CFO round table: Managing uncertainty

More finance chiefs are helping shape strategy.

BY JACK HAGEL
June 1, 2012

Business was about as good as it could get for A&A Manufacturing in early 2008. The New Berlin, Wis., company was busy cranking out custom-engineered protective covers, cable carriers, and those roll-up doors you see on the sides of fire trucks. The workforce couldn’t keep up with the orders.

“We were working at full capacity—an enormous amount of hours—and we were trying to hire people,” recalled Lawrence Kean, A&A’s secretary, treasurer, and CFO.

But that summer the global economy took a nosedive. Orders slowed to a trickle. Suddenly A&A was staring at an inventory of metal and plastic materials that it had ordered atop a bursting commodities bubble.

“We had to make some painful reductions in service and work our way out of purchase orders,” Kean said.

Few companies were prepared for what became the worst economic crisis since the Great Depression, but many have learned from it. Some—including A&A—have grown stronger because of it.

The global economy remains cloaked in uncertainty. There has been tepid economic improvement in the United States. A debt cloud looms over Europe, growth is slowing in emerging economies such as China, and new regulations and game-changing technology have been introduced almost every step of the way. In between, there have been disruptive political uprisings and natural disasters the world over. The unpredictability is changing how companies manage risks and develop growth strategies.

Managing through that ambiguity was the theme of a recent CFO round table hosted by the JofA and moderated by Arleen Thomas, CPA, CGMA, the AICPA senior vice president–Management Accounting. She was joined by three other CPAs who hold the CGMA designation: Carl Berquist, executive vice president and CFO of global hotelier Marriott International; Brenda Morris, CFO of Love Culture, a fast-growing young women’s clothing retailer; and Kean, whose experiences in 2008 helped build the foundation for a stronger company that is expanding globally.

Their insights were particularly timely. As companies navigate the increasingly complex waters of the global marketplace, CFOs are becoming a more influential part of the strategic-planning process.

“Over the last 10 years, I’ve seen the CEO start to use the CFO more for strategic guidance,” said Morris, who has spent the past decade as CFO of several companies. “There’s more dependence on really understanding the financial and operational risks that impact the business.

And most of the time, the CFO … can provide really good input and guidance.

“I also think most CFOs are just stepping up and being more strategic in nature than maybe they used to be,” she continued. CEOs are increasingly seeing CFOs as a more important resource in managing key initiatives and helping define the direction of the business, Morris said. “That’s what I really love to work on.”

A FUTURE VIEW

Morris’s role at Love Culture exemplifies how the CFO has evolved as the global marketplace has expanded. Love Culture has about 70 stores across the United States. The private Los Angeles-based company, which specializes in affordable apparel for young women, is on pace to add 25 to 30 stores each year for the next several years. Morris is focused on strategic initiatives that will enable that growth.

She regularly monitors the company’s cash position and reviews business processes and systems and looks for ways to improve them. She keeps in regular contact with analysts who cover specialty retailers, mining for cost and sales data from publicly traded competitors—information she can use to benchmark Love Culture’s performance.

Because 95% of the company’s products come from overseas, she keeps close tabs on labor rates, cotton prices, and other indicators around the globe, looking for ways to improve profitability. “One of the advantages that we are seeing in our growth cycle is that we’re able to leverage our growth in negotiations as we increase our volume and add to our store base,” Morris said.

Her thinking is less focused on last quarter’s results. “I’m almost always looking to the future,” Morris said. “I’m looking at processes. I’m looking at people. I’m obviously looking at metrics all of the time and focus almost 100% on, ‘How does that drive us to the future?’

“I don’t look back a lot,” she added. “I look back enough so that we hopefully can learn some things from what we’ve done.”

Looking ahead also means looking for ways to avoid or mitigate bad risks. A rash of unexpected events—natural disasters, political uprisings, stock swings, oil spills, stolen data, the list goes on—have caused more executives to revisit risk management plans.

With global trade, supply chains, and financial markets so closely entwined, most global executives say their businesses face more risks than ever before, according to PwC’s 2012 State of the Internal Audit Profession Survey, which polled 1,530 executives in 64 countries and across 16 industries. Their top concern was economic uncertainty, but fewer than half of the respondents thought their organizations were doing a good job of managing that risk.

“The biggest key is not being comfortable,” Morris said. “… I’m a big believer in having a risk management plan in place that allows you to have three or four different options, if a scenario that you hope never happens actually does happen, so that you don’t have to figure it out in a reactive way.”

CONTROL WHAT YOU CAN

The recession, which has sapped leisure and business travel, has been particularly brutal to the hospitality industry. And that has caused Berquist, the Marriott CFO, to think more proactively when it comes to his company, which operates more than 3,700 hotels in at least 73 countries and territories.

“What you quickly learn is that you’ve got to have contingency plans for each hotel,” he said. “[If] you don’t have any long-term cash flow stream coming in, and if you have big groups cancel, it’s hard to fill up that hotel again. So you have to have contingency plans on the shelf that you can implement on a fairly short basis to get your costs aligned with your revenue streams when they drop that dramatically.”

Indeed, some things are hard to plan for, such as last year’s earthquake and tsunami in Japan. “We have a Ritz-Carlton in Tokyo and, after the tsunami, the business just dropped to nothing,” Berquist said. “But in eight months, it’s back to 80–90% occupancy.

“Countries are resilient once they get through their problems. They’ve just got to get through them.”

