of operational roles today. And so I think I have a pretty good grounding on the realities of what makes businesses financially viable and what does not it doesn’t mean I’m right but obviously, quite frankly, in your point about what makes this crisis different or what makes this period different is really, really interesting. I mean, we’re in the longest, or has been the longest, you know, so certainly post war expansion period. And in the longest probably we’ll see of our generation of the last, say, nine to 12 years, depending on exactly your timeframe of what’s been an amazing bull market run for all industry. And, you know, you believe the rising tide lifting all boats, we’ve all benefited, right? Think of cost of capital, multiple expansion, largely deflationary pressures around wage and other technological advancements have all been really enhancing for operational efficiencies over the last 10, 12 years post the great financial crisis. So I think what’s in the amazing part is we’ve really benefited from a tailwind and whether we appreciated it or not, it was an extraordinary tailwind and probably one that any macro economist would never have foreseen lasting as long and being as great. And so that’s one, right? And the second part being, which we’ll talk a little bit about, is why I think this time is different. You know, one of the reaction functions post the crisis that was exacerbated with the covid I guess realities were an extraordinary amount of liquidity put into the system. Every government, certainly in the G seven and even G 20 world liquefying and enhancing the economic realities of their own economies that contributed to a global access of investable capital. You know, great examples of that embody the tech space when you see small or unknown or even NAS and startups achieving extraordinary valuations with very little to show for it, or the crypto space where you saw evolutions well beyond the base case of Bitcoin and NFTs and second and third derivatives. You know, and I’m a big believer in crypto, so I’m not suggesting that that was a bad outcome, but I’m saying the irrational exuberance that sort of created second, third, and fourth derivative valuations impact, I don’t think we fully appreciated until it’s gone. So why I’m concerned today that makes it different than the years before is I think we’re in a secular shift for two reasons, one is we’re never gonna see negative rates again in our lifetime. I mean, I think that was truly, or we shouldn’t at least see negative rates. You know, when companies like Nestle and others can issue bonds at zero or negative interest rates, that is a perverse situation that doesn’t make any sense where they can get paid to borrow people’s money you know, just the reality of that statement makes it unique in time. And then secondly, you think about the inflationary aspects we’re seeing now around power and energy. And you know, I was driving to work this morning and in the UK where I live, there’s a lot of concern about the energy reliance that the United Kingdom has on neighboring you know, providers you know, the UK is holy imports power or energy people and capital, right? Even we have a twin deficit that’s well known. And you obviously saw the recent treasury issues that were announced this past week, and then overnight the IMF came out and suggested the UK rethink it’s fiscal policy for the coming years. So you, it’s a complicated situation, but I guess underpinning a lot of that response mechanism in Europe in the US has been an energy issue. And you know, one of the things that I find fascinating in a debate because corporates small, medium and large are caught up in this, is we all consume a ton of energy, right? You know, whether you’re a hyperscaler and a data center provider, or whether you’re just a large retailer, your energy footprint is probably quite substantial. And I do think we’re on a secular trend where energy prices are gonna be higher than we’ve seen historically. And that’s also because as we move towards more renewable friendly, carbon-neutral aspects, you can’t replace or displace what’s been a century of buildup of infrastructure around those carbon-heavy energy sources. And while I think it’s great, we move away from them, you can’t just switch a light switch off on one and turn one on the other and think it’s gonna be a level swap and even swap. And so, from a, I think from a CFO or a planning perspective, you know, the two or three areas that have me sleeping a sleepless night, which I think my peers and my and my partners in similar roles and functions around the global phase, is we haven’t seen this kind of recessionary shock and an inflation shock simultaneously. Typically, you’d be going into a recession and you’d see central banks easing policy. But right now we have central banks hiking policy and, you know, to curb the inflation. And when it’s being led by the us, the Federal Reserve you know, that is deflationary or tries to curb some of the inflation pressures the US dollar is facing. But it causes a tremendous amount of inflationary pressures outside of the us. And so I think right now as a CFO, you know, the three letters that are probably most important to the operational function are FP and A. All right? Never have we seen in the last decade such intense planning going on in forecasting over the next, say, coming 6, 12, 24, 36 months, because the year variables that dispersion around that, around things like just your power consumption or energy costs or wage and labor benefits is extraordinary. And I think to me, that’s a really, really important aspect that CFOs around the world having to face they haven’t had to face in probably the last decade.

Madhurima Gupta:
And what do you think the finance leaders in your opinion, should be planning for as the economy is nearing recession? What will be your take on it?

