Executive
Perspectives

The CEO’s Dilemma
Building Financial Resilience
November 2022

Recently, we are seeing general changes in energy
prices, interest rates, foreign exchange movements,
commodity price growth, broken supply chains, andthe highest inflation since the 1970s crisis—the
outlook in all these areas remains highly uncertain.
It is therefore imperative for businesses to optimize
their financial resilience to stay afloat or createcompetitive advantage—72% of CFOs ranked
improving flexibility of budgeting and forecasting as
their number one focus for 2022.

In this BCG Executive
Perspectives edition, we
address how to respond to
uncertainty by building
financial resilience

The best organizations know how to turn uncertainty
into opportunity. This document addresses howorganizations can build financial resilience by focusing
on cash, rebalancing trade-offs between expenses andflexibility, building agility into planning and reporting,and adapting financial policy and investor messaging.
Source: CFO dive, FutureCFO, Protiviti; BCG analysis

2

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Introduction to this document

Executive Summary | Building financial resilienceWhyfinancialresilience
matters

Recent global disruptions are leading to significant impacts across companies’ P&L and balance
sheets—with varied effects by sector and region. Adaptability is vital.
C-suite members around the globe have ranked flexibility and resilience as their number one priority
for 2022 and beyond. Moreover, refinancing is expected to be challenging in the near future, making it
imperative to build financial resilience to mitigate negative impacts.

• Reassess cash management: Create dynamic and in-depth visibility and pull all levers to mitigate
liquidity risks (e.g., optimize margins, working capital, secure financing)

How toachievefinancialresilience• Reevaluate financial trade-offs: Selectively invest in buffers (e.g., working capital, cash, leverage) andweigh trade-offs against cost reductions• Improve agility of financial steering: Adjust short- and long-term planning and performance reporting
to enable flexible decision making and mitigation• Adapt capital allocation and investor messaging: Ensure transparency regarding impact of current
situation, stay committed to dividends, consider M&A to build advantage and stay flexible on buybacks
3

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Executives can build financial resilience along four vectors:

Economic snapshot for October shows most recent developments
across risk indicators
Global growth outlook

