Episode 25: How can the CFO’s Office Gear Up to Meet Inflation Challenges?

Madhurima Gupta:
Hi, everybody. Welcome to the CFO circle podcast powered by HighRadius. This is Madhurima Gupta your host. And today I have with me a very special guest with whom I’m gonna talk about how CFO’s office should deal with inflation and prepare for it. Now, before we get started you know, a couple of housekeeping notes, right? So according to the bureau of labor statistics, inflation accelerated further in may of this year with prices rising about 88.6% from last year for the fastest increase since December of 1981, and to provide some perspective, the federal bank targets and inflation rate of 2% for stable and health economic. Now 96% of global economics this year said that they expect US to face high or very high level of inflation for the rest of the year. And this is Asper a WEF report. The previously anticipated pricing freezes most likely will last longer than was expected. Given the pandemic is still not out of the picture. So on that note, how can the CFO’s office and their teams get up for inflation? Let’s get the answers for it from Jack McCullough. Hi Jack, how are you doing?
Jack McCullough:
Thanks for having me. I’m excited to be here. I’ve been looking forward to this for a while.
Madhurima Gupta:
I am so excited to have you as well, and I’m looking forward to a great conversation. So before we get started, Jack, I’m gonna quickly you know, tell a little bit about you to our listeners and viewers. So Jack is recognized as a thought leader in the world of financial leadership with a career that has included CFO positions at 26 different companies. He founded the CFO leadership council, a global organization that is dedicated to empowering senior financial executives through professional development programs and peer networking, his expertise encompasses strategy, operations, finance, human resources, sales, and marketing. And over the years, he has successfully guided and empowered dozens of up-and-coming CFOs on their paths. So on that note, I feel there’s nobody better to help understand how should CFOs office be dealing with inflations today. So, Jack I wanted to understand from you, how do you think inflation is impacting businesses today. Especially mid-market CFOs offices that are still recovering from pandemic.
Jack McCullough:
Yeah. Right. The timing couldn’t be very much worse, right. You’re just coming out of the pandemic and then you’re dealing with a slowing economy and inflation and it’s difficult. I jokingly say when people ask me that they should ask my parents because you know, my parents and their generation, it inflation was just kind of a normal thing, both for families and for businesses and people know how to deal with it. But, you know, for the most part, we’re kind of figuring this out as we go and in terms of how they’re dealing with it, I think it’s probably more difficult on some of those middle market companies you mentioned because they have less clout with both their suppliers and customers. You know, they’re not you know,if you’re a global fortune 50 type of company, you can dictate terms to a certain degree, the way that maybe a hundred million dollar company cannot by annual revenue. So, you know, it’s an absolute game changer and it’s very difficult to predict, and there’s not even that many people you can turn to who are legitimate experts in inflation because very few people have dealt with it on, within the course of their careers.
Madhurima Gupta:
And as CFOs watch inflation numbers rise month after month. And I’m sure the intensity of the concerns also rise the same way. Do you think that CFOs are taking a watch and worry approach or is that something that you agree with or what would be your advised approach?
Jack McCullough:
I believe that in, you know, who knows maybe in 90 days we’ll look back and say, oops, we had that wrong inflation was not a big deal after all. I don’t think so. And I think a wait-and-see type of approach is definitely not the right approach right now. I think CFOs need to get ahead of this. And the first step they can do that is to, you know, first of all, understand it and, you know, understand what is inflation, how does it impact my particular business? And then, you know, based upon that, the next step I think is to educate the rest of your company. You’ve gotta be as CFO. You probably have a very cross-functional type of job. So, and depending upon what your business is, but you need to be meeting regularly with your sales people and coming up with pricing strategies and figuring out, okay, you know what, you know, how much can we raise prices? How much do we have to, how do we sell this to our prime customers at the same time, you’ve gotta be talking to people again, depending upon the business, cuz some are simpler than others. You need to go to people who are involved with the, the supply chain, those people who are purchasing the materials for the products that you manufacture and sell or, you know, whatever it is that you do and, you know, be, be talking with them, making sure that, you know, they’re, they’re aware that the prices might go up, make sure that they have a purchasing strategy. Do we buy in bulk now in case, you know, these things run out of our materials or the prices get catastrophic or do we just sort of continue our patterns and figure it out as we go. And again, each situation’s different, so it’s truly on all-encompassing. And I didn’t even get into the fact that your employees, the most valuable resource and in most companies the most expensive as well. You know, they’re dealing with this too, and you definitely have to take care of them.