Christopher Yoshida:
I mean, showing up financing is clearly important. You know, we’ve all benefited from very loose policy affording a tremendous amount of capital chasing those good investable ideas, whether it’s equity or debt or, or credit facilities and flexible capital structures. You know, I think we all probably were a little naive and thinking that that would last longer. So I’m very emphatic to the companies that I advise, let alone the company that I help run that, you know, you’re funding both by the way, from operations, but also in terms of CapEx and broader strategies need to be really thought through robustly because I do think the world has changed dramatically. And if nothing else, you know, the risk of environment we’re in today makes investors just rethink committing capital today. And so, as you know, whether you’re a public company and a large one, or a private company and a small one, you know, the accessibility and the price of capital is your lifeblood because you know, very few companies, and this is one of the other points, I think is very fascinating, and I’m sure in 10 or 20 years time will reflect on it with a Harvard Business Review study or whatever it may be, you know, I think we’re gonna see, think about 10 company specifically, or were not profitable. And yet investors were attracted to them because this multiple expansion sort of this, you know, this growth story, but how you fuel and fund that growth story, was it rational? If capital prices were priced more appropriately and more in line with where they are today or where they’re going tomorrow, it made a ton of sense when rates were zero and capital was free. And so I think growth capital as it’s coined is gonna be much more hard to procure and much shallow or in depth of capacity. So I think right now it’s about shoring up funding, be extending your runways, if you’re not profitable, find that path to profitability because, you know, if you’re not able to substantiate that, I’d say within inside 12 to 18 months to investors, your cost of capital is gonna be iwa really high and probably quite operationally prohibitive. And I think to me, that’s a really big example. You know, I heard from an investor a few weeks ago who was telling me a story, this is now back in August, which is obviously, seems like a year ago, considering it was only a month ago and they said they had invested in a real estate investment in the US and they’ve had it for several years so they understand the operational cadence of, of the real estate and I believe it was a hotel in the, in southern Florida. And it’s been a nice free cash flowing investment for them for the last several years. They went to refi the mortgage this spring on it, and just the repricing of the mortgage alone, right? Cut the free cash flow into not half, but down to a quarter, down to 25% of what, what was before. And so you can think of that like that, that’s assuming there’s no operational change in the business, but just by repricing your cost of funding in a mortgage, which is the most secured type of funding we can achieve these days to me, I thought was a fascinating statement of how much leverage there is in the system and the operating margins, right? And so I think margins right now are heavily compressed. And so I have sympathy to the investors and to the strategists in the equity market who are saying they’re concerned about margin compression, because I can see that happening both from a top-line perspective as growth is curtailing, you know, sort of the middle part where you talk about your costs are, are hard to control at the moment. So even getting, you know, reducing your head, your head count, or reducing your operational costs as, as somebody who spent a lot of his career in the market, I think that the eye, the storm is never when you want to reduce those costs if you weren’t planning for it six to nine a months ago or a year ago It’s hard to say now is the moment, but I do think things are that pressing where if we don’t take action you’re gonna be a victim of your own lack of decision later on cause I don’t see this getting easier. So for me, my advice to, you know, our, you know, friends advisors, companies and fellow finance leaders is I do think, you know, maintaining as much operating leverage as you can in the business is paramount, reducing costs where you can as paramount you know, getting your CapEx in line so you understand the cost and really having a viable funding path is paramount. You know, we had a window for, like I said, a decade where that was not necessarily the highest priority. It was nice to focus on it, but it wasn’t a requirement. I think now it is.

Madhurima Gupta:
What do you feel do you think a mild recession is just what we needed to get over sky high prices and supply chain vows?

Christopher Yoshida:
Yeah, I mean, I hope it’s not as mild as I hope it’s as, I hope it’s more mild than I fear. I, I’m, I think it may be harsher again, because you look how many countries and economies have twin deficits right now I, you know, I’m not a geopolitical analyst, but the Ukraine conundrum and the energy complex doesn’t seem to have a simple answer because if it was, we, you know, we haven’t advanced the solution much at all in the year 2022. So I do fear that’s going to have a prolonged impact. I mean, if you look just as a corollary, you know, the Federal Reserve hiking rates as aggressively as it is, is putting a ton of pressure on the energy complex, which does demonstrate the world thinks that that, you know, oil right now is back to the beginning of the year, the pre Ukraine invasion price points. So I think they are pricing in obviously a reduced demand side of the equation in the coming, you know, 12, 24 months. But I also do think that we have further to go, I mean, you know, you just think of the irrational valuations. I think a harsher recession is probably more likely, and maybe it might be prolonged, but I do think we’re gonna bottom out and have a shallower gradual recovery. I don’t think it’s gonna be quick because central banks are gonna be, I think, slow to respond in policy by reducing rates to excessively low levels again. So I think that’s gonna make it longer I agree there, but I do think we’re gonna have a sharper decline and, and we’re in the middle of that right now. And that may be where we started to see, I mean, I know we’re only in a technical recession, I believe in some of the economies and in others we’re not, We haven’t even described it as such. But I think we’re all clearly pointed to that direction.

