6 Ways CFOs Can Help Their Organization Become More Agile in 2021 & Beyond
2020 threw a drop-off-the-table curveball at everyone, starting with the alarming withdrawal of the UK from the European Union, economic uncertainty, negative oil prices, political anxiety, and the suffocating impact of the pandemic. It’s been nothing short of a whirlwind. Despite the events of 2020, Bridgepoint Consulting is looking past it all and taking steps forward to continue helping our clients succeed.
As a result of last year’s circumstances, we’ve seen companies become incredibly reactive. While this is sometimes necessary, we’d like to discuss the shift of that mentality to a more proactive approach. Historically we’ve seen companies operating from a long-term, strategic, outlook allowing for stable growth; however, this WAS normal in a world where normal is no more. Today, we’re going to take the CFO position and what he or she should be thinking about moving forward. How should CFOs assess the events of 2020 and make sense of them? What should CFOs be focusing on for 2021?
The crisis has obviously forced companies to re-evaluate how they do business and adapt to this new norm. We’ve seen some do so more graciously than others, embracing an agile mindset and coming out with their heads above water. In this article, we’ll expand on the key areas where CFOs should focus their attention and how they can lead their teams to become more agile organizations.
The 6 key areas for CFOs to assess for 2021 and beyond are:
- Managing Your Workforce
- Evaluating Supply Chain and Working Capital Management
- Real Estate and CAPEX Management
- Capital Structure
- Competitive Landscape
Managing Your Workforce
It goes without saying that most businesses have already pivoted to a remote workforce model. While some companies have been fortunate enough to take on a work-from-home approach, others have had to furlough or permanently let go of employees and entire departments. As CFOs progress through 2021, re-evaluating which employees and departments return will be an essential factor to consider. If functions are critical, should you hire back, or can these departments be better serviced by an outsourced provider? While hiring an outsourced provider may command a premium, it has the potential to allow your organization to focus on its core competencies and become more agile. More to come on this later when we assess Real Estate and CAPEX management.
Work-from-home policies have had a drastic impact on the way we view modern workforce management. The pandemic has been eye-opening in seeing how teams perform in this environment, with some executing better than others. As you continue forward, assessing your organization’s ability to manage and engage your employees to drive results is an important consideration. Historically, organizations have found comfort in “seeing” employees in an office, but that could be deceptive. Instead of finding comfort in seeing employees in the office, we recommend emphasizing your team’s weekly results. If you can begin implementing a performance-based culture, this becomes the norm, and employees learn that this is the expectation. As you look forward to 2021, be sure to train or build flexibility into an adaptive workforce that understands expectations. With expectations in place, you can work to accomplish your goals with an incredibly versatile team that is prepared to work in a volatile environment.
Evaluating Supply Chain and Working Capital Management
Bridgepoint Consulting’s Managing Principal, Michael Johnson, participated in a recent Gartner Report that surveyed nearly 1900 CIOs across 74 countries. The findings? “51% of CIOs reported a decline in the speed of supply, and 18% reported a decline in supplier reliability as a result of the COVID-19 pandemic.” This data is consistent across a variety of industries due to the shifts in supply and demand.
What can we gather from this? Simply put, the pandemic has forced CFOs to re-evaluate their supply chain strategies. Before COVID, companies worked hard to service the customer. Companies knew who their suppliers were and knew who was dependable, enabling them to satisfy customers. They knew who they could depend on and were comfortable with their customer set. In a way, they were operating in equilibrium that enabled them to project supply and demand for their product accurately, but COVID has completely disrupted this. The pandemic has produced massive waves of supply chain disorder. Many companies have faced severe input shortages for their products and services while simultaneously dealing with dramatic fluctuations in demand for their products. This disequilibrium is further exacerbated by the uncertainty surrounding which players in the supply chain, including customers and suppliers, will survive.
