CFO best practice, come rain or shine

Nicky Tozer at Oracle NetSuite offers some advice on how CFOs can learn from the past when planning for the future

 

If there’s a phrase that best characterises the modern CFO, it is “hope for the best and plan for the worst”.

 

UK businesses of all sizes are affected by ongoing issues such as employee retention, energy costs, and growing pressures to meet Environmental, Social and Governance (ESG) goals. In this rapidly changing environment, it is increasingly the CFO who needs to instil confidence in teams whilst also taking preventative measures.

 

Given this economy, top finance leaders will be making preparations for all outcomes, taking into account economic movements and forecasts to ensure the company can react accordingly. Changing your approach to proactively safeguard against potential losses is better than tending to wounds after the fact.

 

Pay attention to cash flow and rolling forecasts

Whenever there are signs of an economic downturn or potential disruption, the instinct of a CFO should be to assess working capital and cash flow before establishing rolling forecasts. This will allow them to project possible outcomes and quickly adapt to market changes.

 

It is less about whether these steps end up being actioned and more about creating healthy habits that will lead to long-lasting resiliency and growth.

 

The critical period to make these plans is when it’s business as usual. When things are in order, CFOs should have the time and resources to properly evaluate available cash so they know where it can be directed if things take a turn for the worse.

 

Having this visibility in place is a prerequisite for rolling forecasts to be implemented. These should be done regularly so that the information at hand is always accurate. It’s not be possible to predict the future state of the economy with 100% accuracy, but based on what the current market says, you can adjust the length of your forecasts accordingly.

 

For example, when there are warning signs that the economy may dip, it’s recommended to have short-term forecasts so cash flow projections are more reliable.

 

It is important to remember that bad situations can always occur prematurely or to a much greater extent than anticipated. We always want to avoid thinking about the worst-case scenario, but if for some reason it materialises, knowing your company’s liquidity options and alternative means of financing is pivotal.

 

In addition to being proactive, technological tools like data warehousing can enhance a CFO’s visibility over supply chains and customers, presenting possible areas for compromise.

 

Construct tiered forecasts; make purposeful cuts

The first response of many organisations is to make reductions. However, making impulsive decisions could end up causing more harm than good. Examining companies from the 2008 recession, this study found that most of the ones that survived weren’t able to recover growth rates three years after the recession ended, while those that managed to outperform rivals and their own previous performance made up a narrow 9%.

 

Findings revealed that the companies that made either big cuts or investments had the least chance of gaining an advantage over competitors. What CFOs today can take from this is not to make hasty decisions but establish a strategic framework that takes the business’s strengths and weaknesses into consideration – this will ultimately help to inform and strengthen your decisions.

 

A good strategy is to construct a model of tiered forecasts with cuts corresponding to different scales of revenue reduction. The priority should be shrinking operational expenses while finding long-term solutions to preserve cash flow further than six months. With these forecasts, CFOs can have a range of plans available depending on how the economy behaves.

 

Conduct regular customer-supplier analysis exercises

No business is fully immune to a downturn, but many have developed ways to become more resistant to negative impact.

 

How will your customer demand and supply change if the economy slows? You want to be able to map predicted buyer behaviour and weigh out the excesses and necessities of your products. This then allows for adjustments to be made in your production process. Again, this is just one part of the larger perspective you want to maintain across your entire business operations.

 

Something that can assist in modelling customer behaviour is Enterprise Resource Planning (ERP) technology. This tool provides data such as which customers are at higher risk and their impact on revenue. With this information, CFOs can modify rates and reach out to more value-added customers.

 

ERP can be equally useful for supply chain visibility, acting as a central record to give businesses greater access to supplier and partner information. These provide CFOs insights into things like risk factors, financial dependence, and opportunities for diversification.

 

What it boils down to

We all want to be in the ‘up’ times, but it is crucial to continue evaluating finances and reallocate resources in alignment with changing priorities. CFOs should continue building their repository of contextualised insights on a monthly or quarterly basis, making sure they have a game plan for each potential scenario.

 

CFOs shouldn’t wait to act, but reflect on how any missed opportunities or mistakes from past experiences can feed into strategies and plans for whatever else is to come.

 

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Nicky Tozer is SVP EMEA, Oracle NetSuite

 

Main image courtesy of iStockPhoto.com