Madhurima Gupta:
And in your opinion, I mean, a cliche question, but in your opinion, what is of more stress given the economic damage that it can cause? Is it a recession or inflation?

Christopher Yoshida:
I mean, I think it’s inflation because, you know, I look at wage pressures you’re seeing around the world right now and if you go to any restaurant or just bodega or retail store or help wanted signs are littering the high streets of every major city I’ve seen, I travel the world quite a lot, both for pleasure, but for business as well. And so I do worry that those wage pressures, like most things, they’re hard to go backwards. And once they start to experience upward mobility, they don’t go down. And so you’re kind of stuck at this high price point. And I do think wage inflation is probably long overdue. I mean, I do believe in cost of living you know, you know, living wages. I think employers need to be, you know, you know, the E and G that everyone talks about.
We always focus so much on the e aspect of, of those three letters, you know, there’s a social impact as well that I think we have a responsibility for as, as fiduciaries or our companies and to our people. So I’m in favor of higher wage pressures to keep up with cost of living, but there are limits to that statement, right? I can’t solve, you know, with runaway inflation, I can’t solve, practically speaking the wage requirements of our employees when energy goes up, you know, energy bills quadruple in a year or their own cost of living for food quadruples in a year. I mean, I can’t quadruple salary. So there’s limits to what can be done and I think that’s where I fear more about inflation than I do recession because I can’t pass those prices on. I mean, some ministries can, we can pass one for one, your increase of your cost, right on to your consumer, most can’t, right? So it ends up making me run on a lower margin business which therefore means I’m more reliant on external FA factors, which doesn’t feel very good from a controlling perspective.

Madhurima Gupta:
And you know, I feel that our financial system is pretty complex and it is incredibly hard for us humans to accurately predict what future might hold for us. And luckily we do have technology that provides us an advantage in that area. So how do you feel, can artificial intelligence help the CFO’s office in these trying times?

Christopher Yoshida:
I think it does. I mean, data is everyone’s friend and everyone’s enemy, cuz you don’t know, we don’t know. And I, and I think, listen, we’re a data company at heart, right? We’re high performance computing infrastructure, So we we’re seeing that mega trend continue where the processing of data through AI and ML is a huge story for the future, right? And how that applies to finance. I mean, I think, you know, there’s a good joke if, you know, your best friend at your job is who as a CFO right now, in my mind, that’s your controller or your head of FP and A because those individuals are being tasked with some extraordinary challenges to try to forecast, you know, what the likelihood is in the future. I mean, just look at the currency markets. I mean, this is not easy to understand what happens to Euro dollar a cable or in India, the rupee,I mean, you’re seeing these extraordinary moves, you know, the yen over the week when the BOJ intervened, you know, which was historic for a G seven country.
So I think right now is really hard for FP and A or controllers to forecast, you know, properly. That’s why they’re under a tremendous amount of stress. But there’s some great tools that they have now available to them that allows them to draw on large, you know, pools of data that helps ’em understand both their business, but also the impact of those costs that are probably a little more hard to quantify. And I think that’s great. So for me, it’s been enabler, but boy if you, if you’re not, if you’re not flattering and installing the virtues of your controller of fp&a head you should be right now because that person is, is arguably the most influential and important person in a, in a financial office across the world.

Madhurima Gupta:
Absolutely. And talking about cost, you know, I really wanna talk about the budgets that a lot of companies or CFOs office have planned towards, let’s say, financial transformation in the coming years and given recession. And, you know, inflation, many enterprises are now starting to cut their budgets for the next year. This will likely put breaks on maybe a few AI projects, maybe hiring or technology based procurements. Do you think it is right for CFOs office to put a hold on such projects given how likely we are to see a bigger gap between companies that perform well and the companies that don’t based on their investment and advanced technology?

Christopher Yoshida:
I mean, I hearken back and having spent time at Carlisle as, as I think, you know, the preeminent private equity firm in the world. You know, they spend so much time obsessing correctly in its portfolio, but operational excellence. And I think, you know, having these tools, and I, so I got to appreciate firsthand what operational excellence from the, you know, from the, the private equity side really means and, and kudos to their focus and then their intense focus on these points. And, and, you know, I think operational excellence comes at a cost, right? Like you say, It’s not straightforward, it’s not easy. It’s not inexpensive, especially in a recessionary period or a transitionary period we’re in right now, but I do think there has to be a priority item at all costs because the other side of that adoption is extremely efficient and it does provide a better operational business. And equally, you know, for a lot of businesses that go across multinational you know, economies and touch points around the world, the complexities they’re facing right now are very hard to map out in traditional excel or manual. It’s just not straightforward. So I think having that technology just allows them to be run better. And I think you’re right, you made a good point, you know, as the industries have become more competitive and one of the great evolutions of covid, if you think sort of this democratization of opportunity around the world where people can work remotely you know, I think businesses have found boundaries to be less confining in the post covid era, which is great, but it just means you need to have more energy and substance to your technology and your robustness of purpose around your modeling and your forecasting and your understanding of your costs and the inputs, and that to me is a very, it’s easy to be manual, and manual can be still very good, but as you, as you stress your organization laterally around the globe I think you need to have much more of a reliance on, you know, common language and be able to articulate that to the, your investors and to your partners. Because you know, whether, even if it’s not just your investors, you’re, you’re selling your operational excellence to, right? It’s your, it’s your supply chain partners, you know, no, people don’t wanna partner your customers, It’s not just your investors. And I think your articulation of your strategy, your operational competencies, and the robustness of purpose around there gives everyone you face, you know, 360 degrees employees too, by the way, you know, hopefully comfort that you’re running, you know, the sound possible, even though you know, you, we acknowledge we’re probably in the early stages of a pretty intense storm.

