SAMIT MOYE explains the different ways in which companies can manage their finances during a crisis
Disruption due to covid is everywhere, organisations are experiencing significant operational, financial and liquidity challenges. Most of the Indian companies who never looked at restructuring their financials, as the cash wheels for them were keeping their businesses afloat before the pandemic, have now taken a huge hit since some sectors are badly affected due to the pandemic, which has affected the twirling of money in all the sectors.
Pick any balance sheet, pre-pandemic and ask yourself, aren’t we seeing a potential to restructure and see where all this cash is going when we say the business is profitable? Companies have waited long enough to ignore the backbone of the organisation – yes and that’s ‘Finance Management’. Now, when globally we are affected by the pandemic, many businesses have realised if they had taken an early look into their organisation’s financial health, it would have been easier for them to sustain or manage their business in such a crisis.
During the crisis, most companies took to cutting employee costs, reducing production, cutting back on general and administrative costs and so on; which is a short-term solution for long-term problems.
Companies should map their cash outflow to their cash inflow, to understand who is funding what. Profitable divisions are funding businesses, which are struggling to survive, or the ones that can be revived. Quick and informed decisions to check whether cutting an arm is better than putting the entire body at risk is what is needed while we survive this pandemic.
The top concern right now for many businesses is to manage their cash pressures to ride out the crisis. In doing so, it is important to identify areas that are risks to the going concern and long-term trading ability of the organisation.
As we always say ‘First Things First’, identifying the problem is very important; and here is what companies should start doing.
The finance team led by an experienced CFO should launch a war room.
Most CFOs should start quantifying their companies’ cash on hand as well as any incremental capital that they can access. Finance leaders will need to forecast cash collections associated with the latest sales projections. With many customers delaying payments; however, some companies may need to double down on collections to remain solvent. CFOs can use various tools or mechanisms – what some would call a ‘spend control tower’– to prioritise payments and impose clear reporting metrics that track liquidity in real-time.
Important points or tips to start with for any company in a war room:
- Cash is King
More businesses fail for lack of cash flow than for lack of profit. The company’s primary finance focus during this period will be on implementing a ‘cash culture’ that is, preserving cash and deploying it dynamically. The CFO must communicate this priority throughout the organisation and help establish incentives to reinforce it so that all departments and business units understand ‘why this matters now’ and what their specific role is in helping optimize cash. The message to both board of directors and investors should focus on the crisis’s actual and projected effects on the company, the actions taken to protect the business, the liquidity situation, and any changes to earlier earnings commitments.
- Use Scenario Analysis
Scenario Analysis is used to estimate changes in the value of a business or cash flow, especially when there are potentially favourable and unfavourable events that could affect the company. Since there is heightened uncertainty in this pandemic situation, business and finance should form a strategic team to build on a range of scenarios rather than on individual time-horizon-based frameworks.
The CFO should also articulate clear thresholds or trigger points that suggest what financial actions the company will take and when. Rolling forecasts should incorporate both macroeconomic and company-specific data to identify major areas of EBITDA risk. The CFO will need to track in real-time the effect that cash decisions are having on the company’s ability to ride out the downturn and resume business operations once demand begins to bounce back.
- Rolling of the Working Capital Cycle
In my first point above, I have already emphasised the need for cash management, and this is not possible without managing the working capital. The CFO should focus on cash conversion cycle, debt/equity ratio, collection of receivables and developing the best payments strategy for your business. The above image on working capital will help you get clarity on working capital.
Talk to your regular suppliers and be honest. If they are not impacted, they might be in a position to help. Assess the ability of affected suppliers to continue production and supply. Make contingency plans for alternative supply in the short and medium-term. Where possible, negotiate for the most favourable credit terms with suppliers and critically evaluate your supplier base to determine if your current agreement is still the most favourable for your business. Go through your customer list and see who is most likely to be most affected and when. Understand fully what the impact on revenue would be from reduced sales and the cash flow implications from delayed payments. Follow up on all debtors as a matter of priority. Make sure your invoice is top of their list. Review your pricing and credit terms; do not assume that your customers are financially healthy. Re-evaluate credit terms with current customers, negotiate the shortest reasonable terms, and carefully review the creditworthiness of each new customer before extending credit. Think about how you can be paid upfront. Now is the time to tighten up your payment terms, not loosen them. Offer a discount for upfront payment. Try to get payment in stages rather than at the end of a project.
