Boosting strategic & financial resilience: 5 tips

Back in the pre-COVID days in late 2019, we published an article that made some predictions and suggestions to help CFOs prepare their business for a year that we believed would test business resilience in Australia.

What surprised us in 2020 was the magnitude.

Undoubtedly, 2020 was a year like no other. It has truly showcased how important business resilience is for companies' long-term survival and success.

CFOs were instrumental in ensuring their business' stability and success, and we sure hope that the article helped some CFOs boost the financial resilience of their company ahead of the curve.

And so, we decided to do the same this year.

Don't get us wrong—we do believe that 2021 is going to be a better year. However, we believe that financial resilience should still remain a priority for Australian CFOs.

Most analysts have celebrated the fact that the COVID-triggered recession in Australia is over.

We too believe that the worst is behind us. But, we believe that 2021 will continue to test business resilience.

Even if this is not your baseline assumption, you may want to consider it as part of your risk and opportunity management for 2021.

There are several reasons for that.

One of the main reasons is associated with geopolitical trends and escalation of trade wars in our region.

Other reasons may include the end of JobSeeker, 'zombie' clients and suppliers already walking among us, pressure on APAC supply chains continuing, and the high level of national debt that is likely to restrict further government support.

While "business resilience" is comprised of a few factors, "financial resilience" is undoubtedly one of the most important elements.

And, it's the CFO's territory.

It's one of the most effective ways CFOs can set their company up for success in 2021.

To support your 2021 preparation, this article will explore:

• What can we expect of 2021?
• Will it continue to test business resilience? Why? How?
• What risks and opportunities is 2021 likely to introduce?
• What can CFOs do to boost their company's resilience?
• What pitfalls should we be aware of?
• How can they be avoided?

It includes:

• Hindsight and insight on 2020 trends that are likely to impact 2021;
• Foresight and predictions for 2021, including new trends, risks and opportunities; and
• Recommendations on how to manage relevant risks and opportunities, which pitfalls to avoid and how.

A HEALTH METAPHOR AS A FRAMEWORK

As COVID has showcased, when a virus attacks our body, the impact would vary—depending on how strong our immune system is.

For a business, resilience is the equivalent of an immune system. Resilient businesses are more likely to weather the storm.

And so, we have found the health metaphor to be very effective as a framework.

It can be used by CFOs a framework for boosting financial resilience and set the company up for success in 2021.

When it comes to looking after your health, there are 5 courses of action that you may want to consider:

This article will explore each of these factors in the context of the business.

We would like to emphasise that this framework applies to all businesses, including those that are currently healthy.

It's about giving your immune system a boost so that it can deal with new challenges and be strong enough to take advantage of new opportunities.

So, here we go...

① MEDICINE

Medicine is used when you are sick and your body needs some external help recovering.

That said, many families keep paracetamol and other handy medications at home so that they have immediate access to them when needed.

Cash is at the heart of financial health and resilience.

Healthy businesses are self-generating. When the business can't self-generate sufficient cash, medication is needed in the form of an external cash injection.

Paracetamol may take care of a headache until your body recovers. In the same manner, injecting cash into the business will buy it some time to make improvements to its operating cash flow (which we will cover in steps 2 and 3).

? Recommendation:

Even if you do not need it at present, have a "paracetamol" in your back drawer as a backup plan for 2021, including government support, debt, and investors.

Debt is cheap and expected to remain cheap for the next couple of years.

That said, you may want to avoid relying on excessive debt to confirm that your business doesn't become a 'zombie company' down the track.

Zombies are already walking among us. We will later refer to risks associated with zombie clients and suppliers, as well as to opportunities associated with zombie competitors. At this point, the focus is on making sure you don't become one of them at any point in time.

When it comes investors, you may want to have a list of potential investors to approach (which includes a due-diligence on their agenda and cultural alignment, as below).

• There is a lot of money available at the moment in the private equity space, but most private equity firms have a medium-term exit agenda, rather than your long-term interests. Some specialise in buying distressed assets, others invest in fast-growth ventures. You may want to identify those PE firms who would be more aligned with your culture, values and agenda.
• Strategic investors are an obvious choice. They are usually long-term investors, but they are likely to want to impact your strategic direction and decision-making. You may want to find out more about their strategy and intentions.
• There are often opportunities to secure investment from other longer-term investors, like some family offices. Again, you need to identify which ones align with your culture, values and agenda.