Madhurima Gupta:
You know, we are coming to the end of the podcast, and there are a couple of questions that I still do have. So in spite of the macroeconomic uncertainty CFOs are not losing their appetites for risk. 38% of those who are surveyed as per a survey that we are wrestling to right now. It looks like they feel that it’s a good time to take risks up which is up from the last quarter by 35%. Why do you feel or why do you see that CFOs feel this way?

Christopher Yoshida:
Yeah, there’s a phrase, and I think you never let a good crisis go to waste. You know, there are opportunities that are bearing fruit around the world. I think as any industry consolidation always makes sense in times of crisis it’s a chance for you to grow vertically integrate. I mean, there’s a lot of good opportunities to do it. And, and I think as you reflect on your own business model, you’ll find opportunities that maybe were less obvious yesterday, that are more obvious today, just given what’s transpiring in the world around us. And so I think, you know, again, finding ways to take up margin efficiencies or increase margin, increase efficiencies you know, integrations, These are all opportunities that people, I think are gonna really look hard at. Because at, you know, when you come out the backside of this, I mean, there’s always those phrases, and I, and I feel like I’m sort of giving soundbites, but you know, you always hear about good companies being, you know, galvanized and built in bare markets in recessionary periods and I think that’s true, you know, as you rethink your business model in times of tight financial realities, I think you just build a better business. And so if you can find ways to integrate, acquire, harmonize you know, grow, those are always good opportunities because the price point typically is quite attractive if you’re acquiring the integration, the margin of savings are quite attractive And so then as you come outta the backside of the recessionary period, which we will, by the way, this is not forever, all right? But I think we need to be mindful. You wanna build with an astute mind and a keen eye for value.

Madhurima Gupta:
So, I mean, this is the last question that I have for you in terms of how CFOs should be looking at inflation and recession and how they should be navigating their way through it. So tell us what are your parting opinions on precautions that CFOs should be taking to safeguard themselves from recessionary pressures?

Christopher Yoshida:
It’s always easy to say that the, you know, the problems of your competitors or the challenges of your industries don’t apply to you. And we always have that sort of distance bias of feeling over better than the average or better than many. I think that is a fallacy. I, and even if it doesn’t apply to you by heating the warning signs of competitors’ failures or trippings, I think you just run a better business. So I spent a ton of time studying my competitive landscape, and I urge others to do as well. I may hold the similar opinion that I may be better, or we may be better than the average or better than most. But, you know, in times of difficult financial periods, you know, all things trade to the same value of average. So you wanna make sure you’re not caught up in it. So I think really heating the warning signs of the world around you, I think being very mindful of funding, because while one industry may be well funded today, it can change very quickly. I mean, again, the tech world has seen this happen overnight, this year as everyone’s now obsessing about, you know, free cash flow and profitability. And so I think just trying to be really focused in methodically executing. And the other part, last part I would say is communicate, communicate, communicate, communicate, communicate to your team, your people, your employees, your investors. I think sometimes in pressure situations, I go back to my time at Morgan Stanley where we had some amazing leaders help navigate through the crisis. You know, there’s a time does it, there’s often you want to communicate less because you feel that the message may not be well received or that the message you have to tell may not be one to be heard, cuz it’s not good. But I think that communication actually does instill confidence and it actually instills purpose, and it keeps your people focusing on the things that you want them to focus on. And I know in the last few months for us, you know, I’ve, I get a ton of people volunteering their assistance to help finance and, and leadership on the company, which is great. But really I want them to execute their roles. And if they do their role well it just help allows us to do our role better. And I think that really comes from communication from the top down. So my key pressing lasting point is communicate. And I think that will help alleviate a lot of stress from occurring down the line.

Madhurima Gupta:
I think With that, we come to the end of this episode of the CFO Circle podcast. Thank you so much for joining us today, and I hope that this was an interesting session for you. So stay tuned and thank you so much Yosh for taking time today and speaking with us.