The company works to steer things it has more control over, such as employee recruitment. So much of a hospitality company’s value is tied to the quality of its service, and about 300,000 people wear Marriott badges. “We’ve got to have the right people,” Berquist said. “And it’s a constant thing, looking for those people all over the world to serve our guests when they show up at the hotel. If you can’t get the best and brightest … then you’re going to suffer.”

So the company has an active recruiting program. It pays for visits to college campuses and sets up training facilities to teach people what it’s like to work in the hospitality industry. The company even has a video game in which potential hires run a virtual hotel restaurant, where they learn about things such as food inventory, staff management, and budgeting.

PLAN FOR GROWTH

At A&A Manufacturing, Kean has become more forward looking in the years since the downturn thumped production in 2008.

The company, which got its start in 1945 in a basement making footballs and basketballs for neighborhood kids, was sold in 2007 to a Boston private equity group, and that has changed the tenor of the corporate suite.

“It’s definitely a different focus on growth and strategy,” said Kean, who has been with the company for 28 years and has seen it grow from 100 employees to about 400. “And so our discussions on an ongoing basis are always strategically focused on how to grow and improve our business.”

The company is tracking publicly owned customers and other industrial companies, looking for leads, risks, and outlooks. A&A’s sales reps play a key part in gathering intelligence.

“If we’re not successful, we ask why that is,” Kean explained. “So we keep a pulse on the competitive environment that way.”

If a quote doesn’t turn into a sale, for instance, the sales rep tries to find out why. Doing so provides A&A with feedback on product design and pricing.

Kean, meanwhile, tracks A&A’s cash balance, monitors the company’s daily shipments to see how the month is progressing, and looks at incoming orders, which help him understand A&A’s backlog and how the company’s upcoming months will be. He’s also paying close attention to the Purchasing Managers Index, which has been showing positive signs.

A&A’s procurement employees, meanwhile, are making sure the company has multiple sources for critical supplies, just to add some security to the company’s supply chain.

“You can’t wait too long to react,” Kean said. “And that’s why we’re looking forward and monitoring our incoming orders and trying to do a better job to predict if there is going to be a sudden downturn.”

The tighter controls and closer watch on competitive and macroeconomic metrics has helped A&A recover from the downturn, and has put the company in a stronger position today.

In 2010, A&A opened a European sales office in the Netherlands, and the company is eyeing opportunities in Asia. “Our customers, many of them are setting plants up in Asia,” Kean said. “And that’s giving us the impetus to expand our geographical reach—to first follow our customers and then, second, try to compete for local business. We are also seeking to grow our business through acquisitions of either competitors or complementary product lines.”

Kean remains uncertain about the economy and therefore he remains cautious. Even if there were some clarity about economic improvement, something else would likely keep him on guard, be it the election or upcoming changes to tax laws, he said.

“There’s obviously some more uncertainty,” Kean said.

Jack Hagel is the JofA’s editorial director. To comment on this article or to suggest an idea for another article, contact him at jhagel@aicpa.org or 919-402-2111.

Tips for young CPAs

Marriott International CFO Carl Berquist offered some career advice for young CPAs during the round table. Here’s his exchange with moderator Arleen Thomas, AICPA senior vice president–Management Accounting. The text has been edited for clarity and length.

Thomas: Carl, how did you make that switch in your career to that strategic role? If you were talking to a 25-year-old, what would you tell them?

Berquist: I would tell the 25-year-old that finance is the foundation of everything. The reason the CFO has to be at the table is because the strategy would be missing a leg if it didn’t have the foundation. So having that foundation—to understand all the moving parts—is critical. It’s hard to put together a global strategy without understanding all the financial implications and just how you’re going to finance that growth.

The world is very complicated, and the more you understand it, the more you’re going to add value when you’re sitting at that table. In today’s environment, because of the complexity—money moves around the world instantaneously these days—you have to know how that all comes together, otherwise you could be taking a huge risk.

Thomas: What advice would you give for the person in your finance team that wants to be the CFO?

Berquist: I would tell them to just become a sponge. Continue to learn no matter where you are in your career. You get to do new things, try new things, become part of the solution. Don’t just say, “Here’s the data, thank you very much, I’m going home.”

Give your views. You don’t have to be right every time, but at least give your views on what’s going on and add value. I just think being proactive is what it’s all about. You don’t have to be the smartest guy in the world, but as long as you’re part of the solution, I think you’ll continue to grow.

The panelists

Carl Berquist is executive vice president and CFO of Marriott International, a leading lodging company with more than 3,700 properties across 18 brands in 73 countries and territories. He is responsible for global finance, including financial reporting, project finance, global treasury, corporate tax, internal audit, and investor relations. He also is a CPA who holds the CGMA designation.

Lawrence Kean, CPA, CGMA, is the CFO, secretary, and treasurer of A&A Manufacturing Co., a New Berlin, Wis., manufacturer of custom-engineered protective cover products, cable and hose carriers, roll-up doors, machinery door openers, slip clutches, and many other products. In 2010, A&A expanded globally, opening a European sales office. The company plans to expand into Asia this year.

Brenda Morris, CPA, CGMA, has extensive experience as a CFO in the retail industry. She is currently CFO of Love Culture, where she is helping develop growth strategies for the young women’s clothing retailer, which has about 70 stores and plans to open 25 to 30 stores annually over the next several years.

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