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The Three Pillars of Financial Acumen in Turbulent Times

If there was ever a time a company and its leaders need deep financial acumen it is now.    

Many of us have experienced periods of financial turbulence in our lifetimes. Black Monday on October 17, 1987, the aftermath of September 11, and the Global Financial Crisis of 2007 and 2008 are some of the more memorable. But these events, as extreme as they were, pale in comparison to the current Coronavirus pandemic.

Businesses large and small are scrambling to understand the financial impact of COVID-19. Last week, the U.S. experienced its largest ever weekly unemployment claims as businesses laid off and furloughed employees. Companies worldwide are deferring capital expenditures and non-essential expenses. Publicly traded companies are suspending or canceling dividend payments to conserve cash.

The financial chops of CFOs and finance professionals across the globe are being tested. However, leaders at all levels need to rely on financial acumen to help their companies survive the months ahead.

So how can business leaders help their companies navigate through the challenges ahead? There are three financial tools to help: the Income Statement, the Balance Sheet and the Cash Flow Statement. These reports are just data until a leader asks critical questions to reveal important insights. Those insights are the foundation for making informed decisions. 

 

Here are some key questions a leader should be asking when using each report:

The Income Statement

  • How will Covid-19 impact company revenue?
  • How might a forecasted drop in revenue impact profitability (and cash flow)?
  • What are the largest categories of spending in the company’s cost structure?
  • Which expenses can be reduced or eliminated to preserve profitability? What expenses are mission-critical for the company? Which can be deferred? Or eliminated?
  • How might reductions in expenses or staff today impact the business’ ability to recover later?

The Balance Sheet

  • How much cash is on hand?
  • How much accounts receivable is the business carrying? Will customers pay as planned? Or might they have difficulty paying their bills?
  • How much working capital will the business need to restart activities after a work slow-down?
  • Are there assets that the company could monetize to improve short term cash flow?
  • How much debt is the business carrying? Is it over-leveraged? Can the business afford to take on more debt? Can it afford not to?
  • How will an increased debt load impact the company’s income statement and balance sheet? What are the longer term effects of borrowing money?

The Cash Flow Statement

  • When does the business expect to receive cash from its customers (sources of cash)?
  • Will the combination of cash and receivables allow the business to cover its foreseeable expenses? For how long? (Does the business have enough working capital?)
  • What expenses does it expect to pay over the next several weeks or months (uses of cash)?
  • What can be done to preserve and protect cash flow, allowing the business to fund important expenses such as employee salaries?
  • Will operating cash flow need to be augmented with financing cash flow by borrowing money?

 

These are difficult times for nearly all leaders and the businesses they manage. Leaders cannot shy away from asking the tough financial questions, especially in a time of crisis. Leaning into your financial acumen and using the tools described above can help your company survive today’s financial shock and emerge ready for success in the future.