How should CFOs respond to the 2020 financial crisis?
Updated: Apr 26
We are only in April and already the on-going coronavirus pandemic has us worried for the entire year. As stated by the International Monetary Fund of the IMF, April World Economic Outlook projects global growth in 2020 to fall to -3 percent.
Companies all over the world are having to take drastic measures to shift production plans, recruitment procedures, and above all, taking all courses of action to increase cash.
Highlighted by an article written by NewYork Times, The global economic recession may take years to recover from, even after the pandemic is tamed — and no one really knows when that will be — the world that emerges is likely to be choked with trouble, challenging the recovery. Widespread bankruptcy could leave industry in a weakened state, depleted of investment and innovation.
You may think why is cash more important now?
82% of business failures are due to poor cash management. It makes sense - no cash means you can’t pay people.
The most important financial statement in a crisis like the current one, is Cash Flow which needs to be watched out very carefully.
Your company might be profitable but if you run out of cash or in more financial terms, have issues with liquidity, you could be potentially risking bankruptcy.
However, with as a Chief Financial Officer or any finance manager, you can take this time to update your financial statements, re-model your budgeting technics and even adapt a real-time financial data analysis.
Real time data analysis will allow you to have access to all the financial statements and data you may need at any moment, using the most up-to-date statements.
The correct and prompt response of CFOs will help any company, from a startup to a conglomerate, be able to survive the financial crisis we are, and will be facing in 2020.
As a CFO, there are a few crucial strategies you need to make sure your team is working on :
1) Your team needs to be developing a forecasting model and track the actual data each month. If your financial department doesn't currently use any forecasting models, now is the best time to kick off a forecasting model. This won't only be beneficial to your finance teams this year, but is a great foundation to be built, no matter how big your company is.
2) Your team should rework on the financial forecast at the very least each quarter after importing the actual data into your forecasting model. Due to the high volatility existing in the current market, your data and model most be up-to-date and updated with any change in the economy that may arise.
To learn more about real-time financial data analysis during the pandemic, give a read to our full blog here.
3) You need to keep your debtors line reliable. Your company should make sure of the settlements of accounts receivables.
The main reason behind this is that this could be the foundation of extra trade terms, for instance, KPI discounts, with distributors or clients for on-time and prompt payments.
4) If your company sells products, during these time stocks are very important.
Your team needs to make sure that stock is at a healthy level.
There should not be an excess amount of stock, nor should there be too small of an amount.
* Not an excess amount of stock since it would freeze the working capital in just materials and finish goods and it will not be efficient due to volatility of the current market.
* Not too low amounts of stock, so that you will be able to respond to the unexpected high market demand and product availability on shelf.
As Kenneth Ragoff has written for the Guardian, the problem, is that we are experiencing not just a demand shock but also a massive supply shock. Propping up demand may contribute to flattening the contagion curve by helping people stay locked down but there is a limit to how much it can help the economy if, say, 20-30% of the workforce is in self-isolation for much of the next two years.
5) You should reduce or change the phasing of the company’s unnecessary Capital Expenditure (Capex) as much as possible.
To achieve this, you may have to take meetings and explain the financial perspective of managing Capital Expenditures with budget owners, business partners and the leading team or the board of directors.
Our CEO has written a full blog, highlighting the reasons why managing your company is important. Give a read to the full blog here.
6) Last but not least, you can do your company wonders by training your colleagues outside of the finance departments with all the basics and important points about financial management during the crisis and help enhance their knowledge about cash and illustrate the difference between cash with profitability.
Today, it's necessary to bring all company-wide teams together to benefit from using synergy on all efforts on getting cash into the company from the sales you make.
To sum up, the economic crisis caused by the coronavirus pandemic is hitting companies everywhere hard. For most businesses, this is far from business as usual.
Financial teams have a particularly large and crucial role to play.
As a CFO, you have to do whatever’s possible to keep the business running.
That means creating new forecasting models, monitoring cash flow, and managing budgets.
This also requires clear communication, great interpersonal skills, and a renewed focus on the mission the company represents and the vision it strives for.