There are many other forms of injecting cash into the business. Unfortunately, we cannot cover all of them in this article. The only point to make in this context is that preparing this backup plan is part of building business resilience.

What is the advantage of doing so?

Like any crisis management plan, the advantage of having it ready is: saving time.

It will confirm that if you find yourself in a situation where you need it, you don't fall into pitfalls like over-borrowing, or letting the wrong investors in just because you must act fast and forced to accept whatever cash you can get your hands on.

② DIET

Lean businesses are known to have a better chance of riding a storm—they are more resilient.

You may not want to wait for the storm, though—it would be wise to continuously trim the fat even if it's currently sunny and warm.

? Recommendations:

Most companies would have improvement opportunities in the 4 areas below—you may want to consider which ones are relevant for your business (based on industry and business model) and deep dive into them.

(A) Trim the tail:

There is always a 'tail' that you can trim when you deep-dive into customer profitability, product /service profitability and team /functional profitability.

Adjusting your cost base to fit the downsized turnover will make your business fitter and stronger.

That said, downsizing your business is not an easy story to sell to your ELT when you are doing relatively well. That is, unless the tail is unprofitable.

So, you may want to use activity-based costing to allocate costs to this revenue and illustrate its underlying negative profitability.

It will then be easier to secure buy-in from the rest of the ELT (except for the executive accountable for sales, perhaps... ;-)).

Note: If you can fill the revenue gap through other initiatives, you may not need to adjust your cost base after all—we will refer to opportunities to grow your revenue in step 3 ('Nutrition').

(B) Suppliers:

This is another typical area for improvement. Usually, product profitability will highlight areas of focus for suppliers that impact your gross profit, but this recommendation also applies to logistics, procurement and other overheads.

Note: We will expand on the topic of supplier review later—the scope in this section is currently limited to profitability.

(C) Balance sheet:

Opportunities to strengthen your balance sheet may include:

1. Inventory. Classify inventory as core (which you must have in stock) and non-core—set (and monitor) different 'days cover' targets for each. Deep dive into product level when needed. Review opportunities to reduce excessive days cover. Get rid of SLOBs (slow-moving and obsolete inventory). Confirm that your demand planning, orders and financial forecast are integrated and measure forecast accuracy beyond total value.
2. Other working capital efficiencies. Look into your payment terms and explore opportunities to improve collection practices. Check your cash collection efficiency by comparing 'debtor days' (AR /accounts receivable) vs your official payment terms. Compare 'debtor days' vs trade 'creditor days' (AP /accounts payable) and make sure you don't have a deficit there. Confirm that AR collection issues are documented—they can help you identify operational areas for improvement.
3. Return on other assets. Consider which assets are not essential for the execution of your 2021 strategy—offload and reduce overheads.
4. Debt restructure. 
5. Dividend policy.

Financial ratios that can support this deep-dive:

• Liquidity review: Current and Quick (AKA: Acid Test).
• Operating: Inventory Days Cover, Asset Utilisation (AKA: Sales to Assets), AP days, AR days.
• Financing: Debt to Equity, Interest Bearing Debt to Equity, Interest Cover.
• Profitability: ROA, ROE.
• Forecast accuracy: Variance %, Value of products with inaccuracy beyond a threshold.

Review how these indicators have been trending over time and compare vs the industry.

We have prepared a (complimentary) generic Excel tool with multiple financial ratios that can save you time—reach out if you are interested. We'll be happy to share it with you.

(D) Productivity and effectiveness:

You may want to look into two other areas that would typically have a high improvement potential:

1. Productivity. Review opportunities to improve staff utilisation, back-office processes, software and collaboration tools. Cross-train your staff. Review the value creation process in your business—changes to ways of working might have created new process bottlenecks and risks. Run scenarios and map risks throughout core business processes, and consider automation and process improvement.
2. The effectiveness of promotional, marketing and sales spend: Consider ROI on discounting, marketing and sales spend. Reduce discretionary spend. Review appropriateness—are your marketing channels, formats and content still suitable for your post-COVID business model?

③ NUTRITION

'Nutrition' is about helping the business grow and protect its revenue pipeline through sound risk and opportunity management.

We have made 4 predictions below for 2021, with points that you may want to consider, and recommendations.

Prediction #1: The pace of change is likely to continue to accelerate in 2021, which will introduce new risks and opportunities.