Explore your options around creating some liquidity on your balance sheet through invoice discounting or factoring. Invoice discounting will enable you to borrow funds using invoices as security while factoring is when a business sells invoices to a third party at a discount to the actual value.
- Focussed Productivity
The CFO should actively reallocate resources to businesses with strong existing revenue streams and optimize the company’s use of alternative sales and delivery channels, such as e-commerce. With much of the world in lockdown and demands falling, it will be necessary for finance leaders to take decisive actions for reducing operating costs, but it will also be critical for CFOs to maintain some flexibility and to balance those reductions against the eventual need to scale operations back up, as the economy recovers.
In the meantime, the CFO and finance team can also bring some rigour to spending management by implementing rapid zero-based budgeting for all discretionary expenditures, such as indirect procurement. Be strategic and do not execute cost-cutting initiatives that could compromise revenue-generating capabilities or that risk diminishing value in the business.
- Strengthen the Balance Sheet
CFOs should use this period of crisis as an opportunity to perform a deep diagnostic on the balance sheet – for instance, refinancing debt; reducing inventory, accounts-payable and accounts-receivable terms; and so on. This sort of balance sheet clean up can extend the company’s financial flexibility while keeping everyone focused on key metrics at a chaotic time. Additionally, CFOs should guide peer executives in a review of major R&D, IT, and capital allocations and use the opportunity to optimize the company’s investment portfolio. Finance leaders will need to quickly shift human and financial resources to higher-yielding projects and the initiatives most valuable to the company’s future. The CFO should provide you with financial intelligence, Financial Matrices (design and monitor KPIs) and actionable insights about business to enable the CEO to take quick and informed decisions.
- Digitalisation Strategy
This is the first economic disruption that requires a large part of the global workforce to perform their duties remotely, making digital collaboration tools necessary to keep the business functioning. However, the finance team’s use of digitization to help the company manage the crisis should not be considered a one-time event. Digital initiatives that once seemed out of reach – from automated closings to real-time forecasts – are now business-critical. The CFO and finance team should take a leadership position in advocating for the use of digitisation across the organisation, long after the crisis has passed.
The CFO and finance team can codify the solutions that they have developed – the cash war room, rolling forecasts, and collaborative dashboards, for instance; and help scale them throughout the organisation. This active, informed embrace of digitisation will be invaluable for ensuring accurate reporting, informed decision-making, and business continuity in any future crisis.
Automation helps you save time, avoid costly errors, and keep all-important documents at your fingertips. This helps transform the finance function that is efficient, accurate, and a department, which does not dread the end of every quarter.
- Reinforce the Role of Financial Planning and Analysis
The FP&A role are no longer limited to management reporting; it also requires lots of business insight so that the top management can formulate an effective strategy. Under crisis conditions, the FP&A team must accelerate its budgeting and forecasting work, providing continually updated business information that the CFO and the finance organisation can then incorporate into an integrated forecast.
The FP&A team should use collaborative tools to monitor and manage key performance indicators; in a crisis period, issues with data latency will not be acceptable and the team’s updates need to become a true rolling forecast, supported by a ‘decision cockpit’. Some finance organizations may lack executives with the skills necessary to elevate the FP&A team into such a role – those with analytics and business backgrounds may be in particularly short supply. The option in such a case could be to outsource your finance activities.
Outsourcing your finance department may help you grow your business. Paying for professional financial services, as needed, allows you to reduce overhead costs and direct funds to more profitable channels. Having financial experts perform various accounting tasks on your behalf ensures that you will not miss deadlines or pay hefty fines.
Additionally, a financial expert makes use of the latest technology to provide you with a comprehensive business analysis that your staff can use to formulate revenue-generating methods.
In sum, outsourcing your finance department is an innovative and cost-effective way to ensure that your business attains success.
No one knows how long the pandemic will last, but in time, businesses and daily life will find a new equilibrium. CFOs are key to ensuring that their organisations not only survive the current crisis but also thrive in the next normal.
