FP&A in Human Resource: planning through a recession
As revenues and cash inflows dry up in a recession, cost pressures start to grow across organizations, and tough questions start needing answers fast.
HR during a recession
Most CFOs and Financial Planning & Analysis (FP&A) teams will inevitably be facing the layoff question soon if they have not already. FP&A teams, as the owners of your organization's financial plans and advisors of optimal business performance, have a vital role to play in your human resources planning right now. When a recession looms, your FP&A team needs to partner with business leaders and HR professionals.
HR planning hacks for challenging times
Below are our six top things to be mindful of when taking on this challenging task:
1. Build scenario forecasts
The current recession is unlike the purely economic ones we have witnessed before. In recent times, we have observed the 2008 financial crisis and the 2002 dot com bubble burst. These were different. This recession has been induced by a contagious virus that is a very real threat to human lives.
A lasting solution is dependent upon finding a cure or developing immunity. As a result, uncertainty exists, with predictions of the economic recovery timeline ranging from a month to over a year. Whether life will resume fully to what it was before or with new precautions and controls is also an unknown. Hence, it is essential to build multiple financial scenarios with different recovery assumptions.
With any recession, your FP&A team must calculate the 'cash burn' rate for various scenarios and determine at what point your company will run out of cash. The key is to identify the trigger points where drastic decisions will need to be made, such as unavoidable layoffs, to keep your company afloat.
2. Do not forget the human element
After building each scenario profit and loss (P&L) view, your FP&A team must deep-dive into all costs to optimize the P&L. While your payroll expenses are one cost element amongst many, your FP&A team must remember that ‘employees’ are real humans with families to support.
You should consider layoffs or furloughs to be a 'last resort' after optimizing and reducing other available costs. However, if and when the time comes that staff reductions are required, your teams need to realize their obligation towards the organization and take these tough decisions, albeit empathically.
3. Be creative
When it becomes clear that your company's P&L can no longer bear the fixed cost of payroll, your FP&A teams should exercise their resourcefulness and creativity to find solutions that protect people’s wellbeing as much as possible. Solutions such as encouraging your people to use their earned annual leave, to take unpaid leave, or a sabbatical can be explored, alongside discussions of reduced hours or reductions in salary.
Some of your people will have more work than others and can potentially perform work in different business areas. For instance, people in a CPG manufacturer involved in the production of low-demand products, such as toothpaste or air fresheners, can be redeployed to manufacture high-demand products, such as hand sanitizer and soap.
4. Be open and transparent
In times like these, everyone is aware of the economic situation and the potential impact on their job. Instead of being secretive about the company's financial health, which allows for gossip and second-guessing, you should choose to be as transparent as possible.
Contrary to intuition, your people are likely to volunteer creative solutions to help tackle the situation. People with reduced job responsibilities often surprise management with their ability to repurpose their skills into other areas of the organization. Your people may also be more willing to accept a worst-case outcome if they feel they were involved in the decision-making process.
5. Consider government intervention
Large scale unemployment has disastrous consequences for a country and its economy. Unemployed workers have limited income to take care of their families, are less able to bear the burden of healthcare, and deepen the recession further by reducing their spending. Governments are already stepping in to prevent mass layoffs through fiscal stimulus packages and other forms of assistance.
6. Planning for recovery
While planning the scale down of your operations during difficult times, you must also plan for their eventual recovery. After a slowdown, the recovery period presents a unique opportunity for you to scale and even capture territory lost by competitors rapidly.
Basically, to successfully emerge from this tunnel even stronger than before, you need to stay nimble and agile. It may be worthwhile, if financially possible, to hang on to critical resources during the slowdown, which will be essential to the growth process once recovery begins.
For instance, though your digital marketers may currently have very little on their plate due to reduced marketing budgets, they are a vital force in driving the business's recovery when the recession lifts. Hence, it may be wiser to keep them on the payroll, maybe with reduced hours or pay.
In conclusion, FP&A professionals need to realize that this pandemic may be the biggest disruption of our generation. In these uncertain times, human resource plans become a critical component of managing businesses and their financials. If your FP&A team are closely involved in this process and contribute to creative and intelligent solutions, your organization will reap significant benefits.
How can Unit4 help your HR planning in a recession?
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