The deadline to avoid a US debt default is quickly approaching and, as of this writing, negotiations are still ongoing. While many experts believe a default is unlikely, it’s not an impossibility.
To help navigate the uncertainty, CFO Brew is talking with CFOs and experts about what finance professionals about what, and how, finance professionals should be doing to prepare for a potential default.
Christina Ross is a former CFO turned founder and CEO of Cube, an FP&A software platform. We talked with her about first steps in the event of a default, how communication is an overlooked priority, and what CFOs have learned after several years of disruption.
This interview has been lightly edited for clarity.
How likely do you think a debt default is, and how seriously should CFOs be taking the risk of a debt default?
It appears high today, but we’ve never defaulted before. I also know we're living through a period of time in which we’ve experienced more unprecedented events than we would have ever expected.
Nothing’s out of the question. In which case, to your second question, CFOs should absolutely be preparing today, no matter what, even if there were just a 5% chance.
What then are the first steps and the biggest priorities that CFOs should be thinking about?
The number one thing, and again, this is my cup of tea, is “keep calm and plan on it.” You should always expect as a CFO to be the voice of reason. But you should have a plan for everything. And one thing that we always advise CFOs here is make sure you’re doing adequate scenario planning.
You should be looking at your assumptions around borrowing costs; you should be looking at your assumptions around revenue. Depending on your industry, this could be good for you [for example] if you’re a major exporter, and the US dollar decreases in value. However, for most of us, I think, especially if you’re in some way impacted by governments, then this could affect your top line. So make sure you’re building those scenario plans not only looking at borrowing rates, but what’s happening with your top line.
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The other major thing that’s important for CFOs, and I think this goes underreported a lot, is the importance of communication. And not just communication to your internal team of finance, but communication to your broader senior leadership, to your CEO, and even to your customers around how you as a company are handling this.
Sometimes people don’t need to know everything’s gonna be okay, but they need to know you’re aware of what’s happening and that you’re addressing it. And then, most importantly, keep a long-term view. This too shall pass, like every other major crisis we’ve seen in the last five years, 10 years.
How are you seeing CFOs using the lessons they’ve learned over the last couple of years to confront this current, as you say, crisis in the making?
I think CFOs today are a lot more certain of uncertainty than they have been in the past. If it can happen, it may and probably will happen. A great thing about CFOs as a character trait is we tend to be very risk-aware, and risk awareness is really our time to shine.
What are the technical accounting and financial management practices that CFOs should focus on in the event of a default?
Managing your cash flow more aggressively will be key here. So again, that’s your accounts receivable, your accounts payable, looking at any debt you currently have outstanding and what those borrowing rates are, especially if they’re tied to prime rates, because those can change. You need to model in potential negative effects there.
So being very aggressive not only on the planning side—again, your modeling, but on how you actually manage cash in the business. So there’s working capital, which I mentioned around accounts receivable and accounts payable.
But then there’s also just general cost control. This may be a time to tighten things up again, though one could argue we’ve already been tightening the belt. I think it’s time to look for more creative areas, or areas people tend to ignore a little bit more, which are things like working capital.