What are finance teams’ biggest challenges?
How is the finance function evolving?
And what’s in store as they help businesses navigate what could possibly develop into the biggest economic crisis of our lifetimes?
Between January and March 2020, we teamed up with Financial Director to ask finance professionals from a range of industries — from financial services, to manufacturing, pharmaceuticals, and construction — for their thoughts. Here’s what we learned.
Positive cash flow is key at the best of times. US Bank reckons poor cash flow management is a factor in 82% of business failures. Conversely, Foresight CFO’s Kirk W. McLaren argues that healthy cash flow makes it “possible to be a profitable business without being an entirely successful one.”
But for such an important ingredient for business success, managing cash flow can be surprisingly problematic.
When we asked finance professionals what they struggled with most, cash flow management won hands down. 72.1% agreed it was their biggest challenge, ahead of increasing profitability (45.2%), implementing new technologies (33.7%), and automating accounts payable (30.8%).
In the current climate, this is expected. With revenue shrinking across the board, keeping incomings and outgoings in balance will be most finance teams’ main focus, at least in the coming months.
That said, cash flow and profitability go hand in hand. And focusing on the former at the latter’s expense is risky. As McKinsey note, in times of crisis “the ability of the resilients to drive earnings growth despite top-line challenges [is] a critical differentiator.”
In other words, making sure there’s enough cash to pay the bills is important in the short term. But boosting income — whether through cost-cutting, new growth areas, or a mix of both — will be critical in the long term.
“Profit is a very good measure of performance, but if you don’t keep an eye on your balance sheet and cash flow, you can still run out of money. It’s dangerous to just get on with it and assume the cash will come in, because if it doesn’t, as quickly as you need it you’ll still have trouble meeting your bills. You need to make sure there’s always enough in your account to cover your outgoings.”
If cash flow management wasn’t tricky enough, finance professionals admit they find it difficult to keep track of outgoings and put the brakes on spending.
This is mainly down to two issues:
From a visibility standpoint, 70% of those we interviewed said it took up to two weeks a month just to investigate spending across the business. Operational spending was the biggest time-suck. Despite departments as marketing, sales, and IT spending in an agile way, finance teams find it difficult to track spend quickly.
This was before Covid-19 started affecting markets. With the economic outlook uncertain, finance teams will be under more pressure to keep a handle on spending. Which means even more time spent tracking and number-crunching.
More worryingly, over-reliance on manual processes means data is prone to errors that may skew analysis.
In an MHR Analytics poll, 73% said they didn’t trust their financial data. But even when they use technology, respondents told us integration issues can make it difficult to get the whole picture.
The majority of our respondents — 71% — said they allocate up to 2% of their annual budget to T&E (travel and entertainment). About half also said they allocate 1% to 5% to other variable spending, while 20% set aside a whopping 5% to 10%.
With most countries on some degree of lockdown for the foreseeable future, T&E spend is bound to go down (though finance will still have to account for it in projections). But other spending — particularly e-commerce, software subscriptions, and other products that make remote working and collaboration possible — will go up.
As most businesses go into belt-tightening mode, variable spend is looking like a prime candidate for the axe. Soldo’s Head of Portfolio Marketing Hannah Murray-Sykes explains: “It’s a high percentage of the budget, especially for costs you can’t predict in an area that’s so difficult to track.”
At the same time, as McKinsey note: “…across-the-board cost cuts can create more problems than they solve.”
With this in mind, finance teams will need to walk a tightrope when it comes to decisions around spending. And if you rely on spreadsheets and other manual processes, your life is about to become more difficult.
As it happens, while they’re often considered late adopters, finance professionals are becoming more open to tech. 62.2% of those we surveyed would consider using a finance automation tool to streamline their spend and expense management.
Not everyone is sold. 61.8% told us they don’t look at real time data. And over 16% said they don’t plan to do so in the next 5 years.
That said, the ongoing crisis may well change their view.
Over the past few years, the finance function has been moving from operational to a more strategic role. With the outcome of the crisis — or even when it will end — still up in the air, business leaders will need finance to produce ever more clear data to inform their decisions. And tech offers a simpler workflow and better analytics at lower cost.
Murray-Sykes notes that, with access to tools that unlock real time data and visibility, “the broader impact they [finance] can have across the rest of the business changes completely.”
The question is, how soon can finance teams forgo their misgivings and embrace the change?
What’s in store for finance teams as they navigate the Covid-19 crisis and beyond?
Read our full report: SPEND MANAGEMENT: Variable spend attitudes at a time of crisis for more in-depth insights.