3

GDP forecasts1 (real GDP YoY)
USEurozone
GlobalFinancial markets

5

Equity market performance (YTD change)7

2021A

2022E

2023E

2024E

5.9%

1.8%

0.4%

1.4%

5.3%

3.1%

-0.1%

1.5%

6.0%

2.9%

2.3%

2.9%

Aug '22

Sep '22

Oct '22

S&P 500-17.0%-24.8%-18.8%

Eurostoxx 50-18.2%-22.8%-15.8%

Job openings rate4

Aug '22

Sep '22

Oct '22

Change10

US

4.84%

5.52%

4.64%

-88bpsEurozone

5.60%

6.31%

6.05%

-26bpsCommodity prices and inflation

Commodity prices2Brent oil
Natural gas
USEurozone

Aug '22

Sep '22

Oct '22

Change10

89.6

79.5

86.5

+8.9%

9.1
228.9

6.8
165.0

6.4
84.0

-6.1%
-49.1%

Consumer price inflation (YoY) 3
Aug '22

Sep '22

Oct '22

Change10

US

8.3%

8.2%

7.7%

-0.5ppts

Eurozone

9.1%

9.9%

10.7%

+0.8ppts

4

Q1 '21Q2 '22Q3 '22

Change10

US

7.3%

6.8%

6.5%

-0.3ppts

Eurozone

3.1%

3.2%

-

-

Aug '22

Sep '22

Oct '22

Change10

3.7%

3.5%

3.7%

+0.2ppts

3.0%

3.0%

-

0ppts

7.3%

7.1%

-

-

Unemployment rate5

Corporate spreads (high yield)82

Labor market

US
Germany
France6

Monetary policy

Monetary policy rates6

Manufacturing

PMI manufacturing (<50 = contraction)9Aug '22

Sep '22

Oct '22

Change10

US

2.5%

3.25%

4%12

+75bpsEurozone

0.5%

1.25%

2%

+75bps

Aug '22

Sep '22

Oct '22

Change10

US

52.8

50.9

50.2

-1.4%

Eurozone

49.6

48.4

46.6

-4.1%

1. Bloomberg, data as of 10/12/2022. 2. Data presented as end of month figures. Brent oil in $/bbl; US natural gas (Henry Hub) in $/MMbtu; Dutch natural gas (TTF front month future) in EUR/MWh.
3. CPI monthly seasonally adjusted data from Bureau of Labor Statistics; HICP monthly data for Eurozone from Eurostat. 4. Seasonally adjusted rates; Bureau of Labor Statistics for US; job vacancy
rate from Eurostat for Eurozone. 5. Bureau of Labor Statistics for US; Eurostat for Eurozone. 6. Federal Reserve for US; ECB for Eurozone (main refinancing rate). 7. Bloomberg. 8. Bloomberg US
Corporate High Yield Average OAS; Bloomberg Pan-European High Yield Average OAS. 9. ISM manufacturing PMI for US; S&P Global Eurozone Manufacturing PMI from Markit for Eurozone. 10.
Change Sep vs Oct 11. Change Q1 '22 vs Q2 '22 12. As of 11/2/2022 Note: All displayed numbers are based on end of month figures. Changes based on incremental changes vs. previous months.

4

Copyright © 2022 by Boston Consulting Group. All rights reserved.

1

BCG Executive
Perspectives
AGENDAWhy financial resilience matters now

5

Copyright © 2022 by Boston Consulting Group. All rights reserved.

How to achieve financial resilienceRefinancing will be challenging in the near term—companies
need to build financial resilience to mitigate impacts
US corporate debt as share of GDP near record high• Significantly higher financing cost | Global corporate
debt maturities peak in 2026; rising interest rates (and spreads)
increase accumulated financing cost by $40B to $60B a year

US debt relative to GDP (%)

Non-financial companies

2020-2022• Cautious private-equity financing | The days of US privateequity shops leveraging firms at debt-to-total-value ratios of 85%
are long gone. The US average debt-to-value ratio for privateequity deals last year was closer to 50%

91%
90

78%

80
74%
70

0
2000

2005

2010

2015

2020

Note: Adapted quotes; Sources: Federal Reserve (Oct 31, 2022), S&P Global Ratings, Bloomberg,
The Economist, The Wall Street Journal, The Financial Times, Fitch Ratings (all Jun-Oct 2022)• Historic high-yield-bond volume drop | Issuance stood at$207B on Oct 24, 2022, compared with $776B at the same timein 2021, a fall that surpasses the one recorded during thefinancial crisis. But maturity peaks in 2026 and 2029 provide
breathing room
• Higher risk from leveraged loans | US leveraged loanborrowers face a wall of maturities in the next two to three
years, and the number of such maturities has been growing fast
• Experienced CFOs wanted | Companies are increasingly
searching for CFOs with experience in cost management
and balance-sheet refinancing as they struggle for visibility on
6
the direction of the economy

Copyright © 2022 by Boston Consulting Group. All rights reserved.

2008-2010100• Higher expected loan defaults | European loan market
defaults expected to rise toward 3% in 2023, with significant
2023 and 2024 maturities looming

Transparency on your starting point is key for building financial resilience

Unprepared

Fortress

What actions are needed toaddress financial instability
while leveraging a favorable
market?

Marketstability1

At risk

Are you strengthening yourcompetitive advantage byinvesting for financial resilience?

Prepared
What immediate steps arenecessary to mitigate pressing
financial and market risks?

How can you use your financial
strength to improve position in
an unstable market?

Low
Low

Financial stability2

1. E.g., supply chains, labor pools, geopolitics, consumers, investors, rival moves; 2. E.g., profit volatility, free cash flows, debt levels, funding options, leadership readiness
Source: BCG analysis

High
7

Copyright © 2022 by Boston Consulting Group. All rights reserved.

High

BCG Executive
Perspectives
AGENDAWhy financial resilience matters now

8

Copyright © 2022 by Boston Consulting Group. All rights reserved.

