NSC Norfolk Southern Corp

By Mark Maurer and Nina Trentmann 

To prepare for uncertainty, finance chiefs turn to scenario planning. They develop models to help quantify the effects of what-if situations involving cash flow, sales revenue and other metrics.

However, the unprecedented nature of the coronavirus pandemic has complicated the practice, upending annual budgets and investment time lines, and rendering forward-looking guidance futile.

CFOs in recent weeks have set aside pre-existing plans or are treating them, at best, as a starting point. Some companies have opted to draw on the fallout of the 2008 financial crisis as a de facto worst-case scenario.

But unlike past crises, many executives find every element of their business under strain.

"You've got these great plans and as of yesterday, they're completely meaningless," said Brian Kalish, who consults on financial planning and corporate treasury issues.

As the pandemic drags on, finance chiefs across sectors are devoting more time and resources to examining a range of potential scenarios. They are also stress-testing business-continuity plans and trying to revise forecasts more frequently.

"We just don't know what we're facing," said Mark George, chief financial officer of Norfolk, Va.-based railroad operator Norfolk Southern Corp.

Norfolk Southern last year started relying on stress-test scenarios to test its liquidity and gauge if it was positioned to deal with another crisis such as the 2008 downturn, Mr. George said. The company's finance team imagined scenarios using varying multiples of revenue and then simulated the impact of that revenue on cash flow. Those exercises are helping the company evaluate possible outcomes, he said.

"Part of this is driven by, frankly, the PTSD we all have going back to the 2008 financial crisis," he said.

Many CFOs, therefore, hesitate to stick to their predictions for the coming quarters. Sixty-two percent of S&P 500 companies have withdrawn or revised earnings guidance since April 1 because of the pandemic, according to research and advisory firm Gartner Inc.

Policy makers and company executives increasingly expect a swoosh-shaped recovery, denoting a large drop in the economic performance followed by a prolonged return. But economists continue to consider a variety of possibilities, such as a short collapse followed by a bounce back to pre-pandemic levels of activity, or a slower version of gross domestic product recovery.

"The world is going to be different in three, six and 12 months," said Christopher Kastner, CFO of Newport News, Va.-based shipbuilder Huntington Ingalls Industries Inc. "Thinking through what's going to be next, I know that's hard to do and we're challenged with it."

The unpredictability has made even worst-case scenarios revolving around natural disasters seem suddenly manageable.

"A hurricane you can see the other side of, so it's easier to plan when you're going to come back up the other side and how you're going to execute," Mr. Kastner said.

As companies tighten their budgets, models and planning tools aren't expected to undergo significant innovation. Businesses likely will continue to use planning tools they already have because it is very difficult to develop new tools in the midst of a crisis, said Bryan Lapidus, director of the financial planning and analysis practice for the Association for Financial Professionals.

Group 1 Automotive Inc., is examining scenarios covering a 12-month period, said CFO John Rickel. Its parts and services business division was particularly resilient during the 2008 financial crisis as people held on to their vehicles longer and needed repairs and service, but is facing declines now, he said.

The pandemic has pushed the Houston-based dealership chain to test out worst-case scenarios that would be worse than anything tested before the current crisis, Mr. Rickel said, such as a 30% to 40% decline in revenue for its parts and services division.

Group 1 is swiftly adjusting by focusing on the potential impact on costs, cash and loan agreements. It has developed a strategic plan to reduce capital spending and suspend its dividend, he said.

"You want to be in a position where if those more dire forecasts come through," said Mr. Rickel, "you're not putting the business at risk."

Write to Mark Maurer at mark.maurer@wsj.com and Nina Trentmann at Nina.Trentmann@wsj.com

(END) Dow Jones Newswires

May 24, 2020 09:14 ET (13:14 GMT)

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