The undeniable fact about the COVID-19 crisis is that it landed squarely in the finance department. Globally, every measure adopted to deal with the effects of the pandemic, whether it is risk management, cash flow, human capital, IT infrastructure, or financial planning and analyses, they all begin with finance.
Smart, decisive action, on the part of CFOs, is required to ensure that their organizations can handle their cash requirements during the COVID-19 pandemic. CFOs must act fast to improve cash visibility across every layer of the business and guarantee that their organizations have optimal cash management measures implemented to withstand unpredictable events both in the short and long-term future.
The positive news is that the instruments for handling the current cash flow issues are better than they were ten years ago. Primarily, organizations have improved access to more and better information, as well as better data analytics and forecasting tools. Furthermore, communication is quicker and less-problematic between various departments in the organization, as well as with suppliers, consumers, and financial institutions.
It is also important to note that modern business resource planning frameworks offer better visibility into buy-to-pay and order-to-cash procedures. Moreover, cloud-supported AI capabilities are available and can be used to digitize and review documents, as well as, oversee cash at every individual transaction level.
A Global Overview of CFOs’ Views Regarding the Effects of COVID-19 on Businesses
Every CFO is experiencing some effects of the Coronavirus. This perspective is supported by a PricewaterhouseCoopers CFO pulse survey that targeted 867 finance leaders spread across 24 nations. For CFOs in the US and Mexico, their biggest concern is the potential of COVID-19 resulting in a global economic recession. Nonetheless, 90% of the CFOs surveyed remain optimistic that their business would return to normalcy within three months in case COVID-19 ends immediately.
54% of the CFOs surveyed hold the view that the pandemic has the potential to cause a significant effect on their business functions, while 58% of them expect a reduction in the enterprise`s turnover or profits in 2020. On the other hand, 34% of the survey respondents indicated that the impact has been limited to particular regions, although they added that they are following the situation closely.
In the Middle East, this study found that 67% of the CFOs surveyed are convinced that the Coronavirus pandemic has the potential to impact their organizations significantly. While CFOs in the UAE are the most worried about the effects of COVID-19 on their companies at a proportion of 77%, CFOs in the KSA believe that the impact is restricted to specific areas of their business.
The key concern for CFOs in the Middle East is the financial impact of the pandemic. This concern is shared by 78% of the survey respondents who indicated that they are anticipating a decline in revenue due to the pandemic.
Challenges CFOs are Facing due to COVID-19
From a survey carried out by Sheffield Haworth, a global talent consultancy, that targeted CFOs from the retail banking, SME, and consumer lending industries, one CFO argued that the current crisis is both a management and intellectual challenge. Essentially, when management executives are under this amount of pressure, it also reveals their relative strengths and weaknesses.
With this in mind, the key challenges CFOs are facing today include:
- Staff disruption and the need for the digital transformation of the organization
- Liquidity and cash flow challenges
- Emerging risks
- The need for operational improvements
Staff Disruption and the Need for Digital Transformation of the Organization
It goes without question that the Coronavirus crisis calls for an emphasis on the health and welfare of your staff granted the unprecedented changes they have to navigate daily.
Similarly, back-office operations have been disrupted as a result of the enforcement of social distancing as a preventive measure against the novel Coronavirus.
Liquidity and Cash Flow Challenges
Sustaining cash flow and guaranteeing liquidity for the company to remain operational represents the top priority for CFOs in Saudi Arabia especially in highly leveraged businesses.
This perspective is based on the fact that the cost of financing has gone up, whereas the issuance of stock through public markets is an unwelcome option considering the significant declines in stock prices, increased market volatility, and challenges in projecting earnings.
Although the national bank has approved huge capital injections to offer liquidity in the credit markets and the government has announced different monetary stimulus packages to support both the public and businesses in navigating the current crisis, there is a chance that the credit profile of some enterprises may be downgraded as a result of declining cash flows. This aspect makes new cash borrowings for affected businesses either expensive or unattainable.
Apart from their financial responsibilities, COVID-19 has forced CFOs to monitor emerging and unprecedented risks. For this reason, CFOs have the task of ensuring adequate risk oversight and guidance.
Broader than the digital transformation of the enterprise, both finance and corporate operations need to be adapted and scaled up to deal with disruptions of demand during the current pandemic. Primarily, CFOs need to take into account what needs to change in how the organization functions and identify the emerging opportunities that can be harnessed during the crisis.
Managing Staff Disruption and the Need for Digital Transformation
To safeguard the health of employees and guarantee the success of the digital transformation in their organizations, CFOs are taking a variety of measures. The first measure is planning for the possibility of crucial members of staff being affected by the Coronavirus. Typically, a viral pandemic may lead to a scenario where most of your staff, or even you, are unable to work for a certain period.
For instance, in the absence of senior management employees for critical duties and pressing decisions, CFOs have the duty to institute measures that ensure business continuity such as retasking other members of staff and restructuring protocols of access to critical files. However, it is important to ensure that appropriate internal controls are maintained in managing staff disruptions during this time.
