With the global spread of the Covid-19 pandemic causing a worldwide humanitarian and economic crisis, we are now living in a world of large-scale lockdowns, quarantines, border closures, school closures, and social distancing. Consequently, companies have had to react swiftly and decisively to protect their clients, employees, suppliers, and ultimately their financial results to ensure survival. The rules of how business is conducted is changing on a daily basis as companies adapt to evolving rules and regulations, health guidelines, and epidemiological forecasts. Digital connectivity is the key to this adaption with companies struggling to achieve transparent communication with clients, colleagues, business partners, and investors, as work from home becomes the new normal.
It is amid this chaos and uncertainty, that the CFO must stand-up and provide strong leadership to steer the ship through these choppy waters, and ultimately ensure the company is in the best position possible to bounce back when the light appears at the end of the tunnel. The CFO while not always one of the higher profile C-suite positions, is the leader who is directly responsible for a company’s health and organizational resilience. Over 30 years of experience supporting CFO’s with our suite of e-Invoicing, P2P and AP Automation, and Innovative Financial Solutions, has provided us with an in-depth insight into the actions CFO’s must take to successfully navigate their companies through any crisis, especially the one we are experiencing now.
Number 1: Execute a Communications Plan!
While many companies look to the CEO for leadership during times of uncertainty, it is also the CFO who must take a lead role in both the financial and strategic aspects of crisis management. The first step to guiding the company through the Covid-19 crisis is to ensure that the CFO “over-communicates” both the actual and projected impact of the crisis on the company, and what actions are being implemented to protect the business. The CFO must ensure that they pre-emptively address the specific concerns of different stakeholders including employees, business partners, boards of directors, and investors, with proactive, assertive, and most importantly, frequent communication updates. With the Covid-19 crisis causing a never-ending shift in the business landscape, so will the priorities of the company constantly change. Unlike during a business as usual (BAU) environment, where a CFO’s company announcements and financial reporting are delivered as per a specific schedule, now they will have to address the urgent and immediate concerns of all stakeholders concurrently. Whether it be communicating cash optimization strategies to employees, liquidity positions to boards of directors, or revisions to earlier earnings commitments to investors, the CFO has to dramatically increase the frequency of their communications to demonstrate that they are taking fast and resolute action!
Number 2: Launch a Cash War Room!
Unlike investments that provide returns based on levels of risk, the usual risk with cash is the “opportunity cost” of holding it and the erosion of this cash due to inflation, with “opportunity cost” in this case, being in the form of higher yielding investments that the money could be utilised for. However, all this dramatically changes in the face of a crisis, such as the Covid-19 pandemic, where cash definitely becomes king! Unlike asset classes such as stocks, commodities, property, gold, and cryptocurrency, the balance you see in your bank account is the money that you have, while the value of your other asset classes today may not be of the same value tomorrow! This is where in the face of the Covid-19 crisis, CFO’s must provide a security blanket for their company by launching a cash war room. After quickly quantifying the cash balance of the company, the CFO needs to identify and implement urgent financial administration policies to incrementally increase the value of the balance sheet. This includes immediately implementing aggressive curbs on spending throughout the company; doubling-down on outstanding accounts payable collection activities to mitigate the risk of customers becoming insolvent; tapping on available lines of credit while concurrently exploring avenues for raising capital; seeking relief on debt covenants; renegotiating supplier agreements; prioritizing payments; and tracking the company’s liquidity in real time. During the ongoing Covid-19 crisis, cash shortages are a distinct possibility and conditions are constantly changing, so the implementation of these measures by the CFO to establish a cash war room, will provide the company with peace of mind.
Number 3: Activate Financial Planning & Analysis Tools!
The CFO can sometimes be lulled into a sense of complacency when indirect costs, direct costs, and sales revenues remain consistent and easy to analyse and forecast over many financial quarters. Unfortunately, there is nothing like a crisis combined with government intervention, to come along and turn everything upside down. Under crisis conditions, the CFO must strengthen their budgeting and forecasting activities in order to provide constantly updated business information to the C-suite executive team, board of directors, and investors, which becomes a rolling, real-time forecast. Some CFO’s in large multi-national companies (MNC’s) will be fortunate enough to have their own dedicated financial planning and analysis (FP & A) teams to support them, however most do not have this luxury. These CFO’s will need to identify finance executives within their department with strong analytics and business backgrounds who can transition from their current daily management of accounts roles, to the identification and analysis of key financial metrics that will dictate the company’s course of action through the rocky months ahead. This evaluation of key financial metrics, together with the implementation of real-time dashboard analytics and data-driven “decision cockpits” is where the CFO combines the finance, business, and digital expertise required to successfully navigate the company through the Covid-19 crisis.
