Challenges For CFO’s In The Current Marketplace

The roles, demands and responsibilities of a modern Chief Financial Officer (CFO) are evolving under the current climate as the UK recession begins to bite. CFO’s are now placing greater emphasis on the following aspects of their role:

Cash flow management

Managing the Company Balance sheet

Access to Finance

Forecasting

Cost management

Resourcing

Cash flow management has become increasingly important due to restrictions in credit and lending from the financial institutions. Many companies currently are faced with falling revenues combined with a squeeze on margins and rising overheads in the form of fuel and power prices. Companies will be looking to recruit CFO’s with strong experience in financial management in order to lead the business during these challenging times. Companies must be lean in order to cope with pressures on both the top and bottom line. CFO’s will find it important to manage their working capital effectively and build up cash reserves in order to provide a buffer to finance projects which may be unable to raise the required finance externally. A successful CFO will need to install strong financial and cash management across the business. 

CFO’s will also place greater emphasis on managing their balance sheets as opposed to profit which is of greater concern during an economic boom. The balance sheet is a key tool to demonstrate that the business is well run and is subject to the required degree of financial control.

Access to finance remains a key concern of CFO’s under the current economic climate. Reduced bank lending and tougher conditions on raising finance present significant obstacles to raising the required funds to pursue investment opportunities and to grow the business. CFO’s are constantly pursuing new methods of raising finance as they can no longer rely of raising the necessary funds through bank loans. Companies will explore a number of alternatives including leasing or sale and leaseback and may even resort to factoring their debts. We have seen an increase in the number of intelligent schemes used to raise finance over the past few years and this has given rise to opportunities within the private sector. Cash rich companies such as the National Grid for example offer corporate bonds to businesses at competitive rates. Tesco in turn has sought to raise its profile and compete with the banks by offering mortgages to consumer. Unfortunately the scheme never took off as the idea had significant potential. In order to successfully raise finance, CFO’s will look to streamline their costs, strengthen their balance sheets and improve their forecasting.

Forecasting remains a core responsibility of the CFO, particularly for publicly listed companies which must announce their results to the market. The CFO must balance the importance of demonstrating the growth potential of the business whilst ensuring that sufficient prudence has been incorporated into the Budget to ensure that the results do not fall short of analyst expectations. Many businesses fall into the trap of reporting overoptimistic forecasts and it is the CFO’s responsibility to challenge the assumptions used by the sales force and other senior management. Small businesses are becoming increasingly adept at forecasting in order to secure the necessary bank finance. Business plans are a vital component and a strong CFO or accountant will help to produce a quality and robust document. Management must also monitor and update their KPI’s which may well have changed as a result of the economic downturn.

CFO’s like to focus on cost management as this is an area that is under their control and is not subject to economic and political factors. CFO’s must work closely with all areas of the business to identify and implement process improvements and promote financial control. During the recession companies are investing in procurement and logistics as supply chain management is a key to running a business efficiently and reducing costs. Credit control has also become increasingly important as a number of businesses are facing financial difficulty, particularly in Europe. Companies must be proactive in chasing their debts, setting and monitoring credit limits and placing accounts on stop where necessary to reduce their exposure to bad debts.

In order to cut overheads, management must consider the impact on resourcing. Increased austerity and cost cutting has resulted in a lack of strong permanent employees in the business. A strong team will enable the operations to be managed efficiently and help to reduce costs. Despite increased unemployment in the UK, there has been a shortfall of strong experienced permanent staff in the recruitment market, particularly within the accountancy sector. Perms are more likely to sit tight in their jobs under the current climate and strong candidates will likely be working under a 3 month notice period.  CFO’s have therefore found themselves having to rely on interims to fill key roles, which can be more expensive.

Cash is key to a CFO’s success in business. Strong cash management and financial leadership is a key skill required in today’s market. Companies must demonstrate that they have a strong balance sheet, maintain a good credit rating and prepare robust forecasts in order to raise the necessary finance required to run their business. Companies in the UK are working to reduce their debt and many have held back on their dividend distributions in order to retain sufficient cash reserves within the business. CFO’s must work closely with other departments and display knowledge of all aspects of the business in order to promote the strategic direction of the company. Just knowing the numbers is not enough to lead the business during these tough times.