On the other hand, stay-at-home and social distancing guidelines mean that organizations need to embrace the digitization of their work processes. CFOs are expected to support this transformation and lead by example. Furthermore, in collaboration with the Human Resource (HR) and Information Technology (IT) departments, CFOs need to identify strategies that can help their employees communicate online, and enhance staff engagement overall.
However, many businesses lack established structures for virtual access to important systems and data. For this reason, CFOs need to collaborate with their CIOs to improve essential remote access to vital systems and information while protecting against cybersecurity risks.
For businesses in the sectors such as property and construction, some members of staff cannot work from home. This aspect calls for fresh strategies of structuring the workspace to ensure social distancing, secure handling of materials, and effective sanitization of the workspace.
CFOs are crucial to the effectiveness of these measures through the planning and provision of necessary resources to facilitate the restructuring of their organizations.
Identifying Short-term Measures to Grow Liquidity and Cash Flow
According to Kevin Dancey, the CEO of the International Federation of Accountants, the Coronavirus pandemic has created a scenario where CFOs are faced with shrinking balance sheets, growing risks, and challenges to the supply chain.
CFOs are not only expected to offer leadership through this pandemic but also beyond it. For this reason, short-term solutions are necessary to keep companies operational and employees on the payroll. An insights report by Deloitte underscores the importance of CFOs to analyze models of their cash flow to determine the depth of liquidity the business possesses under the current pressured corporate setting. This step is critical, especially in times of economic crisis whereby businesses are stretched to their limits financially.
With governments announcing stimulus packages to support struggling enterprises, finance leaders will be looking to review financing and liquidity to create the appropriate credit facilities. As a CFO, it is important to take a proactive approach with financiers to seek waivers and stay on top of potential issues and breaches of financial agreements.
CFOs can also seek to expand their network of financing sources to secure extra lines of credit if access to new bank loans diminishes and agreements become more restrictive. In the short term, CFOs should consider taking advantage of government loans and grants, and central bank purchases of bonds to shore up their access to cash.
Another crucial step to take in this context is to monitor and control receivables. Typically, customers and suppliers seek to extend payment periods when they are faced with cash-flow and credit challenges. Proactively managing receivables and rapidly handling disputes can play a vital role in addressing the risk of payment defaults and delays. As such CFOs should work with relevant departments such as credit and collection to observe and ensure strong cash flow that will, in turn, have a positive effect on revenue.
Alternatively, CFOs can opt to secure a bigger float through extending payment terms to vendors.
Comprehensive Risk Management
If there were any doubts about the importance of a CFO to an organization, the current global crisis is quickly highlighting the fact that their position in a business is not limited to accounting only.
Instead, the involvement of CFOs in addressing the risks their business faces is now more crucial than ever. Firstly, as businesses digitally transform their workforce and provide additional external access points to their systems, susceptibility to cyber risks such as data theft, ransomware, and other attacks also increases. Monitoring and investment in cybersecurity represent some of the strategies that can be adopted to offset such risks.
However, granted the unpredictable nature of the depth and length of COVID-19 and the related economic consequences, CFOs are not aware of the risks that may arise down the road. For this reason, continuous involvement in scenario mapping to identify the type of risks that have the greatest potential to affect their business is advisable.
Nonetheless, there will be risks that cannot be foreseen or easily avoided. In such a scenario, liquidity and agility are necessary to mount an appropriate response. One of the ways businesses can ensure liquidity to address unforeseen risks is through identifying tailored insurance policies focused on helping businesses navigate through the uncertainties caused by COVID-19.
Overseeing Operational Improvements
Crises often provide the perfect time to restructure parts of the business that require transformation. The crisis resulting from COVID-19 is no different. CFOs together with an organization’s senior management will benefit from adopting a transformation mindset when they are setting targets, managing performance, constructing budgets, or challenging their business on growth or expense actions.
The finance team should launch a review of the portfolio, with a focus on achieving the full potential of each business unit. This is a time to set aside forward-thinking and explore transformational strategies that can boost income or minimize expenses—not by 5 to 10 percent but by 30 to 40 percent.
For instance, CFOs and the finance organization can lead operational strategies focused on achieving near-term performance improvements. For example, to improve income generation, the CFO can support the development of new products and services. Alternatively, the CFO can actively redistribute resources to businesses or departments with strong income streams currently and optimize the organization’s utilization of alternative sales and delivery avenues, such as e-commerce.
With a large proportion of the world still in lockdown and demand for goods and services declining, it is vital for finance leaders to adopt decisive measures focused on minimizing operating expenses. However, it will also be critical for CFOs to leave room for flexibility as well as to balance these reductions against the eventual need to restore normal operations as the economy recovers. Meanwhile, CFOs can also introduce some thoroughness to spending management by implementing quick zero-based budgeting for all non-compulsory expenses, such as indirect procurement.