[IMGCAP(1)]Despite the major challenges the economy has posed for small businesses and their accountants, this difficult period may actually serve the profession well over the long term.

For all the uncertainty it has brought, the economy could potentially earn high-performing CFOs more prominence in their companies, if not in the business world in general. While nearly any economic downturn can create a situation where small businesses look for additional guidance and leadership, the severity and complexity of the current recession has the potential to send even the most savvy business owners in search of financial counsel.

With a number of financial issues on the minds of small business owners, many will turn to their CFOs for specialized guidance to usher their businesses through to better times.

The value of reliable, level-headed financial advice is currently so sought-after that some have speculated that we may be entering a new era where CFOs will rise to the stature of CEOs. Whether there is a legitimate trend afoot or whether this is merely a passing phase that will be forgotten when prosperity returns, only time will tell.

But while the prospects of widespread co-leadership arrangements may still be uncertain, today’s economic environment could have a very real and positive effect on the CFOs who recognize opportunity and respond appropriately.

To prove their financial acumen, CFOs will have to show they can respond to widespread small business concerns and cover territory that may surpass the expertise of many small business owners. This includes managing increased business risks, crafting contingency plans to protect the business, spurring dependable gains, and improving cash flow.

Manage Risks with More Accurate Assumptions
Predictably, the economy has tempered small business owners’ appetite — or at least their capacity — for risk. According to the American Express OPEN Small Business Monitor, a semi-annual survey of business owners, about half (48 percent) of small business owners are willing to take financial risks over the next six months to grow their company.

Of those willing to take a risk, the majority said they were only willing to venture a moderate financial risk (38 percent of all respondents) in the next six months. In more prosperous times, small business owners showed much more capacity for risk, with nearly six out of ten (57 percent, September 2007) willing to take a financial risk to grow their business.

Clearly business owners are intent on following a more conservative route to weather the economy. But while direct financial risks such as loans, credit lines and salary increases are easy to identify and grasp, small business owners may not be as in touch with other potential risks without the help of a well-informed CFO.

In addition to financial risks, a wide variety of areas, ranging from long-term planning to daily operations, currently present a potentially elevated risk. To deal with this reality, a first step may actually be to take a step back, in order to gain a broader perspective. Before looking at specific risk-prone situations, it may serve companies well to look at fundamental variables in the situation, such as their current business assumptions and perceptions.

Assessing these basics is vital, because one of the greatest risks in this economic climate is operating with outdated or simply inaccurate business assumptions.

Take the precautionary measure of reassessing key assumptions such as growth and earnings projections. While some businesses may, for example, operate on earnings and growth projections that are calculated annually, these figures may prove to be too inaccurate over time, due to the increased volatility of the economy and the number of unpredictable variables at hand.

Consider looking at figures that are, for example, six months or older, and assess whether they are sufficiently accurate to date. If there is already a significant discrepancy between predictions and reality, you may already need to adjust current budgets to limit damage.

And in the future, it may be worth evaluating whether or not projections and budgeting should be dealt with for shorter periods, such as on a bi-annual or quarterly basis. The more accurate these figures are, the better informed you will be to make solid risk management decisions over the long term.

Other assumptions to potentially be on guard for are those concerning the downturn and its duration. The current recession is decidedly unlike any in recent memory, and assumptions based largely on recent recessions could prove to be very unreliable. While optimism has its place, this suggests that assumptions of a rapid recovery may prove to be false, leaving those who banked on a quick recovery to deal with overstated revenue projections and overly generous budgets.

Develop Contingency Plans
While adjusting assumptions is an important move that CFOs can make to reduce risk, another crucial strategy is developing contingency plans. No matter how accurate their estimates and projections may be, there will always be unexpected factors —particularly in a climate of volatility. If a company’s response to an unexpected event is purely reactive, and not based on well-reasoned plans, months of diligent and careful risk assessment in other areas can be upended. Contingency plans based on the most significant worst-case scenarios will help avoid spur-of-the-moment decisions if the worst does actually occur.

There are various types of scenarios to take into consideration, starting with the big economic picture and moving down to more business-specific issues. Even if the recovery is slow, it’s important to have plans to react to opportunities that present themselves. So while it seems contrary to warnings of excessive economic optimism, it’s important to have some type of plan in case isolated opportunities arise, or if the recovery outpaces expectations somewhat.

In the area of business-specific risks, no company can afford to neglect the potential for risk passed on by customers and vendors. In building worst-case scenarios, companies can begin by considering which customers and vendors are the most critical to the business, since these relationships are the most likely to require contingency plans.

To assess their business’s key existing relationships, CFOs should take the initiative to learn as much possible about a company’s solvency and overall financial strength. If customers or vendors are publicly traded, simply following them as an investor would provide valuable insight into the risk they represent. In the case of private companies, following industry news that affects them can provide important risk-related information, such as the loss of large accounts, increased market turbulence or rising raw materials costs. Although this may seem like a considerable amount of work, simple alerts from online news services based on company names or key industry terms can go a long ways toward keeping you informed.

For existing customers or vendors, take a look at how they have performed in relation to your own company over the past quarter or six-month period. If vendors, for example, show a change in performance, such as late deliveries or goods or services or variable quality, it’s safe to assume the risk has increased. Likewise, customers whose payment time has extended significantly may pose significant risks.