Number 4: Create Hypothetical Financial Models!
One of the greatest fears that the Covid-19 crisis has generated in companies around the world is the “sense of the unknown.” Not knowing when the crisis will end, what restrictions the government will enforce next, when will business travel be allowed to resume, and how your customers will be impacted, all adds to the heightened uncertainty and anxiety being felt. This is where the CFO needs to generate hypothetical financial models based on a wide range of business scenarios, as opposed to operating per BAU time-horizon frameworks. These hypothetical financial models provide different points of view that encompass multiple scenarios such as the predicted growth or decline in the number of Covid-19 cases, what industry-sectors are negatively impacted the most, and which geographical territories are better positioned for faster recovery? The CFO must liaise closely with the business units to identify critical threshold limits, the effects on supply and demand if these limits are triggered, and what financial actions the company will take as a result. These hypothetical financial models are therefore incorporating company-specific data, macroeconomic components, and second order impacts including workforce dislocation, supply chain disruption, customer liquidity forecasts, and cash leakages, which all contribute to accurately calculating EBITDA risk. With this in place, the CFO has created a crisis management framework providing branch logic where the company’s leadership can refer to forecast elements based on the changing conditions and therefore make better business decisions that preserve cash reserves.
Number 5: Conduct a Diagnostic Audit of Your Balance Sheet!
This period of crisis is an opportunity for CFO’s to perform a deep dive review and diagnostic audit of their Balance Sheets. The objective of this diagnostic audit is two-fold:
1.) Strengthen the resilience of the Balance Sheet;
2.) Revaluate all company investments. These objectives are achieved by optimizing accounts receivable and accounts payable terms and conditions, refinancing debt obligations, reducing stock and inventory surpluses, and reviewing goodwill impairments. This “spring cleaning” of the Balance Sheet will achieve incremental benefits that bolsters the company’s financial resilience, increasing the length of its recovery runway. Furthermore, the CFO must streamline the company’s investment portfolio by conducting a major review of all capital allocations, especially in the areas of research and development, as well as technology. With return on investment (ROI) analyses completed under BAU scenarios, these projected returns and time-frames will most certainly be negatively impacted as a result of the Covid-19 crisis and will need to be revised downwards accordingly. The CFO is required to demonstrate strong and intuitive leadership by rapidly transferring both financial and human resources to high-yielding projects and investments, which enhances the company’s financial flexibility while still being focussed on core metrics.
Number 6: Strike the Right Balance!
In business, when “striking a balance,” you learn to accept components of both strategies in order to satisfy some of the demands of both sides of an argument, as opposed to all of the demands of just one side. During the Covid-19 crisis, this is the tight-rope that all CFO’s must walk as they endeavour to strike the right balance between reducing operating costs and exploring revenue generating opportunities, in order to boost the company’s overall productivity. The ultimate objective for the CFO here, is how do we cut all unnecessary Indirect Costs (and in the cases of less profitable departments, their Direct Costs as well), while intuitively allocating Direct Costs to products and services with high strategic and revenue value? Our research has demonstrated that during previous economic crises, companies with high-performing CFO’s reduced their operating costs by a significantly higher percentage and at a much quicker rate, compared with their under-performing peers. However, at the same time, they also identified revenue generating opportunities to achieve near-term performance improvements. This included reallocating resources to departments with strong revenue and profit streams, investing in omnichannel sales and delivery platforms, or developing new products and services that target clients experiencing financial challenges therefore facilitating long-term loyalty and retention. During this Covid-19 crisis, CFO’s must strike the right balance where they take decisive action to reduce operating costs, yet demonstrate flexibility to balance these reductions against the need to scale the business back-up as the economy recovers.
Stay tuned and follow us for more information, as we present the “Top 10 Ways CFO’s Can Navigate Their Companies Through the Covid-19 Crisis!”