Dealing with uncertainty: The top three questions to ask your CFO

With persistently high energy costs, changing regulation and a tight labour market, businesses in Ireland are contending with a complex economic landscape. Coupled with global uncertainties and shifting consumer behaviours, executives are continuously navigating risks that could challenge their growth and sustainability. While the challenges are well-known, their evolving sources—such as increasing interest rates, supply chain disruptions, and changing regulatory environments—make it critical to reassess strategies regularly. In this post, I outline key areas of concern for directors and propose some questions they should be asking their CFOs to gain a deeper understanding of the financial and operational risks their businesses face.

How prepared are we to meet the upcoming Corporate Sustainability Reporting Directive (CSRD)?

This (2024) is the year that CSRD comes into force for many large companies and non-compliance will lead not only to reputational consequences but to financial ones also. Your CFO should have a plan to collect the new data needed, ensure its quality and integrate it into traditional data collection systems. It will be key for boards to understand how much investment will be needed for compliance to CSRD. Now, as ever, regulation means cost. But there are meaningful consequences for not meeting CSRD requirements – through fines, penalties, lack of access to capital and an increase in cost of capital.

So this is one cost that must be borne by the business and not just for reputational reasons but for cold hard economic ones too. Even though CSRD requirements are not yet live for SME’s, boards of SME’s would be advised to prepare for increased data collection and reporting requirements. If you are an SME that has large corporate clients, your clients will need to collect data from you as part of their own reporting requirements. So while SMEs do not need to comply with the CSRD immediately, they should be taking proactive steps now to prepare for future requirements, whether due to direct regulation or indirect pressures from partners and investors.

What is our Working Capital Situation and how is it evolving? 

Profitability and balance sheet strength are always important to guard, but when it comes to a crisis situation, today as ever, cash is king. We could take that a little further though and say that cash flow is king. And while cash is critical, the true liquidity situation of the business is best understood when looking at the entire working capital cycle, encompassing not just cash but also inventories, receivables and payables. It is important not just to understand the working capital cycle of your business but also how it is responding to the current conditions. Cash flow is not just important to a business, it is oxygen. Just like a human being can’t survive for very long without breathing, a business will not last long without cash.

Unseasoned CFOs may throw out figures of reserves or cash buffers. But more savvy CFOs understand that in a real crisis, cash buffers can disappear overnight and it is the business’s skill at breathing – taking in and paying out cash – that will count. Cash flows around a business in a relatively predictable cycle and understanding the nature of this cycle is the key to protecting it in times of distress.

How resilient is our business model to potential economic downturns or shifts in consumer sentiment?

Apart from two quarters of contracting GDP due to the COVID-19 pandemic, the last time that Ireland suffered a recession was the 2008 Global Financial Crisis. There is nobody who can predict when the next recession will come but what we know with some amount of certainty is that our current capitalist system is prone to cyclicality and it’s been quite a while since our last real economic trough. Preparing for a softening of the economy therefore, is a sensible thing for any business to do. Your CFO should address risks in revenue streams, liquidity, and contingency plans for maintaining financial health during a downturn. It is important that boards develop contingency plans and scenario analyses to navigate a potential recession or consumer behaviour changes.

As Warren Buffett famously said in the wake of the tech bubble bursting in 2000, “you only find out who’s swimming naked when the tide goes out”. Now is the time for businesses to get togged up in preparation for leaner times. Should this writer be too pessimistic and a recession not arrive, making the business leaner and more competitive has only upside for shareholders anyway. Ensuring that steps have been taken to understand and optimise working capital, as mentioned above, will only support these efforts to make the business “recession proof”.