As the global economy slowly gets to its feet, business leaders are looking to the CFO to guide them toward recovery, driven by insights to make the best possible decisions. With such global economic uncertainty, few things are a foregone conclusion, but what data-driven insights do businesses need to best respond to persistent change? In this article, we take a closer look at three key areas finance must address if companies are to emerge from this period in a position to thrive.
Managing cash pressures will remain a top priority for CFOs in 2021. Many organizations have seen revenues plunge during the COVID-19 pandemic, which has had a negative impact on cash flow due to delayed supplier payments. According to Fortune, 94 percent of the Fortune 1000 are seeing coronavirus supply chain disruptions, and facing the reality that they will need to become more agile in managing inventory. Fragility across the entire procure-to-pay cycle can have a negative impact on working capital and how organizations manage it.
The problem is that many businesses have limited insight into—and management over—cash inflows and outflows. This hinders their ability to fund critical business initiatives and impacts debt exposures. A lack of agility and a reliance on legacy technology are two of the primary factors preventing businesses having a 360-degree view of working capital.
We have discussed the fast-moving nature of the pandemic in a previous article, and this intensifies the need for fast access to real-time finance data. The finance function must be in a position to share immediate insights into the organization’s cash position, as well as cash inflows and outflows with the broader organization. And business leaders must be able to quickly understand the company’s cash position in order to fund growth initiatives, adjust the level of existing investments, or reduce the level of risk across the organization.
Improving visibility into working capital also means having the systems and processes that allow the business to adapt payment terms, cash collection goals, and inventory needs to optimize working capital. This extends to getting a better handle on spend management, whereby finance has the ability to analyze purchases and reduce maverick spending. Challenges to the supply chain can lead businesses, often through panic, to make significant inventory spend with non-preferred suppliers. This reduces the potential for savings from contractual discounts, and is common during turbulent times.
Finance should be in a position to provide the business with real-time, up-to-date reporting on cost savings by category spend, total visibility into project pipeline and spend, and, crucially in today’s environment, visibility into the overall health and performance of supplier relationships.
While finance has a key role to play in better management of working capital, it is not solely the remit of the CFO. Speaking on the McKinsey podcast "Make Working Capital Work Harder for You," Matt Stone, an associate partner at McKinsey in London, describes the need for cross-functional collaboration. “Working capital is not something that just a CEO or CFO can change. The payables are managed by procurement, receivables are managed by the commercial teams, and inventory combines operations, supply chain, and other business leaders. To be able to turn the performance around across all of those, you have to convince a number of people at all levels of the organization to change their day-to-day behaviors.”
“It’s important that investors understand a number of potential outcomes, so using what-if scenario modeling to help guide the business is really key.”Barbara Larson General Manager, Workday Financial Management
Getting the right insights into the business to guide data-driven decisions can be challenging when change is constant. During the global pandemic, with government lockdowns and a rapidly evolving landscape, the ability to recalibrate and make decisions quickly has been crucial. Yet, even during more stable times, having the ability to empower other business leaders to make data-driven decisions is becoming increasingly important.
In fact, data-driven insights are absolutely key in empowering decision-making. This was clear from a global Workday study of business leaders where technology laggards—those lacking organizational agility—stated that out-of-date information and siloed teams are major barriers to the democratization of decision-making. At the other end of the spectrum, 80 percent of technology leaders from more agile companies stated that employees have access to timely and relevant data without gatekeepers blocking access to such information, compared to just 24 percent of laggards.
This mismatch makes sense. Businesses, as they grew and evolved, accumulate different technologies—systems that are often piecemealed together and lack smooth integration. The same is often true of data sources, with companies often relying on multiple data sources and reporting tools being threaded together to paint the full picture. For finance, this makes it challenging to quickly and confidently report on performance, identify variances, and surface risk—three vital components that can delay business-critical decision-making.
Barbara Larson, general manager, Workday Financial Management, points to the importance of breaking down technology and culture silos if finance is to empower businesses to make data-driven decisions. “What finance must be able to do is to quickly understand the impact of changes on the business through real-time access to data, at varying levels of detail and dimensionality directly from their accounting and planning system,” she says. “Performance, variance, and risk are three of the key insights finance must be able to provide to the business, and the need for self-service access to plans, actuals, workforce details, and operational analytics is much more powerful when it lives in a single system.”
For many companies, one of the most difficult parts of the COVID-19 crisis has been the uncertainty and volatility it has created around the long-term future. Financial markets have swung back and forth, leading to pressure from the investor community and a need for a more strategic approach to investor communications. Across many businesses, the finance function is tasked with providing thoughtful and proactive communication on how management teams are dealing with the crisis in addition to scheduled earnings reports.
In the short-term, finance will have to consider the impact of the situation on guidance, and whether it needs to withdraw, revise, or reaffirm. According to Deloitte in the article "Investor Relations: Adapting to the COVID-19 Next Normal," against the backdrop of a rapidly-evolving environment, quantitative information—the preference of most investors—may not be available. “In those cases, affected companies may need to consider how material the disruption is to their business—an increasingly difficult task as uncertainty related to the impact and duration of the pandemic persists—and respond accordingly,” the report states.
In the article, Deloitte recommends several CFOs and investor relations professionals, in addition to reevaluating guidance and assessing disclosures. One of the major focus areas is undertaking scenario planning to forecast potential impacts and associated consequences of areas of particular interest to investors, such as covenants.
Larson echoes this advice. “It’s important that investors understand a number of potential outcomes, so using what-if scenario modeling to help guide the business is really key,” she says. “Finance should also be looking to highlight the stability of the business by emphasizing long-term objectives and being able to demonstrate those metrics clearly. Last, but certainly not least, risk mitigation planning is a pivotal part of restoring investor confidence, as preparedness in such uncertain times demonstrates a degree of control.”
To learn more, check out The Hackett Group’s key actions for finance leaders: Looking Past COVID-19: Five Critical Messages for CFOs.