Madhurima Gupta:
Absolutely. And if you talk about cash flow and given that with inflation to maintain your inventories, everything that you need to manage, cash flow definitely plays a huge and vital role. So how vital is it for businesses to shore up cash flow? So you can so they can, you know, withstand the expected and unexpected challenges that may come their way.
Jack McCullough:
Yeah, it’s a critical thing, right? I mean, you know, gap accounting is great. But you know, cash flow is the name of the game in times like these and they just need to do a better job of managing it. You know, in the past a lot of CFOs, they didn’t worry too much if an account receivable were getting old, cause they knew that they were going to eventually catch it and you know, they were doing so well, you know, it was kind of a, not a bad problem to have necessarily, but now you do have to, you know, take a more proactive yet reasonable approach to managing account receivable. And again, if you’re a company that has inventory, you need to better do a better job of managing that, but it’s a risk, you know, do you spend a lot in buying inventory now because of supply potential supply and state shortages? Well, that ties up your cash. You know, it’s not like your supply is just gonna send you the inventory and expect you not to pay for it on good terms. So it’s a real difficult juggling act to master to say the least.
Madhurima Gupta:
Absolutely. And I, okay agree. A high inflation rate essentially means that your receivables are decreasing in value of the same rate as if you know, you are paying extra interest. So what would your advice be for CFO’s office to ensure that they are collecting receivables timely to be less impacted by inflation?
Jack McCullough:
Sure. And you know, I think it’s all about communication with your customers and your sales people, because, you know, say you’ve got a, you have a customer that, you know, 15, 20-year relationship and that customer is experiencing cash flow problems, you know, that probably they’re gonna figure it out within a year or maybe just the circumstantial change. You don’t want to be that, just pay me shut up and, and give me the money type of person you, you don’t want to burn that bridge and a 15-year relationship for short term inflationary problem. So it’s really a matter of just kind of working with them, getting an understanding of what their financial position is and, you know, treating them as a partner more than anything, getting through the high inflation period together. Okay, you need an extra 10 days. I can live with that, but you gotta give me your word that when 10 days comes, you’re not gonna ask for another 10 days that type of thing. And by the way, you can take the same approach on the other side of the transaction too. So it’s largely a lot of communication. You know, credit checks. Again, I know people that used to never do credit checks. They didn’t care. They’ll pay for it, you know, we’ll get them to pay for it. But you know, now you need to do some credit checks and find out, you know, do these people pay on time or they reliable, do they have a history of late payment and that sort of thing. So that’s sort of be come back in Vogue and it’s not even so much that they’re not gonna pay it, but you know, if your standard terms of 30 and people are paying 75 90, you better know that up.
Madhurima Gupta:
And, you know you just mentioned that credit checks is not something that a lot of companies do, In fact there is a report that we did, HighRadius did about you know, early this year where we wanted to find out what growth priorities for mid-market CFO offices are when it comes to accounts receivables specifically. Right? So interestingly credit is not one of the priorities credit check, credit automation is not one of the priorities for majority of CFOs that we surveyed and we surveyed roughly 140 exec level members of CFO’s office at different locations across north America. Why do you think, or in your experience, why does credit check, credit automation take a back seat at CFO’s office?