How to achieve financial resilienceFour key elements of building financial resilience
Where to refocus on creating buffers
instead of minimizing costs

Financialtrade-offs

What levers to pull to ensuresufficient cash reserves

Cash
focus

How to adapt planning to enable aquick response to unexpected changes

Agilefinancialsteering

How to track performance in an
increasingly dynamic environment

Flexible capital allocation andtransparent investor messaging
What to change in capital allocation and investor messaging
to adapt to the current environment
Source: BCG analysis

9

Copyright © 2022 by Boston Consulting Group. All rights reserved.

How to ensure in-depth visibility
into near-term liquidity

Cash focus | Cash is king… again, it’s time to pull all levers to manage
liquidity
Reassess capital expenditures

Forecast liquidity development on a rolling basis• Incorporate various scenario and sensitivity analyses inliquidity planning• Plan ahead and prepare for mitigation levers as needed

•

•

4

Secure financing

Optimize margins

2

Reassess pricing and sales management• Manage costs, i.e., raw materials, personnel, SG&A
• Adapt approaches like ZBB (zero-based budgeting)•5

Improve working capital
Decrease inventory (e.g., via cycle time reduction)• Strengthen receivables management(e.g., invoicing cycles, reminders and dunning, terms)• Optimize accounts payable process(e.g., avoid early payments)

Short term
Source: BCG analysis

Secure sufficient borrowing capacity• Review financing options (e.g., debt vs invest)• Optimize maturity structure of debt for inflation• Consider tax options/breaks for investments•

Boost asset productivity•

3

Reevaluate segmentation of capital projects(e.g., replacement or growth project)• Assess countermeasures (e.g., postponement,
prioritization) based on urgency or risk

6

Outsource/lease• Reduce capex (e.g., simplified product portfolio)• Optimize asset capacity and downtimes•

Medium term/long term

10

Copyright © 2022 by Boston Consulting Group. All rights reserved.

1

Improve visibility of cash situation

Cash focus | Pulling all levers to overcome cash shortage
Example of a global medical technology and equipment provider
At the start of COVID-19, the company’s revenue dropped by over 60%. Thisput the business in a very vulnerable and cash-constrained position

Traditional
planning methods
ineffective due tochanging
environment
Short time horizons
to adapt strategy
and slow cash burnrate

Concrete actions
Evaluated cash balance under various scenarios• Developed a tool to create transparency in cash flows
over evaluation period
Protected net working capital by slowing cash burn• Identified noncritical expenses and functions• Reduced manufacturing capacity to limit cash burn• Leveraged demand forecast to balance ensuring
inventory level and slowing cash burn+$150MOPEX savings identified
across decision scenarios

Implemented effective measures toensure survival at the time of crisis

Enabled a real-time dynamicplanning approach for the future

Adjusted debt and refinancing based on scenarios• Created evidence base to convince investors and banks torefinance at lower interest rates and with longer payback
periods
Source: BCG project experience11

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Key challenges

Significant impact

Financial trade-offs | Trade-offs between managing costs
and flexibility need rebalancing
From minimizing cost…

…to enhancing flexibility

by…
ExamplesCash

Leverage

FX
Source: BCG analysis

Reduce cash to lower
financing costs

Increase to benefit
from low cost of debt

Accept FX risk

Allow buffers
to secure supply chain

Increasecash reserve• Renegotiate supplier/client terms• Incentivize early payments andoptimize dunning• Review nondiscretionary expenses• Improve cash forecasting and stresstesting, redefine liquidity buffers

Reduce to increasefinancial leeway• Focus on longer-term financing

Accept hedging costto lower FX risk

• Reassess FX exposure• Reevaluate potential equity financing• Boost hedging where relevant
12

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Working
capitalMinimize tofree up capitalFinancial trade-offs | Assess risk appetite and financial trade-offs
by actively managing balance sheet
Example of a global fleet management company
Given global uncertainty, leadership embarked on a balance sheet optimization1 program
to develop a funding strategy, improve operational flexibility, and enhance financial resilienceLow visibility ofcurrent liquidity
position
Complex capital
structure withexpensive funding
sourcesElevated
uncertainty due tomacroeconomic
situation

