COVID-19 risk and leadership lessons for CFOs

CFOs are focused on the battle to survive and maintain cash flow during the COVID-19 crisis. But as the effects of the outbreak continue to ripple across the global economy, finance leaders are learning valuable new ways to manage risk in the future.

Experienced leaders have been drawing on lessons learned during previous crises, such as the credit crunch of 2008 and the 9/11 terrorist attacks in the US. They are also discovering that the pandemic has unique aspects that are leading to new risk management ideas. If implemented quickly, these concepts could help them survive 2020 and become more resilient in years to come.

Finance leaders are learning:

• The importance of agility in managing cash flow, working capital, scenario planning, and other financial planning tasks;
• How to protect future opportunities while also fighting the immediate impact of the virus;
• The ramifications of remote working, including how to prepare for it and make sure staff stay safe and productive at home;
• How to show leadership and how to empathise with staff, customers, and other stakeholders while also making tough decisions.

Supply chain protection

UK-based Ian Pettifor, FCMA, CGMA, group CFO of insurance technology firm Azur Underwriting, said COVID-19 has created challenges. Whilst Azur has employed remote working practices for a number of years, it is in the middle of a wholesale chain and therefore exposed to the robustness of the business continuity plans of the business-to-consumer firms it deals with.

Some of its broker distributors have suboptimal work-from-home arrangements, so they have “dropped off the radar” during the lockdown. Azur has responded by offering support to brokers not able to access its digital platform. Such support includes Azur staff keying in information on behalf of brokers, who may have sent quote submissions or policy updates by phone or email.

UK-based Joanne Watmore, ACMA, CGMA, financial controller at Equilibrium Financial Planning, has joined other senior managers in keeping a daily record of what they have learned and can do differently when the effects of the virus recede.

“One risk management lesson has been to keep in regular contact with our key suppliers, knowing their business continuity plans, and keeping the managing partner informed of those we’ve had to put a pause on,” she said. “When we are back up and running, we need to know if suppliers are there; or if not, what impact that has. In the finance function, our focus is on cash flow forecasting to make sure we can keep paying staff and suppliers.”

Joe Anichebe, managing director of consultancy Emizar Associates in the UK, said COVID-19 has re-emphasised lessons from previous crises, such as 9/11: “Most importantly, manage your cash, understand who your best customers are, and prioritise those relationships.

“In a sharp correction, everyone holds onto cash. But this time is also different in that many businesses are taking a genuinely caring and considerate approach towards others — not just staff but also key stakeholders such as suppliers. When we come out of this, we don’t want to be on the wrong side of the story with other companies going to the wall because we were holding all our cash. Be responsible and look after yourself, but not at everyone else’s expense.”

UK-based Nadim Ahmad, CEO and CFO of global professional services network Clyde Moray, said the supply chain disruption will be such that marketplaces will look very different post-crisis. Businesses will have to work out where they fit in and restructure accordingly.

For example, some imports or exports from China may disappear, so companies that rely on these will need to be creative in finding new products, suppliers, and even whole new markets for their goods and services.

Radical thinking will be needed, Ahmad said. “Some CFOs and CEOs will have emotional attachments to their people and organisations. They may not accept the new reality and see past what they already thought the business looked like, which could be damaging.”

New opportunities

Many finance leaders, however, are keen to look for new opportunities that might arise from the crisis, and to make sure they are ready to take advantage.

“We don’t know how deep or long the economic dislocation will be,” Pettifor said. “But in our industry, the COVID-19 outbreak could create a huge opportunity as insurers tend not to be that advanced technologically. For example, many did not understand the extent of their risk exposure and are still struggling to have clear, real-time insight into their risks.

“So there is no point destroying our business by removing all unnecessary expenditure. When we come out the other side, we wouldn’t be able to take advantage of opportunities. We need a balance between survival mentality and maintaining that optionality.”

Digital way of working

Finance leaders agree another likely positive from the crisis will be a more mobile or digital-first way of working as companies learn how to operate with all or most staff working from home and no face-to-face meetings.

In addition to meetings through Microsoft Teams or phone calls, rather than traditional face-to-face meetings, Watmore’s company has continued to keep clients updated through its app. Clients have been more receptive to using the app, which is more secure than email and offers a more efficient way to maintain regular contact with clients.

“That is different to how our business operated two weeks ago,” she said. “So we’ll look back and see it as an opportunity to give our clients a better, more efficient service.”

Tighter cash management

CFOs’ core financial skills will be in high demand during the COVID-19 crisis, for example, in providing frequent financial updates to the business; rapid forecasting and scenario planning; and tight cash, liquidity, and working capital management. But this crisis is unprecedented in the way it is cutting many businesses’ revenue to almost zero during the lockdown phase, forcing finance professionals to find ways of doing these things even more efficiently.

Financial planning in the current environment is completely different from the way it has been done, according to Netherlands-based Amrish Shah, FCMA, CGMA, head of financial planning and analysis at media production business Endemol Shine Group.

“It goes out the window,” he said. “It is important to become more responsive and agile, while accepting greater uncertainty. This is not straightforward in a decentralised environment like ours.”

To achieve this agility, Shah’s function has moved monthly meetings with the operating company to weekly; started producing weekly reports on production revenue, profit, and cash flow; and adapted reforecasting to focus on the most pressing external business.

Endemol Shine’s finance function has prioritised short-term liquidity and intensified its focus on working capital, discretionary expense, investment management, and securing financial aid.

The function has also stress-tested scenarios — for example, how it would respond if lockdowns lasted for six months.

Shah said two overriding lessons for future crisis preparation have emerged.

“First, in a decentralised environment, nearly all operational responsibility and policy-setting is devolved locally,” he said. “This means that in a crisis situation — where the need for transparency, visibility, and action planning becomes even more important — leaders should set the response framework and reporting requirements very quickly and clearly and hold the operating companies accountable to them. The normal time and effort to build consensus and alignment among the units is not available.

“Second, in a stable environment, the planning and control cycle is set with clear reporting guidelines, timelines, data models, and structure within ERP and BI systems. In a crisis, increased frequency of reporting and planning within these tools may not be possible or desirable. So, it is important to determine upfront whether, for example, planning around cost mitigations will be integrated in the normal routines or collected outside core planning systems, to support faster decisions.”

Leadership and agility

Ahmad said finance leaders — even those with many years of experience — will learn a lot about their own people and leadership skills during the pandemic.

“The current crisis is different [than] 2008,” he said. “Growth has evaporated; companies will be haemorrhaging cash; and the risk of corporate failures will be huge unless brave and resilient leaders emerge.

“They will be trusted to make the right decisions, but at times it will feel like a difficult juggling act between empathy and what is logically best for the business. CFOs must come to the fore by stabilising cash and through effective liquidity management and providing agile financial forecasting, scenario planning, and strategic support.”

— Tim Cooper is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.