CFO to CFO: Staying the Strategic Course in CrisisBy
The CFOs of Inspire Brands and Baker Hughes discuss how to maintain a strong balance sheet and innovate in challenging times.
When dealing with a crisis such as a pandemic or geopolitical conflict causing supply-chain disruption and other challenges, it’s easy for companies to focus on putting out fires and shoring up the balance sheet to get through the quarter. The best finance leaders, however, aim to navigate choppy waters while maintaining a big-picture perspective and continuing to invest in the company to build for the future. In a conversation with Strategic Finance, Brian Worrell, CFO of energy technology company Baker Hughes, and David Pipes, recently retired CFO of Inspire Brands, whose portfolio includes Arby’s, Baskin-Robbins, Buffalo Wild Wings, Dunkin’, Jimmy John’s, Rusty Taco, and Sonic Drive-In restaurants, talked about balancing short-term demands and tactics with long-term objectives and strategic plans.
SF: What may CFOs overlook or give short shrift to during stressful times?
Worrell: It’s easy in times like this to focus on the to-do list or the task at hand to demonstrate some wins. And during these periods of uncertainty and heavy activity, teams look for concrete examples on progress. Lots of moments during these times, I try to encourage the team to stay externally focused to ensure that we aren’t missing anything in the market. Subtle shifts can make a big difference. It’s important to ask the right questions and continue to make sure you’re bringing in relevant examples from other companies of what’s going on in the market. And if you’re making some bets that aren’t on other people’s task list, make sure you communicate those so everyone understands that you’re investing in the company’s long-term growth.
One thing that has to be in the forefront of each leadership team is making sure you spend time and motivate and inspire teams, even during critical periods, whether they’re going through an M&A [mergers and acquisitions] integration, whether there’s a big project that’s due or supply-chain disruption like we’ve seen in the last year, and sometimes overcommunicating can be important. But making those long-term objectives turn into bite-size wins can be incredibly helpful.
Pipes: The most important thing as it relates to that is keeping in mind that long-term goals can’t be put off until the long term. In other words, if you lose sight of that, then your three-year goal is effectively a rolling three-year goal. If you aren’t working on it along the way, it’s always three years out. So, it’s important to keep in mind that you have to continue to nourish these goals, and there are short-term objectives that need to be achieved toward the completion of the long-term goal.
For example, if I’m talking about facility-remodel goals, unit-expansion goals, or technology goals, those are all things that you can’t just decide, “We want this done in three years, and then we’ll start on it in three years.” And then the other aspect of that is whatever the stressful time may be, remember that your business landscape in the broader world may be different at the end of it. And so you have to think ahead as to how you want to operate or what you think things will be like post the urgent situation and how you’re going to manage your business during those times.
SF: What are financial red flags that the balance sheet needs to be shored up? And what options should the CFO consider?
Worrell: I’m constantly looking for any trends in cash, any cash lanes, working capital metrics going in the wrong direction and maybe not at the right time. There are times where you expect working capital to build, so if you can see some unusual things happening there, I always look out for significant changes in the other assets and liabilities category because that’s where sometimes an early warning can start to creep in. The CFO at times like these has to be in the details and making sure teams are focused on these areas. Generally, the teams follow the CFO’s lead, so it’s critical to share insights on the balance sheet with the operating team. A few times in my career, I’ve seen companies leave red flags just to the finance teams to spot and fix, and that’s never a good recipe. The CFO must communicate and be very transparent about issues and get out ahead of things early. If you start to see those warning signs, start to work on them immediately because it’s much easier solving a small problem sooner than a big problem later.
Pipes: As you think about the financial red flags, there are the normal financial red flags and then those associated with something as big as a pandemic. But monitoring the cash flows, and, certainly, if you go from positive cash flows to negative, that’s a red flag. When you aren’t meeting your plan or your forecast, posting negative year-over-year sales, things slowed, collections of receivables, all those things are red flags. Some are more critical than others. So once you see that, and one of the first things we did, we pulled back on all discretionary spending. We have a lot of capital spending that we do for remodels and new restaurants, even projects that don’t have to be done in a situation like that, so we made a decent pullback there. At the same time, though, we made sure that as we were reducing spending, we were careful not to do it in a manner that’s going to have the effect of exacerbating the problem.