Consumer habits, shopping preferences, and needs have shifted in 2020 and further changes are expected in 2021 as we adjust to a "new normal". Even if they haven't changed already, your customer journey, experience and needs may change in 2021.

? Recommendation:

You may want to confirm that the business has refreshed its customer relationship management focus in preparation for 2021 across:

1. Customer journey. First, you may want to confirm that the business has refreshed its mapping the customer journey and has considered the new touch-points, experience, pain-points and needs. Second, you may want to confirm that associated adjustments have been made to processes, means of communication, products and services to improve the experience where needed and capitalise on new growth opportunities. Identifying new customer needs and pain-points to solve are great for NPD ideation and may open new growth avenues.
2. Retention strategy. It's much harder to acquire a new customer than to retain an existing one. If the business is B2B, you may want to confirm that the business focuses on key customers (in terms of size and profitability) to explore the topics above while increasing their loyalty and limiting attrition. B2C focused business, especially with digital models, have data-driven means to do the same.
3. Financial stability of key customers. Some of your key customers may have increased debt in 2020. Plus, JobKeeper support is ending soon. Some may have not yet adjusted to their "new normal". If they don't survive, you'd lose their business. If you help them survive, you gain customer loyalty. Talking to customers more frequently will help you understand their position and collaboratively find the win-win proposition that will help them survive while benefiting your business in the long-term. On the other end, it would help you reduce bad debts if you believe that a customer is in distress and you can't help. Monitor them closely and consider working with them only on a prepayment basis.
4. Your customer value proposition (CVP) and strategic repositioning. Your customers' price sensitivity and risk appetite may have changed as well, which would impact your CVP and positioning. You may want to review and refresh your business model, using a business model canvas. We have prepared a complimentary step-by-step guide to help you with that—reach out to request the PDF, or talk to us about helping you facilitate strategic finance workshops with your leadership team to pressure-test it (refer solution #4 on this page).

Prediction #2: 2021 is likely to offer you some extra customer acquisition opportunities.

? Recommendation:

You may want to confirm that the business is considering the following opportunities to acquire new customers:

1. Strategic alliances. The fact that more businesses spend time revisiting their business models to adjust to the "new normal" will open more doors for strategic alliances. Take advantage of it.
2. M&A. There are likely to be more opportunities to acquire businesses in distress in 2021 for a bargain cost. Their customer portfolio may be one of their most attractive assets for you. Keep in mind that there may also be an opportunity to buy some of the assets of businesses in liquidation without having to acquire the entire business.
3. New product /service development. As mentioned above, developing new products and services to meet new customer needs may drive growth through a bigger share of wallet. However, it may also help you acquire new customers as well. When they are on board, it should be easier to also cross-sell your existing services to them. You may want to discuss these topics with the ELT to confirm that they are not overlooked.
4. Geographical expansion. The move to a virtual 'working from home' model almost across the entire economy has an upside—it helps to reduce the cost of geographical expansion. Suddenly, servicing a business in another part of the country may be done with almost the same level of effectiveness. You may save the need to invest in a physical footprint.

Prediction #3: The pressure on supply chains is likely to continue, and might even escalate in 2021.

• The 2020 health crisis will continue to put pressure on some supply chains (supply, logistics and/or customers);
• Suppliers' and customers' financial stability might still be undermined; and
• Geopolitical trends and trade wars are likely to put more pressure on Australian business in 2021.

? Recommendation:

As part of your risk management framework, you may want to confirm that the business is reviewing and managing risks related to supply and demand, including continuity risks, impact on growth, cost pressures, and cash flow related issues.

• Keep in mind that this may be required even if there is no direct impact on your business—there might be an indirect impact if your suppliers or customers are impacted.
• Also, reputational risk has been one of the emerging risks over the last couple of years. You may want to take into account that if your overseas suppliers are under financial pressure, they may tend to over-flex their work health and safety standards, or their quality standards, which might impact your reputation.
• You may want to explore establishing backup relationships with alternative suppliers without material adjustments to your existing supply chain.

Prediction #4: CFOs will need to revisit their plans for the Finance function. Areas of focus will change in 2021, due to changes across the business and its business model.

? Recommendation:

Keep it in mind when you review the above changes to the business and assess what changes Finance will need to make to meet new business needs. Consider skills, processes, and changes to data, systems, KPIs, reporting.

