How CFOs can create a COVID-19 crisis war room

The COVID-19 crisis landed squarely in the finance department. Nearly every response to the crisis starts with finance: risk management, cash flow, human resources, IT, and financial planning and analysis (FP&A). McKinsey partner Ankur Agrawal talks with FM senior editor Drew Adamek about how CFOs and finance departments can successfully navigate the challenges of COVID-19 while finding the hidden opportunities. Agrawal shares how CFOs can create an organisational cash culture, the increasing importance of FP&A, and the leadership skills that are most important during a crisis.

What you’ll learn from this episode:

• What a CFO’s top three crisis response priorities are.
• How to create a cash culture within your organisation and why it is so key to survival.
• Why CFOs need to be front and centre to any crisis response.
• Why communication is key during a crisis.
• How adopting a bold transformation mindset around resource allocation can help organisations thrive.

Play the episode below or read the edited transcript:

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

To comment on this podcast or to suggest an idea for another podcast, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.

Transcript:

Drew Adamek: The coronavirus crisis has landed squarely in the CFO's office. From shifting revenue streams, to human resources upheaval, to the rush for cash management, all the way to the urgency of scenario planning, the CFO and the finance function are on the front lines of organisations' COVID-19 responses.

The CFO's outsized role in the COVID-19 response comes as no surprise to Ankur Agrawal, a partner in McKinsey and Company's New York office. He's a co-author of McKinsey's recent report, "The CFO's Role in Helping Companies Navigate the Coronavirus Crisis." Ankur, along with his co-authors, look at the ways that CFOs can drive organisational response to the crisis.

I'm FM magazine senior editor Drew Adamek, and I spoke to Ankur recently about how CFOs can create an internal cash culture, how to find opportunity in crisis, and why CFOs should develop a more holistic view of data during the coronavirus crisis.

Ankur, thank you so much for joining us.

Ankur Agrawal: Thank you, Drew.

Adamek: In facing this crisis, what, in your mind, is a CFO's first priority?

Agrawal: I see a CFO's role and priorities in three horizons. I think the first horizon is resolve and resilience, which is managing the here and now, and those primarily include first and foremost having crisp and clear communications within the finance teams, with the management team, with the board and investors, and being the voice of reason in these times of uncertainty. Because CFOs have a great deal of responsibility in sharing the perspective of the financial performance of the companies. So that's the first.

The second is setting up immediate actions, and most companies are actually facing a liquidity challenge, so being purposeful around cash and cash management, and setting up a war room and infrastructure to really drive near-term cash flow implications is very, very important and key. And then doing what we call scenario-based assessment and planning is core and centre of planning for CFOs.

And given the uncertainty, having a view on what are the likely scenarios that might unfold, having a perspective on what are the implications for their respective sector and company, and the likely hot spots where there might be EBITDA risks, cost risks, or uncertainty based on the footprint of customers, I think is very, very important. I think that's the first horizon of response the CFOs have to tackle.

Adamek: And you've written quite clearly about the need for a cash war room. What exactly do you mean by that, and what are some things that CFOs in my audience listening can do to help establish their own?

Agrawal: So what we mean by cash war room is an infrastructure which allows you to rapidly get organised around key cash events, key cash KPIs, key cash metrics. And more important than having the metrics and the data is creating a cash culture within the organisation. Organising executives around the need for cash, a cash mindset, and that we need to really look at each and every action we are taking with that framework. And then finally, creating a bit of a central team which is looking and managing all of the cash-related items, whether it is receivables, payables, purchase order outstandings, what are the incoming sales.

And, by the way, this also applies to many companies that are facing growth-related events … because their products are in need or required and they really need to manage their cash through the spirit of growth. So it applies both in companies facing a liquidity challenge, as well as growth. I think that's what we mean by cash, which is a combination of data and transparency around key cash events, a cash culture, and an organisation structure of executives who are taking decisions in a very purposeful way to make sure there is rigour on cash management.

And the final thing I would say is cash is not only about the income statement. There is an element of managing the balance sheet very purposefully and the inventory is part of it, are you really getting visibility into your inventory on a daily basis and getting your products to where it is needed. I think that's also part of the responsibility of a cash room.

Adamek: This has come as a major shock because it's been so swift. What are some of the steps that you see that CFOs can take to stabilise their business in the face of this stunning reversal of fortune, as it were?

