Recession watch: Estimates, planning, and communications are key to economic resilience, says CFO

As recession fears persist into Q2, we’re asking CFOs and other finance pros who have been through a prior recession how they’re gearing up in case the economy does contract in the coming months. Want to share your wisdom? Drop us a line, and let us know your thoughts.

Jeremy Klaperman is CFO of Rho, an all-in-one financial platform that streamlines financial operations, including banking and treasury management, for middle-market companies. He began his career in investment banking at Goldman Sachs Group before transitioning to investment portfolio management at D.E. Shaw and Citadel. Klaperman has experience investing in and advising companies across industries during significant market cycles, such as the 2001 tech bubble, 2008 financial crisis and the coronavirus pandemic.

CFO Brew spoke to Klaperman about what finance professionals should be thinking about in the near-term, specifically how companies should gather a wide array of projections and estimates to build economic resilience.

This interview has been lightly edited for length and clarity.

Describe our current economic moment and the potential for a recession.

The economy has clearly been weakening: Companies are reducing employment and we’ve had one mild shock to the system, predominantly focused on the US banking system. There seems to be a quick policy response to that, so hopefully that will be mitigated. There hasn’t been a huge, major, exogenous shock. So for example, if you think about a lot of great recessions, there was a significant material fundamental cause, like the financial crisis of 2008, or the European banking crisis, or Covid-19, or the burst of the tech bubble in 2001, or the savings loan crisis in the ’80s, etc. We haven’t had a huge material, exogenous event like that yet, I hope. So it rather seems to be just the normal cyclical nature of the economy: weakening, ebbing and flowing.

It’s hard to predict [if a recession is here or coming]. I can see it going both ways. We generally try to focus on not one particular outcome, but rather a consistent range of outcomes. So we don’t really focus on predicting it. But rather, we’re focused on the actions we take and the response to the best practices to respond to whatever occurs.

For our audience of CFOs and finance professionals, what should be top of mind for the next six to 18 months?

It’s your projections, or estimates, your forward-looking views on what the business will do. It’s your plans—how are you going to respond to whatever happens?—and your communications. Your projections, your plans, and your communications. What I mean by each of those is for your projections, you want to have a detailed financial model that’s going to estimate what your revenues and costs and cash flows are, but you don’t want to focus on only one single outcome. But, rather, do scenario analysis, consider a wide range of outcomes: What happens if everything is fine? What happens if there’s a terrible recession and the economy goes down by 5%? Consider a wide range of outcomes.

And then the next—planning: You want to make a plan in advance for the different scenarios, so don’t wait for something to happen and then respond…Let’s lay out the steps in advance as much as possible for what we’re going to do and get ready to execute. And then finally, communication: You want to have a regular dialogue with your key stakeholders. Your investors, your lenders, and your employees are obviously key ones. Whether it’s a recession or not, I think it’s good to have a regular update, whether it might be monthly or might be quarterly. It might be in the form of just emailing them. It might be having a big conference call with all your employees once a month. And if you’re in the habit of doing that regularly, you’ll be better able to respond and work together.

What are some challenges that the companies you work with have had with this?

People don’t consider a wide enough range of outcomes. Think about all the different things that could happen. So, some of your customers are in a cyclical industry: What happens if the demand of that industry or the revenue for that industry goes down 30%? How’s that going to impact you? Or what if there is a significant hike in interest rates, or maybe there’ll be a big decline in interest rates. You’ve got to consider all these things and then make your plan of attack.

There’s been so much for firms to deal with in the last five years. For organizations that haven’t had the time or wherewithal to start planning for the recession, is it too late?

Companies are complex organizations, but the best companies are always focused on self-improvement. It’s never too late to identify something you’ve been doing that could be improved or changed, reinvent yourself, and figure out how you can improve. So, no it’s never too late at all.—LR