Jack McCullough:
It is changing, but I think, you know, I think we’ve been enjoying basically decades of prosperity, at least in the United States. I mean, our worst major struggle was you know, the late 1970s we had a brief recession in 2008 and, the.com crash around 2002, but by and large, the economic downturns have not really been terribly problematic based upon historical standards. You know, clearly we’ve had, you know, nothing even remotely like the great depression. So I do think it’s one of those things, you know, we’re growing, we’re happy, we’re making a living, you know, it doesn’t matter if they pay in 36 days versus paying in 62 days. And it almost doesn’t matter if we lose one or 2% of our customers because they don’t pay you, you know, it’s under normal times and certainly under, you know, a time like right now, it’s not a very you know, practical way to run a business. So you get sort of developing those old school skills of, Hey, let’s do a credit check and you know, do it on everybody. One person told me they did a credit check on I’m gonna say it was Ford motor comp. And you know, what the person Ford just said, we’d pay everybody in 60 to 75 days. he’s like, you know, we’re a hundred percent, we’re gonna pay you in that time range, but don’t expect us to do it faster cuz we won’t and then you just make the gamble, you know, Ford motor companies, company, obviously most of us would like to sell to. So it might not have been Ford. I don’t mean to bring them into it. It was one of the big motor companies. And so you just make that decision. Can you live with that? And if you can, then you just sort of plan for that, you know? So you know, you just sort of understand the realities of your customers and potential customers and then just make smart business decisions based upon that.
Madhurima Gupta:
And since you’re talking so much about accounts receivable, I think it’s also fair to talk about accounts payables. So, you know, what is your recommended approach for CFOs to strike the right balance? I mean, you know, by getting their customers to actually pay on time while also you know, making sure that the frequency at which a vendor gets paid is a little later so that you have cash in hand and you can ensure liquidity.
Jack McCullough:
I used to jokingly say we pay 30 days after the third phone call and you’d be surprised how many people would, What! 30 people actually thought I was serious, that was our payment policy, but you know, it is a tricky one because sure, selfishly, if you just look at, in a vacuum, Hey, you know if I can turn this net 30 into a net 60 and do that over and over again, you know, I can generate basically X dollars worth of interest-free cash. Right. So you know, why wouldn’t you do that? And here’s why you wouldn’t because, you know, first of all, probably shouldn’t just be violating your contracts just because you think you can get away with it. It’s not a particularly nice thing to do. But you know, putting that aside and putting aside just, you want to be a good business partner, your person, but you want your suppliers to really like you and again, across the supply chain where, you know, you’re just, you’re running out of shortages, which is one of the things driving inflation, right? So if you need this component in you product and there’s a global shortage of, and your supply is like, okay, should I go to company A who’s continued to pay me right on time? Or should I go to this smuck who is taking advantage of this situation and is consistently paying me 30, 45 days late. So you don’t want to put yourself in a precarious position just to save a little bit of, you know, cash flow. Obviously, there’s a balance in there. Right? So in, you know, there’s just so many things to think about, but I would say truthfully, I would still sort of pay on a similar patent certainly to your critical suppliers, the ones that you can’t live without, you know, pay them right on time. Make sure they love you. Cause it may matter, you know, down the road, you know, if something’s not that critical, sure. You can, you know, take an extra 10 days here and there and position yourself, well.
Madhurima Gupta:
Interesting. So essentially just like you would segment customers for your receivables, you segment your vendors into buckets as well, depending on how critical they are and accordingly decide what you know, how frequently or how quickly do you wanna pay them.
Jack McCullough:
Yeah, exactly. Right. I mean the ones that are core to your business, you know, pay them, you know, the company that sells you office supplies, if you pay them late and they don’t like it, well, you know, guess what, there’s 300 other people that will sell you office supplies, right? So, you know, I’m not, I don’t mean that to be flippant or anything like that, but you know, there, if you just have to pick and choose, just know who you can live without and who you can’t live without.
Madhurima Gupta:
The other thing that I wanted to touch upon is report that actually came, I came across, which is by Gartner you know, according to the report 78% of CFOs are expected to increase or maintain their enterprise digital investments through 2023, even if inflation persists. Right. So CFOs clearly do realize that global the global view that the CFOs have in terms of tech being as a means to mitigate inflation. So in your opinion, what role does digitization of CFOs office play in mitigating inflation?
