Hopefully most public and private companies took a conservative approach to building their 2023 budgets last year. It is best for public companies to take a similarly conservative approach to 2023 Revenue and EPS guidance during the current earnings season.
Most CEOs did not live through the 2008-2009 Financial Crisis. The 2008-2009 period was an extended period of economic weakness which required that CEOs and their management teams learn to significantly tighten their belts to protect earnings as revenues took a haircut. Lessons learned during this period were extremely valuable.
Few of those leaders remain active in their CEO and CFO roles. However, today’s crop of CEOs and CFOs should find retired executives with experience managing through the 2008-2009 Financial Crisis and leverage those people as advisors, Board members and the like as the global economy further slows.
What to do if you are a relatively inexperienced CEO with an inexperienced senior management team. Hopefully you created a conservative 2023 budget sometime in the second half of 2022. The budget should have a plan to drive customer retention and profitability that includes calibrating compensation plans such that variable compensation is more heavily-weighted to customer retention, profitability and cash flow growth than in years past.
I’m concerned that young, inexperienced management teams with young, inexperienced Board members will not take a sufficiently conservative approach to internal budgets nor to investor guidance that will be presented on upcoming earnings calls.
CEOs: don’t worry about your stock taking a hit as a result of providing conservative 2023 guidance. It is better to do so now rather than miss Revenue and EPS estimates on the April and July 2023 earnings calls. The penalty for a miss would be more severe.