It’s time for CFOs to whip their company into shape
Anders Liu-Lindberg
Leading advisor to senior Finance and FP&A leaders on creating impact through business partnering | Interim | VP Finance | Business Finance
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Think a few years back. Interest rates are near zero or even negative. Cash is free and companies have taken on significantly more debt in the decade following the financial crisis. CFOs didn’t have a worry in the world as resources were abundant and investments could easily be funded.?
It wasn’t exactly like this, but you get the picture. Today it’s different. Interest rates have risen fast, capital markets have tightened, and resources aren’t as easily available. Now it’s time for CFOs to spring into action. Their mountain of debt needs to be reduced and cost levels, having increased significantly during the past two years, need to be brought under control.?
Why is this important? It’s because debt levels and productivity improvements, and resource re-allocation have been identified as critical levers to strategic value creation by McKinsey. Moreover, bringing down debt levels is one of the top ten priorities for CFOs in 2024.?
These levers are right down the CFO’s alley and CEOs find it natural to place the CFO at the helm of such initiatives. This week we discuss tangible ways for CFOs to drive debt and cost levels down to free resources for important growth initiatives.?
Ten strategies to bring down debt?
Let’s start by considering ten strategies for bringing down debt and then discuss the importance of reallocating resources. None of these strategies are revolutionary, however, it’s important to size up the options and understand where the biggest improvement potential lies. Here are the ten strategies:?
These strategies are not exhaustive, and you can surely find more. What’s important is that a thorough evaluation takes place on how these initiatives can be executed and the impact that can be expected from them.?
One global logistics company we worked with was suffering from a high debt level driven by a past acquisition. The company was under pressure from the rating agencies to have their credit rating lowered, which would only increase their challenges.?
They had already tried most of the cost-cutting and working capital optimization strategies. In addition, they were continuously squeezing their vendors for every penny when possible. Their challenges severely limited their investment potential. Eventually, they turned to asset liquidation by divesting some of their non-core activities and got an external boost from the pandemic which led to skyrocketing freight rates.?
What’s illustrative about this example is that you often need to activate a wider range of these strategies. Rarely is one or two enough and it would be beneficial for CFOs to try and institutionalize these strategies into the company’s way of operating. In that way, this can become a source of competitive advantage in the long run rather than just being a reactive strategy when the company is facing challenges.?
The importance of resource reallocation?
The point of reducing debt levels and improving productivity is to free resources to enable the company to invest in growth. However, growth can come from simply reallocating resources to more promising business opportunities.?
McKinsey has identified that a company needs to reallocate 50% of its overall resources measured as invested capital over a decade to boost the odds of strategic success. You can consider this across multiple dimensions and at a macro level e.g., business units, or micro level e.g., products and customers.?
This is very much linked to your company’s “where to play” and “how to win” choices. You need to ensure a hardcore prioritization of your strategic choices. If you’re betting on a certain part of your product portfolio you need to close or divest the other parts. If you find only certain customer segments to be attractive you should stop servicing others or find very low-cost to service models.?
The challenge that most companies face is that they spread their resources too thin. This results in promising business opportunities suffocating from lack of resources and poor opportunities burning cash without any expected returns. It’s a true lose-lose situation underlining the criticality of resource reallocation.?
Returning to the aforementioned logistics company, they made some hard choices at the macro level deciding to divest half of its business over some years. In some ways, they were forced into making these decisions since most parts of their business required significant investments to become or remain competitive. There simply weren’t enough resources to go around. Faced with the choice of continuously underperforming across all segments or betting big on a few of them, they chose the latter.?
Having freed significant resources, they could invest in their remaining product portfolio, which enabled them to differentiate themselves from competitors and significantly increase their sales force. Over a decade they did in fact reallocate 50% of their invested capital into their focus areas and it’ll be interesting to follow how value creation will increase from their strategic choices in the coming years.?
Bring out the whip!?
We have underlined the importance of bringing down the debt level and reallocating resources. Now it’s time to get practical or as we said, bring out the whip. CFOs must assess the current shape of their company. Try answering these questions.?
Answering these questions gives CFOs a good starting point for assessing the shape of their company. If your company is not in shape, bring out the whip and get in shape. If you are in shape, consider how to ensure your company stays fit. Only the CFO will pick up the slack here, but it will do the company great service, in the long run, to pay close attention to and act on its fitness.?
How fit is your company and what fitness activities are you currently running? Are these run by the CFO and is there buy-in across the organization on their importance? How are you ensuring your company’s fitness in the long run? Let us know how you’re whipping your company into shape and what you’re doing with the freed resources.
This was the fifth blog post in our new series "The Top 10 Priorities for CFOs in 2024". Starting from this series we go even deeper into the issues, bring you candid perspectives from the frontlines, and share actionable advice on what the Office of the CFO should do to create more value. Read the previous articles in the series below.
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Catch the insights from our latest series "The Modern Finance Function" here.
You can read all blog posts in our previous series "Demystifying AI in Finance & Accounting" below.
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Anders Liu-Lindberg is the co-founder and a partner at Business Partnering Institute and the owner of the largest group dedicated to Finance Business Partnering on LinkedIn with more than 12,000 members. I have ten years of experience as a business partner at the global transport and logistics company Maersk. I am the co-author of the book “Create Value as a Finance Business Partner”, a long-time Finance Blogger, a LinkedIn Learning instructor, and a Top Voice on LinkedIn with 325,000+ followers.
Time to take action and drive down those debt levels! CFOs are pivotal in steering this strategic value creation. ?? #financejourney
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8 个月Yes, CFOs should have moved yesterday or longtime ago to put their companies into right shape specially those who were not performing well.
Global Finance Executive | CGMA | Driving Sustainable Growth and Inclusive Leadership| Fortune 500 experience
8 个月Anders Liu-Lindberg - great article! I like that you covered tactical actions (refinancing, debt consolidation), fin ops excellence that should really be in-built from the get-go (working capital, cost optimization) and then brought it down to FOCUSED strategy. All companies want "grow out" of their debt but if the business has too many "leaky buckets" where they didn't find a winning formula and it keeps sucking resources, you need to divest. Not only small companies, many big ones are doing this and tend to see better results within 1-2 years.
I teach Storytelling to Finance Teams | Course Facilitator | Keynote Speaker
8 个月Having seen the number of bankrupcies in Belgium the last months, even for historical companies, I can't agree more on the fact that managing debts is a priority for CFOs