Concrete actions
Rapid liquidity assessment for immediate visibility,
followed by building of bespoke dashboard tool
• Developed working capital control tower to provided realtime view and forecast of liquidity with 50+ data sources• Modeled multiple custom stress scenarios• Automated monitoring and forward-looking alerts
for early warning
Evolved balance sheet and treasury operating model• Conducted a deep dive into financial risk appetite• Repositioned balance sheet to ensure all metrics
stayed within risk appetite for potential stress scenarios• Created dedicated forums for regular leadership review
of operating metrics indicative of financial resilience+10%

P&L impact, based on activebalance sheet mgmt. (incl. T&C2)

Improved liquidity position andsimplified funding strategy
Reduced reporting burden andautomated risk monitoring
Enhanced forward visibility anddecision support for executive team

1. Balance sheet optimization includes working capital, cash & liquidity, financing, capital structure, risk management & counterparty management (e.g., bank group)
2. Terms and conditions Source: BCG project experience

13

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Key challenges

Significant impact

Agile financial steering | Executives need to increase agility
in planning and reporting

Long-term planning

Short-term planning

Set relative targets• Absolute targets quickly become too easy
or too hard in dynamic environments• Targets relative to benchmarks provide a
better bar to evaluate performance

Descope budgeting• Detailed budgets lead to more frequent
planning errors rather than more control• More aggregate budgets provide necessary
flexibility during execution

Reassess portfolio moves• Dynamically review as opportunities andrisks change• Evaluate diversification to minimize risk

FINANCIALSTEERING

Increase forecast frequency• Frequent look-aheads becoming increasingly
important• Model/AI-based forecasting allows greater(monthly) frequency at reasonable effort

Performance reporting
Focus on relative reporting• Actual vs. budget often is not indicative of performance anymore• Refocus reporting on ratios and benchmarks instead of absolute numbers

Source: BCG analysis

Improve cash and cost tracking• Environment requires greater transparency of cost and cash
• Reporting detail on these items and their drivers should be increased

14

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Start

Agile financial steering | AI-based forecasting improved theflexibility of decision making
Example of a global financial and mobility service provider
Management employed an AI approach to forecast performance for 50+ business
entities to drive more flexible actions and forward-oriented performance discussions

Concrete actions

Arduous task ofensuring highforecasting
quality

Developed AI algorithm to improve forecasting• Validates forecasts by comparing with past performance• Selects best algorithm(s) for each KPI• Detects outliers, automatically adjusts value

Organizational
skepticism
toward AI
forecasting

Implemented AI forecasting with systematic change
management• Pilot run in parallel with human-based forecast to prove efficacy• Set up appealing dashboard to facilitate acceptance• Allowed management to always weigh in to secure ownership

Potential lastsluggish reaction
as in priorfinancial crises
Source: BCG project experience

Changed to a forward-looking steering approach• Switched reporting from actual vs. budget to last forecast vs.
current forecast• Allowed to validate if last actions need to be adapted• Focused on actions to improve next forecast vs. current

Improved forecasting quality
70% AI forecasts more accurate vs. human forecasts

Quicker with lower effort
Allowing monthly forecast in 1 instead of 10 days

Enabled dynamic decision making"What to change to improve next forecast?"

15

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Key challenges

Significant impact

Capital allocation and investor messaging | Ensure transparency around
impact on business, stay committed to dividends and flexible on buybacks
Capital allocation

Clearly communicate impact on performance and investment thesis

1

Ensure clear understanding of strength anddurability of sources of cash

1

Provide detailed view of impact of current
environment on business and investment thesis

2

Prepare to be flexible, to manage cash situation in
an uncertain environment

2

Convey potential risks, opportunities, andflexibilities

3

Maintain commitment to dividends as one of the
top priorities, suspend only as last resort

3

Proactively offer clarity on changes in short-term
performance expectations and mitigations

4

Assess M&A, to secure assets at lower valuation andbuild long-term advantage

4

Focus on resilience of the business and strength in
the current environment

5

Pursue buybacks—after securing liquidity,
backed by point of view on intrinsic vs market value

5

Highlight investments and initiatives that willcontinue to build long-term health

