This year is likely to bring the best of times and the worst of times for chief financial officers (CFOs).
It is not hard to see why these will be rough times for those entrusted with company finances. The downturn in the economy and a tight credit market will test the abilities of CFOs of even the best-managed companies. And many reputations could be shattered in the case of financial officers in companies that have taken too much debt and tinkered with their financial numbers.
We have already seen the second possibility in the case of Satyam Computer Services Ltd and its CFO. Srinivas Vadlamani has been arrested in the week after the firm’s former chairman B. Ramalinga Raju admitted that the books had been cooked. Raju has subsequently said in a statement that his CFO was not involved in the fraud.
The Satyam case is an extreme, but it has helped investors focus on what the chief corporate bean counters are up to. There was a far smaller ripple in the same week that Raju dropped his bombshell. The stock price of real estate developer DLF Ltd fell sharply on 8 January after there were rumours that its CFO Ramesh Sanka had resigned, an unlikely reaction when the times are good.
The global slowdown and credit crunch that have come after five extraordinary easy years are bound to put the finances of many companies under stress. Those balance sheets that are burdened with loads of debt or have been massaged by accounting tricks could stand exposed if the economic downturn continues and companies find it tougher to either roll over their debt or take fresh borrowings.
But these testing times will also bring CFOs into prominence in a positive way. One thumb rule is that companies chase market share and growth when the going is good, which is when marketing departments and CEO ambitions take control of the corporate destinies. But the CFO is more likely to be heard when the going gets tough. Look inside your own companies and organizations: Aren’t the finance guys becoming more important?
What happened during the earlier downturn at the beginning of this decade is further proof. CFOs shot into prominence. At Tata Motors, Praveen Kadle was in the forefront of the cost-cutting and capital restructuring that helped the auto maker recover from a bruising slowdown and record losses. At Hindustan Lever Ltd—as it was then called—D. Sundaram ensured that working capital was tightly managed. At Gujarat Ambuja Cement, Anil Singhvi took charge of the entire company as he moved on to become CEO.
These are just a few of the examples that quickly come to mind to show how slowdowns and recessions bring the finance guys into prominence. Many CFOs I met in those years were taking a hard look at every corner of the company—from strategy to asset sales to wage costs.
Will it be the same this time around as well? As finances get stretched and sales take a hit, it is very likely that CFOs will have a tough and challenging time trying to keep their companies on course.
A new report from Citi’s investment banking division on corporate finance priorities for 2009 says: “The corporate finance priority is clear: how to create sufficient financial flexibility to survive a scenario where the recession continues well into 2010, where bank credit remains scarce and where capital markets remain in turmoil. Specifically, managers need to focus on three areas: safeguarding the balance sheet, rethinking their capital deployment and protecting their supply chain.”
These suggestions are for CFOs in the developed nations—where companies face a nasty recession rather than a mere slowdown, the markets are more turbulent, the lenders strike is truly severe and credit downgrades have become very common—rather than for corporate finance professionals in countries such as India. But the broad lessons are worth remembering here as well.
The three most important tasks, say the authors of the Citi report, are safeguarding the balance sheet, rethinking capital deployment strategies and protecting the supply chain. In a country such as India, this could mean trying to cut leverage by either paying back debt or raising new equity, going slow on capital expenditure and ambitious acquisitions and providing financial support to key suppliers so that they do not fold up.
Despite all boom-year excesses, the finances of Indian companies as a group are far better than what they were when the mid-1990s economic boom ended with the shocks from the Asian financial crisis of 1997. At least some lessons have been learnt. But there are many number of individual companies—in sectors such as real estate or those that have borrowed to fund huge overseas acquisitions—that could have a rough ride in 2009.
They say cash is king in a recession. The keepers of that cash will be kings too.
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