Jack McCullough:
Absolutely. There are, you know, a few things that is impactful that you could do as a digital strategy. Cause when you think about it, you know, you make a digital strategy. So in the long term, you know, it can reduce costs significantly. It can, you know, give you more efficiency, increase operational improvement. It can, you know, increase a lot of cohesion with employees and a lot of companies still have employees scattered all over the globe more than ever before. And by the way, depending upon your industry, it could actually give you a competitive advantage. Ways you work with your customers in the market and whatnot. And where else can you invest to get that kind of an ROI? Right. So I, you know, I just don’t see CFOs wanting to put the breaks on a digitalization strategy at all. And, you know, truthfully, the other side of it is a digital strategy can save or redefine your business. Cuz when you look back at the start of the pandemic Disney, you know, one of the most well respected, profitable, powerful companies in the world, well at the start of their pandemic, their theme parks were closed. People weren’t going to the movies. Those are, you know, I’m not intimately familiar with Disney, but I have to think those are their two biggest sources of revenue is their movies in their theme parks, if you know, otherwise let me know. But you know, they were very fortunate a few months before they had made the investment in Disney plus a total new digital strategy. And because of the pandemic, you know, they were picking up, you know, millions of new subscribers per day for a few months. And that I don’t wanna see, say that it saved Disney cuz I think Disney probably would’ve survived anyway, but boy, it, it sure have made 2020 and 2021 a lot easier to take from a financial perspective when they still couldn’t open up their theme box. So, you know, a digital strategy is critical.
Madhurima Gupta:
Fair enough. I think that’s really a very good example. Thanks for sharing your opinion. The next thing that I wanted to talk about is CFOs, most of today’s CFOs have only worked in an environment where there has been ultra low-interest rate that has encouraged business investments, but in this new setting that we are entering or we’ve been in for a while you know, CFOs would require to change their approach. What is your opinion on that?
Jack McCullough:
Yeah, you know, it is true. I mean, you know, borrowing has, you know, effectively been free for a lot of CFOs, right. You know, less than 1% interest types of rates and whatnot. And now with, you know, the cost of capital’s higher. So you do sort of need to rethink your capital allocation strategy, you know, does it make sense to, you know, to borrow when it’s at 4%, 5%, whatever, you know, it tops out. So it’s a total rethinking of how you’re going to do things on the other hand, you know, if you’re generating a lot of cash in highly profitable, I suppose, you know, it’s good if you’re a saver during a high-interest thing and it creates some opportunities getting back to the supply chain, you know, those things that 2%, 10 net 30, you know, maybe you blew that off in the past, but you know, that’s actually a, it’s a pretty big savings in the modern world, right? You should sort of look at taking those 2% discounts by paying within 10%, but you know, higher interest rate, it changes everything. It’s capital. You know, if capital’s higher companies can’t invest as aggressively and as broadly, they’re gonna have a lower risk investment strategy. When I say investment, I mean, you know, expanding globally or new product lines and whatnot. So it just, it reduces opportunities. It unfortunately reduces a lot of innovation and the executive suite sort of needs to refocus on, you know, what can we really do in this high inflationary environment? You know, is this now really the time for us to, you know, launch our Latin American strategy? You know, maybe we should wait till it’s a little bit more affordable to do. So it’s a, it’s just like inflation high-interest rates change everything. So and unfortunately those things often you know, fight each other, right? You wanna beat inflation supposedly the best way is for the government to raise borrowing rates.
Madhurima Gupta:
And you know, given that inflations here and CFO offices will have to adopt a new pricing to cope with it. So let’s say if there is a, is if there’s a tech company that wants to increase pricing model of their product what should the ideal strategy for the company look like?
Jack McCullough:
Yeah, what we’ve learned is it’s in the past companies could basically raise their prices once a year and you know, get away with it. You know, most of the time your customers won’t complain with a pricing strategy, but now just the realities of the way costs are going up, companies, they either need their prices more quickly than that, or they need to live with, you know, lower margins and you know, neither one of those things is good, but you know, what we’ve learned is actually people are getting it. A lot of CFOs are saying, yes, we’re actually raising our prices once a quarter. And with minimal customer follow, a lot of them are like, oh geez, again, but it’s really about communicating with them, why you’re doing it. You hope that, you know, this is only a temporary thing. And look, we, you know, we’ve had a good relationship all these years. This is just something I need to do. And customers are kind of understanding that. So, you know, I would say be aggressive in raising your prices. The other thing is there’s nothing, you know, the easiest way to justify a price increase is to, you know, offer more features and benefits. And you know, sometimes it’s actually unlocking features that they already have. Like I’ve heard just for example, people only use 6% of the options on their iPhone. So, you know, if you educate your customers and you can get them to use 20%, rather than 6%, they might be willing to pay that extra $50 for the next generation phone.
