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Hard Lessons

One year after the Wall Street meltdown, CFOs say business will never be the same.

As a result, Extra Space Storage is now “in a pretty good situation,” with enough cash to cover all loans coming due until 2011, says Christensen. He hopes he won’t have to hoard the cash for that long. Nevertheless, he is planning to take the company’s debt level as a percentage of market cap down from a maximum of 60% to 45% or 50% over the next five years. “I can tell you it will be many years before you see CFOs go out to get the level of debt you saw in past years,” he says.

Questions about how, when, and if to obtain outside funding are affecting operational decisions as well. In June, Extra Space shut down its development group, which worked on new properties, and abandoned any hope of organic growth for the next six years after calling more than 100 banks for construction loans and getting only one yes. Spencer Rascoff, CFO at venture-backed Zillow.com, says the real estate–focused Website cut its staff by 27% last fall in an accelerated move to get to the break-even point and “remove any capital-market risk. We might not have focused so intently on that if credit conditions had been different,” he says.

Forget about Long-Term Forecasts

This turbulent period has upped the frequency of forecasts to the point that they should probably be called “now-casts.” Actuant, a $1.6 billion diversified industrial company that supplies the automotive, electrical, and energy markets, is now updating its forecasts quarterly, and the monthly operations reviews have gone from “‘It looks like they’re on track’ to almost reforecasting, the rate of change is so fast,” says CFO Andrew Lampereur. Looking ahead, to the extent that it’s done, is limited.

Similarly, at Charles River Laboratories, a provider of outsourced research services, the forecasting horizon is short. CFO Thomas Ackerman says the company is forgoing the five-year plan and is looking only at 2010, “given the lack of visibility” into the future.

Above all, CFOs have become more willing to say that they have no idea what will happen. “We’re entering a period like the 1970s, where there’s a lot of uncertainty, so you don’t try to predict the future as much as you look at a range of possible outcomes and say, ‘What do I put in place now so that I have a lever to pull if the worst-case scenario happens?’” says Starwood’s Prabhu.

Not all of these trends are likely to persist indefinitely. Lampereur, for one, says he expects less-frequent forecast revisions once the pace of change slows down, and Ackerman plans to go back to his five-year financial plan once client demand becomes more stable. One lesson, though, that has been indelibly stamped on the minds of today’s CFOs is that “things can get a lot worse than what we’ve forecast in the past,” says Lampereur. He notes that while previous “downside” scenarios that Actuant management presented to the board capped sales drops at 5% to 7%, sales in the past quarter dropped 35%.


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