In this uncertain supply chain, CFOs need to take steps to optimize their working capital, which consists of cash, inventory, AR, and AP. Never has the statement “cash is king” been more relevant. Finance leaders need to make sure every dollar spent ensures the survival of not only the company but also its key suppliers and customers. On the supply side, a CFO may actually want to accelerate payments to key suppliers to ensure their continued viability while simultaneously negotiating extended payment terms for less critical suppliers. They may even hold off payments to questionable suppliers until the dust settles. Likewise, on the customer side, CFOs will want to be selective on how they manage AR. They may want to consider extending more favorable terms to key customers whom they expect will survive the crisis while possibly shortening payment terms for more doubtful customers or even moving to a cash basis for others. In short, by being strategic about managing working capital, companies can not only ensure their own survival, but they can also help ensure the survival of their key customers and suppliers.
If you’re an organization struggling to manage your inventory effectively, we highly encourage you to connect with us to learn how just-in-time manufacturing practices, risk-based analysis, and other methods can help introduce greater agility into your supply chain processes. Contact David Bizzaro here or Tommy Hannan here.
Real Estate and CAPEX Management
Real estate continues to be a major expense item for most organizations. Yet, the pandemic has presented both unique challenges and interesting opportunities for many, if not all, organizations today. Work-from-home policies have forced CFOs and leadership to re-assess how they plan to manage their workforce and real estate requirements. In our continuing conversations with organizations, we find that when they’re ready for staff to return to the office, most companies are evaluating a reduced in-office workforce. Many are even considering a return of less than 50% working in the office. It’s an impressive metric, but there is a multitude of reasons for this.
Pre-pandemic, it was assumed that companies had to provide a working space for their employees in a controlled environment. COVID has turned this old norm upside down, forcing companies to re-imagine how to enable their employees to remain productive without having access to the traditional workspace environment. As daunting as a remote workforce may seem, it has presented an opportunity for successful companies to reallocate capital away from traditional real estate spend (e.g., rent, parking, maintenance, leasehold improvements, etc.) towards other tools and technology to recreate a controlled and collaborative workspace in the remote world.
Food for thought
Successful CFOs aren’t only thinking about how COVID impacts the bottom line, but also how it affects the workforce. This re-imagined work-from-home environment can become a competitive advantage by driving even greater employee satisfaction. From an employee’s perspective, they can now spend less time and money on commuting, have flexible work hours, choose where they want to live and work, and feel an overall greater sense of empowerment in their jobs. With employee satisfaction and other factors like potential outsourcing impacting your decisions for real estate moving forward, there is plenty to evaluate.
Real estate has a very tangible impact on your organization; however, another area we recommend CFOs assess is capital expenditures (CAPEX). Given the current market, it’s vital to evaluate and analyze your CAPEX on a more frequent basis rather than annually. While it is a balancing act, it’s essential to work in flexibility by shifting from an annual basis to a quarterly basis. With the current market conditions, a quarterly CAPEX budget will allow you and your organization to pivot as the market changes, thus propelling your organization to a much more agile culture. Even if COVID has negatively impacted your top and bottom line, by more closely managing your CAPEX, you may be able to achieve your free cash flow targets.
As we move into 2021, we see both real estate and CAPEX as an area of opportunity for CFOs to assess and fine-tune. By introducing more flexibility into your real estate and CAPEX spend, you will be able to manage the peaks and troughs of evermore volatile business cycles.
Defining Technology Your Organization Needs
Prior to COVID, most organizations had a stable long-term IT road map in place. They had identified the systems and tools they would like to migrate to with a clear focus on CAPEX, OPEX, and associated benefits to these initiatives. With government shutdowns, companies found themselves in survival mode. Initiatives were delayed or canceled in an attempt to preserve cash, other projects were accelerated out of necessity, and new ones were created to adapt to the new normal. Many companies’ 2020 IT efforts became makeshift fixes to hold together their processes as best they could in a remote environment.
