Trying Times for Tech: Re-Factoring the Financial Plan

Every CEO and CFO will face the moment where re-factoring the Company’s financial plan is necessary. Complexity and risk are added when some sweeping external force creates urgency to substantially change this Plan. During the summer and fall of 2022, many CEOs have faced this re-factoring need amidst the complexity of a worsening macro-economic environment. Staying ahead of a shifting economic backdrop is tricky at best for business leaders at all levels and measurably more challenging for the corner office.

With few clear indicators for guidance, Boards have demanded that CEOs “cut spending!” or “preserve cash!”. Ideally, the CEO is proactively taking steps to determine the best new plan that does both of these and more. Sometimes, the CEO is unprepared for these Board conversations, which creates its own set of anxieties. In any case, recognizing this re-factoring exercise for what it is, a conundrum, is necessary for both the Board and CEO.?

While a Board’s demand, phrased curtly as offered above, can be well-intentioned, it is not particularly helpful because it ignores the interconnectedness of total spending with top-line growth and the production of net operating cash. The conundrum can only be solved by considering these three major financial elements simultaneously. Such simultaneous equations underly every CFO’s financial budget worksheet, the nuances of which are many. Demanding that any one of these elements be managed individually is a fool’s errand. ?

Therefore, the re-factoring conundrum must be solved by answering the question: “How much less should we spend that will still allow sufficient top-line growth (ARR) and generate needed net operating cash?” These equations are recursive, interconnected, pinned on underlying assumptions and impossible to satisfy individually. The better the CEO, CFO and Board understand these complexities, the better the chance at creating a satisfactory new plan that reinforces the business strengths and preserves the trust in these relationships. A CEO creates clarity by openly acknowledging the circular relationship among these three principal financial elements and working with the Board (& management team) to arrive at a re-factored plan that satisfies them in total. Minimally, this concept helps CEOs broaden their thinking and approach to this necessary exercise (strengthening their trust with the Board in so doing).

Lastly, with the urgency created by a shifting economy, a CEO and CFO are sometimes better served by creating more than one re-factored financial plan scenario for discussion and conclusion. A 3-Scenario Plan approach likely includes: 1) a new Baseline Plan (the one believed to be best overall given current expectations), 2) an even more conservative plan (which preserves more cash than the Baseline) and, 3) a more aggressive plan (which yields more growth than the Baseline). This 3-Plan scenario creates agility for the CEO and management team while creating clarity for and respect from the Board.