CFOs Draft New Game Plans

Finance chiefs are making tough calls and learning new lessons in a stressful economic and credit landscape. But layoffs aren’t the only option.

CFOs are on defense. Devastating bank failures, rising interest rates lower availability of credit, record inflation, and recessionary woes are forcing them to adjust to a new normal.

And, no, layoffs aren’t the only money-saving play, close observers say.

Instead, finance chiefs are getting creative when it comes to generating profits, accessing capital and mitigating risk. In some sectors, including restaurants, leisure and hospitality, they are even driving job growth—a trend at odds with the current goings-on in the tech industry, where management is culling workers by the thousands.

To boost revenue, many CFOs are evaluating real estate assets, postponing projects and initiatives, renegotiating contracts with partners and, in some cases, spending less on advertising. They are also harnessing emerging technologies to automate workflows, says Chonie Bradley, CFO at 1906, a Colorado-based company that produces cannabis edibles.

“The tech layoffs were really just a reactionary move from having a lot of cash flow over the years and overhiring,” she says. Bradley is referring to major players like Amazon, Microsoft, Alphabet, Meta, Shopify and Salesforce, which splurged and deepened their bench because, during the Covid-19 pandemic, they didn’t want competitors “to hire out from under them.”

Nowadays, the tables have turned. The industries that suffered during the pandemic are supporting the job market, whereas tech companies that spent freely are now grabbing headlines for slashing staff.

The total number of global tech layoffs currently hovers at around 195,000, data shows.

Doing More With Less

Perhaps companies would be wiser to pay more for that one “rock star” talent than to assemble large teams that cannot be sustained, Bradley suggests. “In the long run, you should be able to do more with less: especially if they’re a level up.”

AccuMetrics CEO Jody Ruth, a former CFO to Verizon predecessor firm GTW Wireless, agrees. Additionally, in this economy, CFOs shouldn’t downplay the importance of employee benefits programs to convince their talent to stick with the company, she argues.

“Finding the right talent and being able to afford the cost of the talent are both critical,” Ruth says. “To retain them you must spend and invest more. If a company can afford to pay a higher salary and not bat an eye, just to get the right people on board, growth goals can be met.”

Not every tech company has been turning to job cuts, either.

Asked whether there had been any layoffs at semiconductor company Transphorm, CFO Cameron McAulay responded, “None whatsoever.” Transphorm is growing both in the US and abroad, where it maintains a presence across EMEA and Asia-Pacific. It reported a 25% spike in quarterly growth and plans to expand its workforce by 20% over the course of 12 months.

Even during the Covid-19 pandemic, Transphorm carefully managed costs and did not freeze hiring, says McAuley. Instead, it made some additions to support product growth and its manufacturing footprint. “It’s a tough environment. Some of the companies have said they overhired during the pandemic. And meanwhile, you’ve got targets to meet, plus high inflation and the cost of staffing is going up. [Layoffs] are sad, but sometimes inevitable.”

Despite the impression sometimes conveyed in headlines, labor issues are not the only challenge currently facing CFOs. Typical banks tightened credit while the Federal Reserve was implementing 10 consecutive rate hikes—which may not be over yet—to cool the economy. Lack of capital has stymied growth in certain instances, but some CFOs have found other ways to move ahead with their plans.

By seeking out private debt providers—so-called “nonbanks”—CFOs have secured loans even in the current rising interest rate environment. According to Pitchbook, funds dedicated to private debt, including direct lending, raised over $200 billion in 2022: the third consecutive year they crossed that threshold. Their interest rates are high, but they’re willing to take on the risk.

C-suite decisions, especially when it comes to layoffs, often hinge on whether corporate finance executives have enough capital available. When it’s there, along with a mandate for aggressive growth, that’s one playbook they can follow, says Ruth.

“But if you don’t have the growth capital on hand, then your playbook is different,” she adds.

Banking Jitters

Recent turmoil at regional banks, which culminated—thus far, at least—in the seizure and sale of First Republic last month, also complicates matters. CFOs, many of whom are still uneasy following the crises at Silicon Valley Bank (SVB) and Signature Bank, now wonder about PacWest and Western Alliance, two regional banks that are also reportedly under pressure.

Even if their banks appear to have a strong capital position, CFOs must be mindful that negative news, one bad rumor, or merely generalized concern can cause a run in seconds.

“The bank failures were a moment of pause for CFOs to evaluate their banking positions and the associated risk for their company,” says Grant Thornton partner Sean Denham.

Denham compares the situation today to the 2008 financial crisis. Bank failures were vastly more widespread as the Federal Deposit Insurance Corp. (FDIC) took over some 465 institutions. The panic was palpable, whereas now, Denham says, CFOs are simply wondering whether “certain actions should be taken.”

Ruth’s advice: Never put all of your eggs in one basket.

“The SVB situation is an excellent case study in what the new norm needs to be,” she says, especially for midsize to small businesses that typically work with one bank. Many times, lines of credit and other debt terms require all bank accounts and funds to be maintained at the same bank.

That needs to change, says Ruth. “All companies should have at least two banking relationships. The secondary bank should have a healthy amount deposited there: ideally, at least, one for payroll.” In the lead-up to the FDIC’s takeover of SVB, companies that held deposits at the big regional stressed over how they would be able to both pay their bills and make payroll should the bank go into receivership.

Many companies with accounts at SVB had no backup bank and were in the unfortunate position of having to call or email their customers and plead with them to hold all payments until a new institution could be brought online.

“That is never a situation a CFO would want to be in,” Ruth says. “If you think you can get your long-time banker—who may also be a family member, a good friend, golfing buddy or whatever—to provide you preferential treatment, you are fooling yourself [and] there is a high probability that you will not hear the rumblings in time to actually get your cash out before a run on the bank occurs and systems are either overwhelmed or locked down.”

Transphorm managed to avoid that pitfall. The Goleta, California, company transacted with SVB and continues to do so, now that it’s under the banner of First Citizens Bank & Trust Co. But it had another bank as backup and eventually added a third to manage and diversify the risk.

“SVB took everyone by surprise,” says McAulay. “I think diversification is important. You’ll see a lot of CFOs do that. It’s not a good conversation to go back to the board and say you haven’t diversified or managed your risk.”

When the playing field is this uncertain, it’s best to stay cautious and manage the balance sheet as efficiently as possible, he adds. “Because I don’t think instability is going to leave us any time soon.”