CFO priorities amid the coronavirus crisis

Finance teams around the UK are wrestling with many challenges as a result of the COVID-19 pandemic. They face health and safety concerns, significant threats to cash and liquidity, supply chain disruption, and the large-scale shift to remote working. CIMA’s UK CFO Forum recently met by videoconference to swap perspectives on today’s business landscape. The discussion centred on four themes: resilience, business models, going concern, and recovery. The CFOs’ main observations were:

Resilience

COVID-19 has presented a major financial and operational shock to organisations. Large, well-capitalised organisations with extensive resources and robust business recovery plans seem to be holding up comparatively well. Life is more challenging for SMEs, however, especially if they are undercapitalised and under-resourced.

The financial resilience of an organisation can be influenced by the sector in which it operates. For example, organisations that provide consumer goods or essential manufacturing services are not subject to the same potential squeeze on income as travel companies and charities.

The shift to remote working has tested the operational resilience of many organisations, especially those that historically had a face-to-face culture. While some organisations had already enabled remote working before COVID-19 struck, others have had to embark on a major scramble for laptops and mobile phones. In some organisations, staff still need to visit the office — at least some of the time — to access critical information and systems.

Health and safety is a top priority in factories, laboratories, and other workplaces where people work alongside one another. Deep cleaning practices have been adopted, and shift patterns have been altered. Nevertheless, it can be difficult for organisations to secure the personal protective equipment needed for staff to work safely.

A further challenge to operational resilience has been posed by disrupted supply chains, with some companies struggling to secure key components from overseas suppliers. Organisations that previously reviewed their supply chains as part of their Brexit preparations are now benefiting from the insights they gained when doing that work.

Business models

Organisations of all sizes, across different sectors, are having to adjust their business models in response to the crisis. The alcoholic beverages industry, for example, has seen a collapse in demand from its customers in the bar, pub, and restaurant industry while supermarket sales have soared. As a result, companies are reconfiguring their production plants to accommodate this shift. In the charities sector, team members who are used to working alongside one another in an office are having to think differently about how they collaborate and how they deliver services.

As well as adjusting to the present, organisations are also having to reimagine their futures in light of COVID-19. Companies are beginning to rethink how they develop and build relationships with their customers. Now that customers have become used to videoconferencing tools, it will become easier to connect with them using virtual channels going forward, reducing the cost and time involved with international travel.

For universities, there is a question over their future funding models if international students no longer want to — or are no longer able to — physically attend their campuses in the UK. Also, domestic students might expect reduced fees if they are based remotely during their first term.

Going concern

To continue as a going concern, an organisation needs to have enough cash to pay its staff and suppliers, service its debt, and cover its other overheads. Organisations that had low cash reserves going into the crisis, and that have since suffered a fall in revenues, are at risk of no longer being a going concern. As a result, their finance teams may be exploring measures such as applying for bank loans, negotiating the emergency sale of the business and — in a worst-case scenario — administration or liquidation procedures.

The travel industry has been particularly hard hit by COVID-19. During the CFO Forum, one CFO from the sector highlighted how smaller businesses in the sector are struggling to secure the crucial bank loans that will enable them to survive. They have also found that while their smaller creditors have been willing to offer payment holidays and renegotiate payment terms, their larger creditors, including banks and landlords, have been less supportive.

Some companies that do not themselves suffer from going concern issues are focused on the financial viability of their customers and suppliers — they want those customers and suppliers to exist once the worst of the crisis has passed. They are providing support by using their own working capital and extending payment terms.

In the past, the Charity Commission for England and Wales has encouraged charities to develop sufficient reserves to keep carrying out their activities in the event of financial difficulty. These reserves are now proving crucial to enabling charities to survive.

Recovery

Organisations are planning for recovery by undertaking cash modelling and scenario planning around what different versions of the future might look like. Where necessary, they are also trying to secure loans. Fortunately, some finance providers are committed to making extra liquidity available to viable businesses.

Supply chain management is likely to play an integral role in the recovery process. In particular, companies will look to balance additional cost with resilience when choosing suppliers. Manufacturing companies that struggled to source the parts they needed in the crisis are likely to source from nearer home where possible. The UK government has an opportunity to look at how it can support SMEs to provide the products sought by larger businesses.

The main recovery concern for charities is how they can secure funding going forward. Once the worst of the crisis has passed, many charities will be trying to fundraise simultaneously — all targeting the same, reduced pot of money. This will make it difficult for some charities to survive.

Looking ahead

COVID-19 presents a wide range of challenges to organisations. These challenges differ significantly according to an organisation’s sector, business model, income streams, and levels of cash reserves. Some organisations will find that they have proved their resilience in this crisis while others are still struggling to adapt. Furthermore, going concern will be a massive issue for certain organisations, but less of a priority for others. Nevertheless, what all organisations have in common is the desire to take advantage of the recovery when it comes.

For more news and reporting on the coronavirus and how management accountants can handle challenges related to the pandemic, visit FM’s coronavirus resources page.

— Andrew Harding, FCMA, CGMA, is chief executive–Management Accounting at the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.