CFO’s and Finance execs all are under tremendous pressure to enhance liquidity and reduce operating cost. And those are absolutely required measures to take if a company wants to survive this corona crisis.
But does it prepare companies for the days after? Is it sufficient? Probably not. CFOs should increasingly look beyond the current crisis and guide their company’s leadership to prepare for renewed competition once we gradually step out of this crisis.
Research and experience show that the CFO should take the lead in not just cash & cost, but in 5 distinct actions to position the company for successful recovery:
- Optimize liquidity (stop the bleeding)
- Manage profitability, not just cost
- Enhance the balance sheet
- Re-prioritize the company’s portfolios
- Support data-driven business decision
Companies that focused on these 5 fields of play in past downturns proved to be much better prepared for the post-crisis era and outperformed their peers.
Optimize liquidity (stop the bleeding)
Cash is (again) king. While the extend and severity of the liquidity issue is largely dependent on the sector, all companies face similar situations with lagging cash inflows and continued cash outflows. This cash leakage needs immediate attention.
The CFO and her cash management team could set-up a “Cash Control Tower”, i.e. a SWAT team of cost category owners, cash management experts and business budget owners. On a daily basis, they re-prioritize cash outflows (supplier payments, loan covenant relief…) and maximize cash inflow (collection, lines of credit…).
This team will need real-time visibility on cash positions, and a robust cash rolling forecast. The latter should be based on a number of scenari and assumptions around market pick-up rate, customer payments, disrupted delivery chains, tax pay-out…. Finance should be able to provide this data-driven insight on cash evolution to allow business leaders to take corrective actions.
Manage profitability, not just cost
Companies are currently looking at their operating cost and finding ways to flex and reduce their cost base for the (very) short term. The challenge however will be to balance cost reduction with the capability to scale-up fast once market activity picks up again. There is a risk that critical resources have been downplayed below a threshold required to support growth in the near future.
To avoid this pitfall, Finance should look at both sides of the profitability equation. The focus should be on both cost reduction and revenue generating actions. As such, companies could look at ways to re-allocate resources to higher margin market segments or products. Or – for example - focus sales support to monitor the pricing process and avoid that salespeople give away too much discount as they will be eager to get that sale in this difficult period.
In addition, the analysis should not focus on cost categories but should question the business, the operating model, the added value of activities, the sourcing model (in-house or outsource), the demand/supply chain network set-up, etc… The CFO should strive for an ambitious transformation of key parts of the business. Now is the time to restructure the fundamentals, to drastically and fundamentally redesign elements of the business set-up and be prepared for the competition to come once we all get out of this crisis.
Finance can also use a zero-based mindset (ZBx)(1) approach – as described by Kris Timmermans in his book “The Big Zero” - to question the very existence of some activities and costs. To re-allocate resources from non-working costs to value-adding parts of the business. The ZBx mindset can help as it questions not only the level of a cost, but its very existence. It is not about incrementally reducing a cost (“can we reduce a cost with x%?”). It is about fundamentally re-thinking and answering the question "how much should something really cost?".
Clean-up the balance sheet
A third action for Finance to take during this corona crisis, is the balance sheet clean-up. Companies need this clean-up to free up resources and enhance their financial health, to be ready to re-allocate resources to growth and investment as soon as industry shows signs of early recovery.
Balance sheet clean-up includes a review of the payables terms, receivables, inventory levels (and underlying delivery network design), debt financing structure, impairments…
Re-prioritize the company’s portfolios
The corona crisis has impacted assumptions around expected return-on-investment. Projects that were top priority last winter, may now be counter-productive investments. Hence, Finance should task an executive team of experts (business, finance, R&D…) to have a second look and assess the portfolio of investments, capital allocations, R&D or strategic projects.
To support this review, Finance should create a framework of the key business levers (KPI’s), the new hurdle rates, the strategic alignment, the new risk appetite….: a decision framework that keeps everyone focused on the key metrics when assessing the priority of investments. Intention is to shift human and capital resources to higher-yielding projects and areas of future growth for the company.
In that respect, the company should also look at its portfolio of customers and products. Now is the time to optimize resource allocation and that means divesting markets or products that actually kill value for the company because of an inadequate net contribution margin.
Support data-driven business decision
All 4 above mentioned actions require insight: data-driven support for business decision. While some Finance teams have been lagging if not reluctant to heavily invest in digital technology and re/upskilling in areas of data-driven decision support, this is the time to catch up.
Business is navigating this corona crisis in a fairly blind way. It is new to all. There are no proven textbook solutions. But Finance can provide models, assumptions, transparency and simulations leveraging digital tools such as ML/AI, visualization technology, data lakes….
As such, Finance should consider building the following decision support:
- Real-time cash position and forecasting model
- Decision support models with clear assumptions about COVID-19 evolution (quantity metrics, geo spread, disease / infection curve …), market take-up timing and pace, supply chain models post-corona, competitive response, consumer confidence, ….
- Rolling forecast P&L models with defined trigger points when action or a decision by management is required
- Predictive M&A tool
Finance should seek to build a core team of executives (leadership and experts), trained to use the above models to define an exit strategy for the company, and capable of taking immediate decision as needed. That SWAT team should cover all aspects of the business: operational management, people, technology, strategic vision, business risk, …. Such a multi-disciplinary SWAT team will require new agile decision processes.
It is unclear how long this pandemic will last. Nobody knows how and when business will recover. But we can be prepared to move fast when possible. And the CFO can play a pivotal role in helping companies prepare for the crisis, during and beyond. And that preparation requires more than a narrow focus on cash & cost.
About the author
Lieven Bauwens is a Principal Consultant at Avertim. Lieven brings +25 years of consulting experience, with a strong focus on Business Transformation and Strategic Finance. Lieven has worked throughout Europe, Americas and Asia, and held leadership positions at EY, PwC and Bain & Co before joining Avertim.