Dealing with uncertainty: The top three questions to ask your CFO

With inflation coming close to the ECB’s target level, general costs of business have stabilised, easing a key pressure point for Irish businesses. On the fiscal front, things look positive, as Ireland gears up for an unprecedented capital spending plan, funded in part by corporate windfalls that are unlikely to recur. However, downside risks for Irish businesses have intensified. Our small open economy with it’s reliance on US multinationals and exports makes us particularly vulnerable to potential US-led tariff wars. Below, I outline key areas of concern for directors and propose some questions they should be asking their CFOs to gain a deeper understanding of the financial and operational risks their businesses face.

What factors in our business model make us vulnerable to current economic threats and how are we building resilience?

Be it Churchill or Machiavelli who coined the phrase, there has rarely been a more apt moment to ensure we don’t waste a good crisis. In any time of threat, there are also opportunities for businesses that can be agile and resilient. But identifying your exposure to risk is critical. Does the business have the tools, team and time to deal with the changing business landscape?

Your CFO should address risks in revenue streams, liquidity, and contingency plans for maintaining financial health during any economic swings or downturns. It is important that boards develop contingency plans and scenario analyses to navigate a potential recession, export wars or consumer behaviour changes. As Warren Buffett famously said in the wake of the tech bubble bursting in 2000, “you only find out who’s swimming naked when the tide goes out”. Now is the time for businesses to get togged up in preparation not just for leaner times, but for changing times.

How are we using our sustainability data to drive the business forward and add value?

Now that CSRD has come into force, the hard work of building or adjusting data systems and collection mechanisms has been done. But what remains is the critical task of ensuring that this data is used to actively shape strategy and decision-making. If this data is not being disseminated and discussed at board level, you are at risk of CSRD remaining as a tick box exercise rather than generating the value that it could.

As with any regulation, CSRD has caused costs for businesses. This is unavoidable. The role of the business and its leaders is to ensure that value is created from this cost. It is worth remembering that a core rationale behind CSRD regulation is to standardise the sustainability information that companies report. And standardisation is a key strategic approach to innovation and competitiveness. If you are not actively discussing your sustainability data, and indeed, your competitors, then you risk CSRD becoming a cost with no benefit.

What is our Working Capital Situation and How is it Evolving? 

Profitability and balance sheet strength are always important to guard, but when it comes to a volatile business environment, today as ever, cash is king. We could take that a little further though and say that cash flow is king. And while cash is critical, the true liquidity situation of the business is best understood when looking at the entire working capital cycle, encompassing not just cash but also inventories, receivables and payables. It is important not just to understand the working capital cycle of your business but also how it is responding to fluctuating economic conditions.

Cash flow is not just important to a business, it is oxygen. Just like a human being can’t survive for very long without breathing, a business will not last long without cash. Unseasoned CFOs may throw out figures of reserves or cash buffers. But more savvy CFOs understand that in a real crisis, cash buffers can disappear overnight, and it is the business’s skill at breathing – taking in and paying out cash – that will count. Cash flows around a business in a relatively predictable cycle and understanding the nature of this cycle is the key to protecting it in times of distress.