By Mark Jenkins, CFO at MHR International
The detrimental economic impacts of the Covid-19 pandemic combined with the uncertainty surrounding Brexit trade negotiations has undoubtedly highlighted the importance of risk management. In response to the challenges experienced over the past year or so, many organisations have prioritised survival over competitive advantage to remain viable. Short term, implementing immediate cost-saving measures to keep afloat may have enabled essential services to continue, however, according to professional service network Deloitte, it’s time for businesses to start planning for multiple ‘alternate futures’. For this to happen, CFOs need to embrace technologies that can not only help them through times of crisis but also position them to leverage new opportunities.
Predicting the unexpected
Understanding and quantifying risk should be an essential part of any business strategy. From a finance perspective, having visibility surrounding cashflow at any point in time means the organisation can navigate through unexpected circumstances. It also enables them to quantify the impact of different revenue and cost levers within the business with the knowledge that the model is sustainable. By knowing the timings of peaks and troughs in cashflows specifically, CFOs can be forewarned about potential issues, adjusting plans accordingly. Yet, traditional methods of forecasting just aren’t enough to keep pace with today’s unpredictable business landscape.
Forecasting is highly quantitative and typically numbers-focused, using historic and present data in combination with trends and patterns to anticipate the future. Whilst it can help inform decision making to a certain degree, its limitations are hard to ignore. Firstly, it requires a massive amount of data which then needs to be collected, organised, and coordinated. When relying on manual methods, this can not only be a drain on resources, but it can also increase the margin of error leading to data inaccuracies and poor-quality information. Additionally, it can be costly as to get the right value from the data, it needs to be interpreted by professionals trained to read and understand the reports. Finally, and perhaps most crucially, it is incredibly time-consuming, meaning the business can be slow to react to situations that require a fast response.
With so many variables at play in the current climate forcing organisations to be prepared to pivot at a moment’s notice, traditional forecasting methods are no longer fit to meet the needs of a dynamic business environment. Instead, organisations should consider data analysis software that can help provide accurate and valuable insights for more informed and faster decisions. This will allow finance professionals to refocus their efforts on scenario planning; making assumptions regarding any future events that may impact the cashflow of the company. If done correctly, technology can drive risk analysis and aid scenario planning, enabling quicker outcomes with greater consistency and precision than traditional methods such as Excel-based spreadsheets. The functionality to incorporate more sources of data also provides added benefits including improved business-readiness and a holistic view of what’s really happening within the company.
However, it’s important to note that data analytics tools are only as good as the information they are being asked to analyse. To interrogate data successfully it is critical that it’s both accurate and complete. An organisation with poor processes and systems, will over time find that its data is unable to offer any meaningful outcomes on which to make informed decisions. So, before relying on sophisticated tools to analyse your data, the first job, is to cleanse it to ensure any corrupt, incorrect, duplicate, or incomplete data is removed from the system. This can be a laborious and time–consuming process as there is an element of introspection required to ensure poor quality information isn’t entering its way back into the system. Many businesses just don’t have the resource, both financially or staffing wise, or the will to overhaul internal processes in a crisis as, understandably, they are distracted by the day-to-day challenges of running the business and ‘firefighting’ other critical issues.
Data cleansing and process optimisation is worth the investment in resource as it’s crucial for gaining a clear understanding as to what’s happening in your business. For businesses that choose to embrace technology and adopt the associated internal changes necessary to produce meaningful outcomes, they can expect significant rewards. The ability to be able to perform scenario planning exercises involving departmental, company and external risk mitigation, for example, can provide insights into revenue forecasting, cost control and ultimately cashflow management which is the lifeblood of any organisation. Combined with being an agile and flexible business that is able to pivot single or multiple strategies based on up to date, reliable information, the chances of survival and long-term success are significantly improved.
The role of the CFO is crucial to the resilience and health of the company. By having the right tools and data in place to mitigate financial risk and support scenario planning, finance leaders can not only help businesses prepare for the unexpected but also help them secure new opportunities in a volatile market.