For 2021, we see CFOs needing to focus on three IT areas:
- Re-prioritize IT initiatives in the new business environment. Enough time has passed to allow the dust to settle. IT isn’t going away and is worth the investment in the long run.
- Evaluate some of the makeshift technologies put in place to operate remotely and determine which ones remain and, of those, which need to be made more secure or enhanced.
- Build a new architecture to allow the organization to grow and scale in the new environment.
Before COVID, IT was a very siloed cost center delivering systems to support the business. Now more than ever, information technology needs to be front and center as part of the strategy encompassing workforce, supply chain, and working capital, enabling it to become a competitive advantage. As CFOs are freeing up capital from physical assets such as real estate, they need to transfer those resources to technologies that enhance their business processes in a remote environment.
The stresses of the pandemic have forced CFOs to re-evaluate their funding strategies. At the onset of this crisis, each organization had its unique capital structure; however, evaluating this structure and its potential should be ongoing. Companies that have been successful at navigating the challenges of the pandemic are those that communicated with their lenders early and often. By communicating to their creditors that they had a well-thought-out liquidity strategy, companies could reassure lenders, putting them at ease.
There have been several different strategies companies have taken on in 2020, from PPP loans to those deferring payroll taxes for up to 2 years as a result of the CARES Act. Each situation is unique, but we’re optimistic, particularly for small businesses, as SBA loans are up 4% YoY, according to the Denver Business Journal. Moving forward, it is important for executive teams to explore a flexible capital structure to maintain agility during turbulent business cycles.
Competitive Landscape Implications
Now, nearly a year into our pandemic reality, there has been a clear line drawn in the sand between winners and losers. With continued restrictions, certain industries will face an uphill battle entering 2021, but this also creates an opportunity for new and disruptive competitors to enter the landscape. As CFOs work to adapt to our previously mentioned areas of focus, it’s important to not forget about your competitive landscape. With so many changes, from a customer and business standpoint, how should CFOs take advantage of this, and where do they start? There are a few things to consider:
Acquiring Market Share
- As some competitors fall by the wayside, companies should evaluate if there is an opportunity to acquire market share that was left behind. In theory, the answer to this should be yes; there is room to gain market share. Determine what this opportunity is and how your company can capitalize on making strides in this arena.
- If there are competitors that have been considerably weakened by the crisis, should CFOs consider an acquisition strategy to absorb key businesses? If this is the case, we recommend consulting with a merger and acquisitions consultant to help weigh the pros and cons of this approach. While it may seem appealing to quickly absorb the competition at great prices, there are many complexities and preparations to review before committing to this strategy.
Exit or Sell Assessment
- On the flip side of the conversation, some companies have been considerably successful during the pandemic and may want to consider being an acquisition target themselves. In recent discussions with private equity firms, we have learned that healthy companies were able to command even higher multiples than before the crisis. If it makes sense, it may be time to assess an exit strategy and take advantage of higher selling prices.
Assessing your competition and your existing position should be an ongoing effort, but with so much change so quickly, we recommend taking additional measures to stay informed. Now that we have entered 2021, we recommend CFOs build more relationships with private equity firms and investment banks. Private equity firms and investment banks often have more profound insights into your market. These relationships will help you stay informed of the market and take advantage of opportunities that may present themselves.
Almost everyone entered 2020 following a course they had chartered in late 2019, completely unaware of the looming storm. When the immensity of the pandemic hit early last year, everyone was forced to batten down the hatches and enter survival mode. By the summer, it became apparent which ships had weathered the storm, which were bailing water, and which were resting at the bottom of the COVID sea. Regardless of their current state, almost all were diverted and were forced to assess their seaworthiness and charter a new course. Now that the storm has started to subside, CFOs should take some time to evaluate the six key areas of their organization to enable them to be more maneuverable. By introducing greater agility into Workforce, Real Estate/CapEx, Supply Chain/Working Capital, Technology, Capital Structure and Competitive Landscape Implications, companies will be better equipped to navigate the new virtual world in 2021 and beyond.