If you pull too much labor out of the restaurant, then your revenues come down even further because you can’t provide service to the customers that come in. We also pulled down availability under our lines of credit to shore up the balance sheet, and I even borrowed some additional funds. Again, tapping into the financial markets, we increased the availability under the lines of credit to be ready in case we needed to do more. And then one of the bigger things that we did, which was not an immediate benefit, but it was a huge benefit, was to understand the changing tax provisions associated with the pandemic and the CARES [Coronavirus Aid, Relief, and Economic Security] Act. And we were able to save many millions of dollars of cash taxes by taking advantage of the changes that were there for everyone to utilize. We had a team that was working on all aspects of it. Constant communication is critical. We were meeting as an executive team really every day for a while as we worked to make sure that we were keeping things moving as best we could.
SF: How can CFOs use data analytics and research to inform financial planning and analysis (FP&A) and long-term strategic planning?
Pipes: Data analytics is critical to understanding the business at any point in time and very helpful in terms of being able to develop your pandemic response, stay ahead of trends, understand what your short-term forecast should be, and develop the longer-term forecasts. For example, early in the pandemic, it was quickly apparent that even when we were doing okay in some of the brands in terms of revenues, the transactions were still way down, and the check was way up. We also saw a huge growth in digital and mobile ordering. And so people were approaching our restaurants differently than they did before, and understanding those changes in purchase behavior enabled us to make changes in marketing and product offerings, like more dinner-type offerings for big groups, how we deployed labor, how much of a discount to offer, and our whole approach to discounting. That information we gathered from analyzing the business was important. So on the one end, it gave us more data to work with in terms of analytics, but it also enabled us to know where we can invest more in that area to see it continue for the longer term and where we can pull back. We didn’t do as much television advertising, but we did focus on promoting carryout, getting delivery, and using mobile ordering.
Worrell: Integrating data and analytics and overall research into FP&A and long-term planning is certainly an evolutionary process with the amount of data that’s being generated within and outside the business. We’ve done a good job as finance professionals, specifically at Baker Hughes, integrating data analytics into performance metrics, looking at anomalies, and driving compliance and controllership. We make pivots around our supply chain—for example, are we paying the same price for parts all over the world, or is one region or part of the company paying a higher price? We’re also getting much better integrating broader industry metrics and research into longer-term financial planning by looking at trends over time and trying to study other cycles.
In the energy industry, specifically in oil and gas, we’ve had a ton of cycles. We use insights from previous cycles to try to model what we think is happening today, and what I like is the data-rich environment we live in today. You can actually get down and model a lot more at a customer level and a type of [product] level; we’re using all that to inform some of our investment decisions as well as the strategic direction of the company. Another way that we use research and data analytics at an HQ level is to make sure we’re informing our dialogue with the operating teams when we’re talking with them about their performance and planning for the next year. And we do a temperature check on our relative performance vs. others in the market, so it helps everyone be a little more informed and have a good fact-based discussion when we’re talking about medium- to long-term plans.
SF: During crises or challenging periods, how can CFOs help colleagues weather the storm, meet short-term obligations, and focus on longer-term strategy?
Worrell: The most important thing that we do during this time is to help the teams break things down into bite-size objectives. People, including me, like to see that they’re making progress and are really making a difference, and that was very important during the pandemic and what we saw on the energy markets last year. I also think it’s important to acknowledge those wins and give teams some things to think about doing better, so we took that balanced scorecard approach. And we in finance have to consider internal perspectives from our company’s leaders and balance that with external perspective from our investors and capital markets, and asking, “How’s the competition doing? What are we hearing from customers?” The answers to those questions can motivate a team and help keep the long-term goals in focus while still achieving short-term wins.
Pipes: The key overall is consistent communication. At the executive team level, we talk a lot as a group about what’s going on in the business and how we’re approaching it. The next layer down is working cross-functionally as well, working with the teams and maintaining that relentless focus on what’s working and what isn’t and how we adapt to the changing circumstances. As a franchisor of restaurants, we communicated as well to our franchisees to help them understand some of the adjustments that we were making on our own company operations, in our marketing, etc., but also helping to ensure that they were aware of the aid that was available to them from other resources such as the PPP [Paycheck Protection Program] money. And so, all that was helpful in ensuring that those businesses stayed healthy, which certainly has an impact over the long term on our business as well.