Source: BCG analysis

16

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Exhibit strong commitment to strategic capital stewardship

Investor messaging

The right tactics depend on your starting position

Unprepared

Fortress

Take action to protect cash;
start piloting agile financial
steering selectively(e.g., frequent forecasting)

Invest to build agile financial
steering
Review buybacks and M&A
especially

Stay flexible in capital allocation

Marketstability1

At risk

PreparedTake immediate action toprotect cash andstrengthen balance sheet

Focus on trade-offs to build
flexibility; start piloting agile
financial steering selectively(e.g., scenario planning)
Stay flexible in capital allocation

Low

Financial stability2High

1. E.g., supply chains, labor pools, geopolitics, consumers, investors, rival moves; 2. E.g., profit volatility, free cash flows, debt levels, funding options,leadership readiness Source: BCG analysis

Act now to build
financial resilience
Dynamically assess the impact
and range of outcomes
Develop clear visibility into
liquidity situation and mitigate
Pursue no-regret moves, e.g.,challenge cost base and working
capital, resecure financing, etc.
Pivot toward short forecasting
cycles and trimmed budgeting
Adapt tracking indicators, enhance
focus on cash and liquidity

17

Copyright © 2022 by Boston Consulting Group. All rights reserved.

HighConnect with our Resilience, Transform, Risk & Compliance, and Center for
CFO Excellence leadership team with any questions

Central Resilience Team

Transform
Tuukka Seppä

Ryoji Kimura
Global Leader - Corporate Finance & Strategy
Kimura.Ryoji@bcg.com
Tokyo

Global Leader – BCG Transform
Seppa.Tuukka@bcg.com
Helsinki

Risk & Compliance
Global Co-Leader – Center for CFO Excellence
Roos.Alexander@bcg.com
BerlinDaniel Feldkamp
Managing Director & Partner
Feldkamp.Daniel@bcg.com
MunichMatteo Coppola
Global Leader - Risk & Compliance
Coppola.Matteo@bcg.com
Milan

Center for CFO Excellence
Juliet Grabowski
Global Co-Leader – Center for CFO Excellence
Grabowski.Juliet@bcg.com
BostonClick here for our latest publications in the CEO's Dilemma Executive Perspectives series and additional Resilience insights

18

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Alexander RoosThe services and materials provided by Boston Consulting Group (BCG) are subject to BCG's Standard Terms(a copy of which is available upon request) or such other agreement as may have been previously executed by BCG. BCG does
not provide legal, accounting, or tax advice. The Client is responsible for obtaining independent advice concerning thesematters. This advice may affect the guidance given by BCG. Further, BCG has made no undertaking
to update these materials after the date hereof, notwithstanding that such information may become outdated
or inaccurate.

BCG does not provide fairness opinions or valuations of market transactions, and these materials should not be relied on orconstrued as such. Further, the financial evaluations, projected market and financial information, and conclusions containedin these materials are based upon standard valuation methodologies, are not definitive forecasts, and are not guaranteed by
BCG. BCG has used public and/or confidential data and assumptions provided to BCG by the Client. BCG has notindependently verified the data and assumptions used in these analyses. Changes in the underlying data or operating
assumptions will clearly impact the analyses and conclusions.

Copyright © 2022 by Boston Consulting Group. All rights reserved.

The materials contained in this presentation are designed for the sole use by the board of directors or senior management of
the Client and solely for the limited purposes described in the presentation. The materials shall not be copied or given to any
person or entity other than the Client (“Third Party”) without the prior written consent of BCG. These materials serve only as
the focus for discussion; they are incomplete without the accompanying oral commentary and may not be relied on as astand-alone document. Further, Third Parties may not, and it is unreasonable for any Third Party to, rely on these materials
for any purpose whatsoever. To the fullest extent permitted by law (and except to the extent otherwise agreed in a signed
writing by BCG), BCG shall have no liability whatsoever to any Third Party, and any Third Party hereby waives any rights andclaims it may have at any time against BCG with regard to the services, this presentation, or other materials, including theaccuracy or completeness thereof. Receipt and review of this document shall be deemed agreement with and consideration
for the foregoing.