The role of FP&A in Human Resource planning under a looming recession
The COVID-19 pandemic has brought the world to the brink of an economic recession. As revenues and cash inflows dry up, cost pressures start to grow across organisations. News of layoffs and a rapid increase in unemployment has already made the headlines, for example 6.6 million Americans have recently applied for unemployment benefits.
Most CFOs and FP&A teams will inevitably be facing the layoff question soon, if they have not already. FP&A teams, as the owners of an organisation’s financial plans and advisors of optimal business performance, have a vital role to play in human resources planning right now. In times of a looming recession, the FP&A team need to work in partnership with business leaders and HR professionals.
Below are a few things to be mindful of while executing 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, there exists an element of uncertainty. Predictions of the timeline of economic recovery range 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 important to build multiple financial scenarios, with different recovery assumptions. The FP&A team must calculate the 'cash burn' rate for various scenarios and determine at what point the 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 the company afloat.
2. Do not forget the human element
After building each scenario profit and loss (P&L) view, the FP&A team must deep-dive into all costs to optimise the P&L. While payroll expenses are one cost element amongst many, it should be remembered that employees are real humans with families to support. Organisations should consider layoffs or furloughs to be a 'last resort' after optimising and reducing other available costs. However, if and when the time comes that staff reductions are required, teams need to realise their obligation towards the organisation and take these tough decisions, albeit empathically.
3. Be creative
When it becomes clear that the company's P&L can no longer bear the fixed cost of payroll, FP&A teams should exercise their resourcefulness and creativity to find solutions that protect employee wellbeing as much as possible. Solutions such as encouraging employees 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 employees will have more work than others and can potentially perform work in different business areas. For instance, employees in a CPG manufacturer that are 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, senior leaders should choose to be as transparent as possible. Contrary to intuition, employees are likely to volunteer creative solutions to help tackle the situation. Employees with reduced job responsibilities often surprise management with their ability to repurpose their skills into other areas of the organisation. Staff 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 operations during difficult times, management must also plan for their eventual recovery. The recovery period after a slowdown presents a unique opportunity to rapidly scale and even capture territory lost by competitors. Basically, to successfully emerge from this tunnel even stronger than before, organisations need to stay nimble and agile. It may be worthwhile, if financially possible, to hang on to key resources during the slowdown, who will be critical to the growth process once recovery begins. For instance, though digital marketers may currently have very little on their plate due to reduced marketing budgets, they are vital force in the drive to business 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 realise 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 the FP&A team are closely involved in this process and contribute to creative and intelligent solutions, the organisation will reap significant benefits.