2020 will be written as the year of firsts for most companies. Unprecedented changes challenged chief financial officers (CFOs) as a global pandemic put a dampening effect on the bottom line of American businesses, big and small. With 2021 just around the corner, how can CFOs take what we’ve learned this year to build more resiliency into their financial planning for next year?
Identify and stamp out operational weaknesses
This kind of economy is no place for operational weakness. The chances are high that the economic fallout from the pandemic will continue to have a negative effect on businesses of all sizes, especially with a slow upturn in the economy not expected until the second quarter of next year, or perhaps even later. For the enterprise CFO, 2021 will be a time to maintain liquidity while concentrating on efficiencies that grow and build our remote and contract workforce.
Cutting costs will be critical in the short term, and CFOs will need to focus on eliminating any operational weak points to create future resiliency in their organizations. From a financial and risk perspective, lean and agile organizations that leverage technology efficiencies will survive and thrive in any upcoming market shifts. It’s important that CFOs engage with the chief innovation officer (CIO) and chief technology officer (CTO) within their organization to identify opportunities for greater efficiency and innovation. Working hand-in-hand will be critical going into the new year.
Our economic expectations are bleak currently, with only 1% of CFOs calling the current conditions in North America “good.” That is a huge shift from the first quarter of 2020, which saw 80% of CFOs feeling positive about the economy and their bottom line. More than half of CFOs now say they will not reach their pre-crisis operating levels until mid to late 2021. These are grim predictions that require a realistic look at cash on hand to prepare for what’s next.
Determine your cash profile
Cash on hand will help businesses weather continued market fluctuations. CFOs must roadmap their expected cash flow by quarter to highlight essential steps to improve their cash profile. The time is now for revisiting liquidity and financing strategies, while firmly leveraging cash flow decisions that preserve the bottom-line budget.
During the coming months, it will be critical to create a strong cash profile that gives the enterprise flexibility to quickly take advantage of market shifts to pad the bottom line. However, do not fail in your efforts to provide transparency to stakeholders who will no doubt be carefully monitoring risk during the market complexities and volatilities that we can assume are ahead of us. Factual reporting on your long-term value strategies will help support your cash-driven priorities and gain the support of stakeholders even when the toughest decisions must be made.
Streamline your budgeting process
We need a new way to tackle old budget models. Strategy, value, and resources will be the top drivers of our budgets next year. This means, in addition to eliminating operational weakness and elevating your cash profile, CFOs must streamline traditional budgeting processes. Developing rolling short forecasts will provide some of the flexibility needed to keep pace with what’s ahead. Greater speed coupled with cost controls will be the name of the 2021 finance game
This shifts traditional finance from the goal of the perfect budget to recognizing that change is inevitable when there is no historical precedent for what’s next in a pandemic-rocked global economy. It’s easy to fall back on the old budget negotiation process; but moving forward in 2021 each decision must be tied to value, strategy, and resources. Rethinking your budgeting process requires the embrace of redundancy and contingency planning from a cash-on-hand perspective.
In this environment, CFOs should test every assumption based on the current situation. This is no time for a static budget; but rather, a crisis-aware agile framework that will allow organizations to ebb and flow their financial bottom line in direct proportion to the external threats that we will undoubtedly face.
The Windsor Group Sourcing Advisory works closely with the enterprise c-suite to help them plan for an uncertain future. Talk with our team of expert consultants about how we can bring value and eliminate the risk for your organization.