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Business News/ Companies / News/  Tools for troubled CFOs: zero-based budgeting, currency hedges and more

Tools for troubled CFOs: zero-based budgeting, currency hedges and more


A number of CFOs at some of America's biggest companies have left their jobs in recent weeks.

Some CFOs look for ways to bring expenses down permanently, while also putting their firms in position for opportunities ahead. Photo: ReutersPremium
Some CFOs look for ways to bring expenses down permanently, while also putting their firms in position for opportunities ahead. Photo: Reuters

The finance chief, more than any other executive, looks directly at the numbers that lay bare the pinch of inflation or the deleterious effects of an economic slowdown. Expenses are proving difficult to hold down as prices surge. Financing costs are climbing, too, and some are finding it harder to borrow. While companies have some pricing power, they can’t raise prices indefinitely and it only does so much to help the bottom line—particularly for multinational companies whose results have been hit hard by the strong dollar.

What worked in the past to help companies prepare for a slowdown often isn’t an option at all today. And hybrid work, data needs and privacy issues make cost-cutting of technology budgets hard to do. The one bright spot could be the lower cost of shipping, though supply-chain uncertainty continues to drag on.

One area to which finance chiefs scouting for efficiencies have turned is zero-based budgeting, a tool that gained popularity early in the pandemic and requires finance executives to question and justify each line item in every new budget period. More traditional budgeting techniques, in contrast, involve adjusting the previous year’s spending, taking into account economic forecasts and other factors.

Reese’s peanut-butter cup maker Hershey Co., based in Pennsylvania, regularly goes through every line of its profit and loss statement, Finance Chief Steve Voskuil said. “It’s even more important now with the inflationary environment to make sure we are thoughtful about how we manage the cost side," Mr. Voskuil said in September.

And finance chiefs say that this time around they are looking for more selective changes than in 2020, ones that will help bring expenses down permanently. They are seeking to identify savings in areas including operations, real estate, logistics, sales and marketing. Some are focusing on their selling, general and administrative expenses, while others are slowing hiring.

Detroit-based General Motors Co. is slowing and in some areas even freezing hiring, and homing in on other fixed costs, Chief Financial Officer Paul Jacobson has said. The company also is deferring some spending on startups in its growth portfolio, except at self-driving-vehicle business Cruise, in which GM holds a majority stake. “We have to find ways to increase productivity," Mr. Jacobson said, adding that demand for GM’s cars remains high. “We are aware that this environment can turn quickly," he said.

At Unilever PLC, Finance Chief Graeme Pitkethly says the consumer goods company has struggled to forecast the level of inflation over the last year or so, a difficulty echoed by CFOs at other companies. In October, Unilever said its expected net inflation from materials is €4.5 billion—equivalent to about $4.69 billion—for 2022, up from €1.3 billion last year.

Unilever increased the prices of its products by 12.5% over the summer months, marking the seventh consecutive quarter of increases. Further hiking prices in the fourth quarter is a “distinct possibility," Mr. Pitkethly said.

“I don’t think I’ve ever experienced a time where the inflation pressures are so high," he said. “I’ve never seen anything quite as extreme as this."

And amid the pressures of high inflation and rising rates following the upheaval of the Covid-19 pandemic, a number of finance chiefs at some of the country’s biggest companies have left their jobs in recent weeks.

What we’ve learned can be seen as a guide on how executives can tackle the challenges and approach the opportunities that lie ahead. Here are some suggestions.

Pro Tips

Cut costs with zero-based budgeting. Facing high inflation and an uncertain outlook, finance chiefs are using zero-based budgeting to lower expenses in areas including operations, real estate, logistics, sales and marketing.

Manage financing costs. Companies are taking various strategies to do this, from paying down outstanding loans and debt, especially those with a floating rate, to considering alternative funding tools. In addition, capital budgets are in the crosshairs, as executives are looking for spending they could trim or delay.

Focus on working capital management. Companies are looking to free up cash from operations, a cheaper option than relying on credit. By reducing inventory or more quickly collecting payments, companies can free up cash from their own businesses instead of relying on external debt, executives and advisers said.

Respond to the strong dollar. As dollar strength pinches earnings, more companies are emphasizing figures that strip away the negative impact of exchange rates. Finance executives at large U.S. companies, including Coca-Cola Co. and materials-science company Dow Inc., are increasing their foreign-currency hedges and covering longer time periods.

Unload pension liabilities. Rising interest rates are boosting corporate-pension plans, providing finance chiefs with an option to lighten their companies’ balance sheets and transfer obligations to insurers.

Seek strategic deal-making opportunities. Grocery giant Kroger Co. is pausing share buybacks ahead of its planned acquisition of rival Albertsons Cos., aiming to use the freed-up cash to reduce debt after it closes one of the biggest deals in U.S. grocery-industry history.

This story has been published from a wire agency feed without modifications to the text

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