Madhurima Gupta:
Absolutely. And I think that’s a very good strategy to also not hurt you know, customer relationships that you’ve had for a very long time specifically. I mean inflation. So are there any other strategies that you’d like to share for you know, companies to not hurt their customer relationships?
Jack McCullough:
Yeah. I mean the main thing is just, just be pro it’s not really a strategy as much as steps you can do but be proactive with your customers you know, make sure that they understand your decisions. In fact, in the, my first book secrets of rockstar CFOs, one of the CFOs that I interviewed and she’s actually, she’s been a CFO to that point, like six or seven times. One of the things she told me she did when she first got a CFO job, she would actually reach out to the CFOs at the five biggest customers or maybe the 10 biggest I kind of forget. And then some of the critical suppliers and she didn’t fancy herself in selling, but it was simply relationship building, open up those doors of communications, get to know them, get to understand what their needs are as CFOs and have them get to understand yours. So if you have those relationships in, in place already, it’s fantastic. If you can just call them directly and say, this is what’s going on, you know, we’ve known each other for years now, this is kind of what we have to do. And, you know, usually if you’ve built up some trust and camaraderie over the years, you, you know, that’s gonna be an easier sell when, if you’re calling the person for the first time, Hey, I’ve been your customer for 10 years. It’s nice to call me. Right. It’s just a different approach when it’s than somebody that you’re talking to once a quarter, just to check in and say, hello.
Madhurima Gupta:
Absolutely the other customer to any companies, it’s employees Jack. So with inflation you know, the demand for labor during pandemic recovery was any way fears and quick trades were at record high and they still are. So when later labor shortage is combined with declining value of dollar resulting from inflation it becomes very clear that employee expectations are also changing. Do you think companies should increase wages to attract and retain talent, you know, and account for inflation?
Jack McCullough:
Yeah. I mean, I kind of think they’re gonna have to, right. I mean, you know, if you want to, you know, keep productive. So, and there’s always sort of that pendulum thing who has the power employees and versus employers and, you know, right now, it’s far on the side of employees as I can ever remember. And I’ve been in the workforce since the late 1970s. So, you know I’ve never seen it like this. And you know, it’s not only from the business perspective of, you know, we need to retain our key people, that type of thing, but there’s also just the factor that your employees are fighting inflation at home. And you need to make sure that they feel good about coming into work every day, even if you’re not gonna lose them, but you know that you want them to be happy, productive, contributing, and, and feel like what they’re doing is important for the company and for their families. And, you know, so, you know, if we’re living in a 10% inflation environment as business leaders, you go home, you’re dealing with a similar inflation rate with your groceries and everything else. So I’ve known people, they’re evaluating salaries of their employees every 90 days. And it’s just, there’s a mini review every 90 days checking in okay. Inflation prices have gone up 2.5%. In the last 90 days, we can’t keep you ahead of that, but we’re gonna give you the 2.5% to make your whole, and we’re gonna find a way to do that. And you know, the CFOs have told me they’re doing this. They have no particular retention issue. It is the weird thing, right? Like people can leave your company to go to a similar company and get a 20% raise. And then by the same token, like there’s a lot of data that supports the belief that people who are recently hired are making people. Who’ve been part of the company for three to five years loyally. So there’s no reason in the world for employees. That’s not fair, but there’s a lot of incentive for people to leave the company to go to another one, do the exact same job for 20% more, you know, why wouldn’t you? Right. So, and then, you know, by the way, they may replace someone that goes back to your original company and that you, you both are getting 20% more, seems like we can solve this problem with, without all the musical chairs.