• Finance ownership of data, systems, KPIs & reporting is a critical Finance enabler of business success. It extends beyond financial data and KPIs. You can find more information on this topic here.
• One of the best ways to help your Finance leadership team help you in the process is through a mentoring program that builds skills, shapes mindsets and increases engagement. You can find more information on this topic here.

④ HEALTH MONITORING & PREDICTION

Monitoring the financial health of your business and incorporating 'lead KPIs', sound predictions, scenarios and sensitivity analyses have never been more important.

? Recommendations:

If you haven't done so already, You may wish to make the following adjustments:

1. Greater cash flow focus. Cash flow is crucial now for all businesses, and cash is the essence of resilience. Put it high on your KPIs, reporting and forecasting agenda.
2. Frequent, effective visibility. If you are used to managing your business to monthly management accounts, consider the need for more frequent monitoring. Some KPIs must be monitored daily, or at least weekly (re financial KPIs, revenue and cash at the minimum). Consider the need to train decision-makers to increase financial and commercial acumen to confirm that your reporting is effective, i.e., drives the right actions. (For more info, refer solution #3 on this page)
3. Critical forward-managing recommendations... Maintain a 13-month rolling forecast, risk and opportunity register, and a risk heatmap. Use a 3-way model for your forecast—one that incorporates scenario and sensitivity analyses to support decision-making. Use the worst-case scenario as the baseline for your backup plans—including crisis management plans, which are essential for business resilience. Make sure that your forecast is a collaborative process with non-Finance users, not just a 'top-down' forecast that remains "a Finance thing". Incorporate probabilities into your forecast and R&O register (since nothing is 100% certain). For more info, refer solution #8 on this page for forward-management and solution #7 for data, KPIs and reporting.

⑤ HEALTH PRACTITIONER

Occasionally, we visit doctors, other health practitioners, fitness instructors, and nutrition specialists to help us improve our body's health and immune system.

It's the same in business, only that in business we also do it due to resource constraints (especially, as CFOs are required to "do more with less").

Worry not—help is within reach.

In PERFORM - CFO, COO Consulting, we specialise in helping finance teams apply strategic finance solutions that will increase efficiency and effectiveness, and help the business secure a sustainable, prosperous future for the business.

We have also prepared a complimentary step-by-step guide to help you increase business resilience—reach out to request the PDF, or talk to us about how we can help.

SUMMARY... and one last recommendation

While "business resilience" is comprised of a few factors, "financial resilience" is undoubtedly one of the most important elements.

It's the CFO's territory, and one of the most effective ways CFOs can set their company up for success in 2021, which is expected to continue to test business resilience.

Our proposed framework is circular, as the efforts to build business resilience is a never-ending one—it is as critical to instil a culture of continuous improvement in this area as much as it is critical in other financial (and non-financial) areas.

? One last recommendation:

While this article focused on financial resilience, we would recommend that you also assess other elements of your company's resilience, e.g., non-financial crisis management plans, people resilience, and strategic resilience.

After all, they would all impact your financials as well and test your company's financial resilience. In a way, it's "the weakest link" case...

Should you have any questions, please feel free to post it in the comments section, or reach out to discuss.

ABOUT US

PERFORM - CFO, COO Consulting is a small team of former CFOs /COOs from some of Australia's most iconic corporations, with a background in strategic consulting from Tier 1 management consultancies.

We have been fortunate to have played pivotal roles in renowned transformation stories like Coles' famous turnaround journey, Pacific Brands' successful effort to avoid insolvency, REA Group's strategic move to regain market share from Domain, Dentsu's journey to fend off market disruption and turn into the disruptor, and more.

And, we have collaborated with the likes of McKinsey, BCG, Deloitte, PwC, KPMG, and Grant Thornton.

Our clients are CFOs in small, medium and big businesses—we help Finance teams apply strategic finance solutions to help them operate more efficiently and effectively so that they can more easily secure a sustainable and prosperous future for the business.

To learn more about it, visit our website performconsulting.com.au, where you'd also find case studies and customer reviews. Note that all services can be delivered remotely.

We also help CFOs by mentoring their leadership teams—our structured programs are comprised of a mix of training, coaching and mentoring. They are structured to be a win-win-win proposition for the company, the mentees, and their line managers. They build mentees skills and shape mindsets and approaches while increasing engagement. They will turn your Finance leadership team into effective change agents. A product brochure with more detail is available here.

Please feel free to reach out to explore how we can support your journey.

E: [email protected] | M: + 61 403 861 945

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