This doesn’t surprise David Lovett, a managing director at turnaround consultancy AlixPartners in London. “No company is going out of business by making losses,” he says. “They go out of business because they run out of cash.”
As this becomes clear to all but the most blinkered CEOs, they are embracing an aspect of the CFO’s role that many once mocked: “the natural pessimism that comes with the finance function,” as Noteboom of Randstad puts it. “As the markets fall, they add another layer of how bad it could get,” he adds. “It gets your attention, that’s for sure.” Whereas in the past such gloominess may have been criticised for slowing a company down, these days it may end up saving it.
At Draka, a cable manufacturer based in Amsterdam, CEO Sandy Lyons is grateful for Frank Dorjee, a CFO who “thinks there’s something bad around every corner.” In contrast, Lyons describes himself as a natural optimist, casting the company’s executive team in the usual roles.
When the duo was finalising its annual budget in late 2007, they believed that in 2008 or 2009 the economic cycle would turn. Dorjee refinanced credit lines, arranging a new facility that covered the firm’s financing requirements through to 2012. Without it, the company would have had to renew this year, a considerably more difficult and expensive exercise, Lyons says.
The company also enacted a capital-spending and hiring freeze in last July, avoiding more severe actions had it waited for the drop in activity later in the year. In addition, leading a project to cut working capital from nearly 30% of revenue three years ago, the CFO helped bring it down to between 16% and 18% in recent quarters, standing the firm in relatively good stead as cash flow becomes critical. All of which makes the CEO beam.
When it comes to the ideal finance chief, Lyons says that “hopefully the primary strengths of the individual line up with the primary responsibilities of the role.” As far as his current CFO goes, Lyons describes him as “calm, conservative and courageous.” As it happens, the company’s themes for this year are similarly alliterative: “customers, costs and cash.” It is a good match, which is lucky for the finance chief, as Lyons notes that his father, a physician, used to joke that the best way to ensure good health is to pick your parents. In a similar vein, “the best way to deal with economic stress is to pick your CFO,” he says. Indeed, some companies are responding to a financial slump by replacing their finance chiefs. (See “Friendly Fire” at the end of this article.)
But Karl-Heinz Streibich stands by his management team, for good reason. At Software AG, the German business software firm where Streibich is CEO, recent financial results have defied the downturn, with 2008 revenue up 16%, operating earnings up 32% and cash flow 62% higher than the year before. With each key department — be it finance, sales or marketing — the CEO practises “full empowerment,” as he puts it. “We agree on stretch targets and I then give my fellow board members the freedom to achieve them. It has worked well.”