Madhurima Gupta:
Very nicely put there. Thanks. So Jack, I think we’ve talked about employees. We’ve talked about how to manage customer relationships. The other critical aspect that I think we should definitely touch upon is the suppliers or the vendors that each company has. So with all of the companies that are going under, how should you know, the CFO office determine who to partner with and, you know, evaluate the risks associated with it.
Jack McCullough:
Sure. And it’s difficult. Like, you know, you can look up credit reports and DnB and that type of thing. Or if they’re a public company, you can get their financials pretty easily, but they do tend to they by their nature, they only give historical information, right? You can look at, you know, what a company’s financial has been in the past, but, you know, if they’ve never dealt with inflation or, or dealt with losing critical employees, or, you know, some of the other issues that we’ve talked about, you don’t really know how they’re gonna perform in that. So, you know, it is largely about proactive communications. I mentioned that CFO who reached out to the people and she did it on both sides, customers and suppliers, and, you know, just talk to them, it’s like, Hey, you know, I know you’re kind of a small company you know, what’s your financial position, you know, can we count on you to survive this sort of thing? Cuz the worst thing in the world that you want, that you could have is customers want to buy your product and you can’t make it because 2 of the 11 critical suppliers you had went belly up or aren’t able to produce. So, and then you’ve gotta go to competitors who you’ve probably ignored for several years and you know, not only it’s great. Okay, well we’ll supply you, but you probably want to be, I treated as the most important customer they have and they’re not gonna do that. They’ve got customers that of their own that have been there five, 10 years, very loyal. Why are they gonna move you to the front of line over them? They’re not going to, so, you know, just kind of keep the communications line open. You know, there may be value to buying from blue chip companies. Great. Maybe you can save some money and support your local economy by buying somebody in your community. But maybe that’s not the most financially stable entity either. You know, maybe you need to go to, you know, a fortune, you know, 500 type of company that you know is gonna weather, any storm that comes through, that’s a difficult decision to make cuz you don’t wanna leave your suppliers just when they need you.
Madhurima Gupta:
Absolutely. And how about supply chain disruptions and with supply chain disruptions, how maybe, you know, your existing supplier is not able to supply you anymore for a lot of reasons that are beyond his control. So in such a scenario, what is the best way to, you know, mitigate through the situation?
Jack McCullough:
Probably good for your critical things to have at this point to have multiple suppliers and whatnot. And you know, there’s, I’ve never been a big fan of hoarding inventory just cause it ties up your cash, you know? And if, you’re mistake your estimates, it can really be problematic. But you know, with these supply chain disruptions, and again, you know, I’ve never seen anything like them, I’ve just never had to deal with them and they haven’t existed on the global scale that they do right now. But with potentially, you know, it could be catastrophic for your company. So while, you know, maybe it’s not the wisest thing from a cash management standpoint, you might have to do some things just to protect your downside. You know, cuz like your point, it’s not the supplier’s fault, right? If, they need, you know, this precious mineral and it’s just not available or they’re being outbid by bigger companies, whatever it might be, what are they gonna do? Right. You know, it’s one of those things they can’t control. So control, you can on the critical stuff and just keep open lines of communication and good relationship, you know, in, in the long term you better route with a single supplier, you’ll get better service in pricing. At least that’s been my experience. I don’t know if an economist would agree with that, but that’s been the experience I’ve had just buy everything from the same person. They know you, they understand you. They like you, they’re gonna take care of you, but you know right now 2, 3, 4 suppliers, you’ve just gotta hedge your bed a little
Madhurima Gupta:
Fair enough. I think with that, we come to the conclusion of this episode, Jack, thank you so much for sharing your experiences and opinions on different wearing questions that I feel CFOs out there would have. We really appreciate you taking the time for this.
Jack McCullough:
Yeah. I was glad to do it and I’m grateful for the opportunity and hope we can do it again at some point.
Madhurima Gupta:
I am looking forward to it again. So thank you so much once again and all our listeners out there. I hope this was a very interesting conversation for you. Stay tuned. We’ll be back with.