For new customers, there is an even greater need to assess risk. It is important to exercise the option of proper credit assessment when dealing with new companies. The standard credit check through Dun & Bradstreet is a first step, but it is also advisable to request trade and bank references, which can provide detailed information about business dealings with the company in question.

If customers appear to be rising credit risks, you will want to reassess any credit you extend as soon as possible. You may also simply want to encourage customers to pay by credit or charge card, so that you will be guaranteed timely payment and avoid the risk of slow payment or non-payment. Customers will still be able to delay payment and may also appreciate the benefits and rewards that a number of charge and credit cards offer.

Build Profitability in Small, Consistent Steps
Few companies can expect major windfall projects in a down economy, but that doesn’t mean that profits are out of reach. In fact, most small businesses generally tend to build profitability in small steps over a period of time, not through major high-profit opportunities. Unlike high-profit business, which generally arrives sporadically even in a strong economy, long-term discipline and small, consistent gains are generally available in any economy to those who seek them out.

To devise a strategy to boost profitability, it is important to target predictable and recurring savings. Trade terms are one such opportunity that the majority of small businesses do not take advantage of. According to the American Express OPEN Small Business Monitor, six out of 10 (59 percent) small business owners say they do not negotiate flexible payment terms with their suppliers or vendors.

With diligence, the seemingly small advantages of trade terms can be significant over the long term. While some terms will allow deferred payment when cash is short, nearly all reward early payment with a discount of 1 to 2 percent. In some cases, delayed payment may present greater benefits depending on an organization’s cash flow, but when paying early is an option, the rewards are worthwhile. Over time, 1 or 2 percent is a significant figure, particularly if that money is reinvested into the business.

Some businesses fail to take advantage of trade terms because they underestimate the value. Others, such as those that are less established, may not qualify for special payment terms, or simply may deal with vendors who do not offer them. For small businesses that are not able to benefit from trade terms with some or all vendors, there are other options for predictable and recurring savings, such as credit and charge cards that offer cash-back rewards, miles, or those that offer trade-like terms.

While opportunities for discounts are scarce in a slow economy, there may still be room for negotiation. By reassessing vendor relationships, small businesses can potentially gain new opportunities. If a company provides steady business to a vendor but hasn’t been able to negotiate better payment terms, discounted prices, or other advantages, there may be ways to gain benefits, whether now or in the future. Consolidating business with a single vendor may, for example, be enough to convince the vendor to extend trade terms. Another possibility is formalizing a standing order, instead of ordering on an as-needed basis.

Cash Flow Vigilance
A down economy usually signals more significant cash flow problems for businesses across the board. Sixty percent of small business owners state they have concerns about cash flow, a figure that has continued to rise since 2007 (46 percent in March 2007, 56 percent in March 2008, and 60 percent in August 2009).

Furthermore, when small business owners were asked about what steps they would take in the next six months to manage their business, more than half (56 percent) said they would cut back on personal spending to create additional cash flow flexibility for their businesses.

Clearly, business owners are so concerned about cash flow that they are willing to put aside personal spending to ensure greater stability for their business. This is a prime opportunity for CFOs to show their expertise.

While cash flow is an area that requires constant attention even in the best of times, CFOs can take meaningful steps to tighten payment cycles and smooth out cash flow. To achieve the best results, the goal is to devise a system by which accounts payable and receivable work in tandem. When the two are not synchronized, cash flow can be an issue even when customers pay regularly and on time.

One way CFOs can take steps to synchronize accounts is to add greater regularity to accounts payable. By negotiating fixed payment dates with vendors and creditors, a business can assure that payments will not continually be due before receivables. This can also help reduce the distraction of dealing with payments in a scattered manner and create more focus in areas of accounting that require greater attention and effort.

Another technique, which relies on in-house resources and is thus predictable, is streamlining accounts receivable procedures. Sometimes accounting procedures themselves are responsible for creating a lag in receivables. Spot checks in specific late-payer cases can help determine whether the business’s accounting system is efficiently getting invoices to the customer promptly.

The goal is not to simply get the invoice in the mail, but to make sure it arrives in the hands of the person who can pay it. Invoices must reach the appropriate customer contact and must contain all essential information, such as purchase order and vendor numbers, so that the customer can process the invoice in a timely fashion.

Finally, when customers do pay late, the response should be swift and begin with opening a dialogue to understand the customer’s situation. A one-time situation may be nothing to worry about, but spotting a pattern of late payment before it is well established gives you more options for dealing with the situation.

The recession presents plenty of challenges, but for skilled CFOs these challenges can potentially represent real opportunity. By creating a more stable environment that allows the CEO to carry out his or her vision, CFOs may be able to rise to a new level of prominence. But in dealing with economic uncertainty, perhaps one key element beyond solid financial know-how will help separate a new generation of CFOs: in-depth knowledge and understanding of the specific businesses they serve.

While financial ability is the critical foundation, applying financial know-how most effectively relies on a real understanding of how a business works, from its marketing and competitive challenges, to its products and services. This knowledge is important in helping a skilled CFO transform from a financial counselor into a financially savvy leader.

Richard Flynn is senior vice president and general manager of American Express OPEN, a leading issuer of card products for small business owners.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access