Agrawal: You're right, Drew. I think it has been very sudden. That said, many CFOs do have resiliency plans, right? And if we can learn anything from the last few recessions, there is a way to sort of work through this in a very purposeful way. One is just taking a very hard look at productivity in each of these scenarios. Are we doing everything we can to make us productive? Accessing and bolstering the balance sheet, which includes drawing down the revolvers, getting access to cash from sources which you have not thought before. For example, many suppliers or vendors are asking their customers for extended credit terms and really making sure that they can stay solvent through this crisis.

And then finally, I think there is an important aspect of financial planning and the finance teams themselves for even smaller companies. Their mindset of daily, weekly managing through is really important, and I think this is the time that finance teams for small companies can really be that front and centre of the response. I would say those would be a few things to consider for CFOs as they stabilise their business.

Adamek: How does your research see the role of FP&A in this current crisis for organisations?

Agrawal: Yeah, and Drew, as I said, FP&A are at the centre of driving decision-making, even in times of normalcy. Today, as there's a lot more uncertainty, their role is really, really important. So first and foremost, driving very strong business partnership, working with their business leaders to understand what's happening in the front lines and that's happening in a remote way, so that takes even more skills than finance teams are used to. So how are you getting the temperature of what's happening in the front line is very important.

Second is planning in a very different way, in a scenario-based way, as I discussed before, but being very agile, and thinking about triggers, and aspects of how you would move from one scenario to another, and what actions then are required for the businesses. So instead of a year-long planning cycle, essentially we are in a month or less than a month planning cycle, and that becomes really important for FP&A.

And third, getting more adept in leveraging data which is nonfinancial data. I think that has been a theme for financial planning for several years now, but in this crisis, getting more familiar with other sources of data and drawing insights from it, whether it is number of clicks, or how customers are buying through online, and then how does that impact the financials. I think the imperative of taking a very holistic view of data in this time is actually even more important. So I would say FP&A is at the heart of it.

Adamek: You and I spoke last time about the importance of digital and digital connectivity for finance. How has this crisis amplified that importance in your mind?

Agrawal: It has, indeed, amplified it in many different dimensions, Drew. First and foremost, as you know, many of the finance teams have relied on business process outsourcing and offshoring, and in these times of crisis and uncertainty, as many countries across the board are in lockdown, having access to data and having a seamless process becomes even more important. So many finance teams, it will become a theme not even today but in the years to come, how do you really make sure that you have redundancy management, cybersecurity aspects of your business, and then more importantly, a stable business process which you can manage and that will rely increasingly on digital tools.

And in the short term, I would argue that there's still some space for finance team to consider real-time data visualisation approaches, which can be very easy and fast to put together so that they can organise around similar sources of data and insight. So both in the near term, then over the long term, I believe this will impact how finance looks at digitisation in their own core work, and more importantly, I think the ROI on many of the digital projects, digital technology investments, and the business cases around it will fundamentally change. So I think this will have a profound effect on how finance approaches digitisation broadly, Drew.

Adamek: I want to shift gears just a little bit away from crisis management and more into opportunity. What are some of the steps that CFOs can take or some of the approaches that CFOs can take in finding opportunity in this crisis?

Agrawal: Right. I think there is one thing we can learn from the last couple of recessions, and we have done extensive research on this, Drew, on the last recession. There are some patterns which emerge for companies which have thrived and survived the recessions, those which we call resilience. So a few themes for CFOs and finance teams to think about. One would be adopting a very bold transformation mindset and reallocating resources. I think the crisis provides an opportunity to look at the portfolio of the business very, very carefully, and having a very transformational mindset which is not 5% to 10% reallocation but 30% to 40% reallocation. How do you really drive that behaviour and mindset shift? So I think that's one aspect of an opportunity.

The second would be around mergers and acquisitions, which is also an opportunity set for companies to evaluate. There is evidence which says resilient companies have indeed made the right portfolio renewal-driven M&A in times of crisis coming out of the recovery. So I think in thinking hard about how does merger and acquisition further accelerate the strategic execution in the companies I think is a core opportunity set for CFOs. And by the way, that includes divestments, too, and taking a hard look at what might be opportunities for shedding assets as companies come out of recession. I think that would be the second.

And lastly, which I mentioned earlier, which is productivity and the role of digitisation. This has been the call to action on digitisation in many sectors. I work in health care, and telehealth has been a big, big shift in this crisis where an option of telehealth has become the next normal in many ways. And I expect similar adoption of digitisation as a way to enhance productivity, as a way to enhance access, and as a way for business model transformations for many sectors.

So I think those are a few themes and ideas for CFOs to consider as they come out of the recession and look for opportunities for reimagining the future.

Adamek: What kind of mindset shift are CFOs going to have to make post-COVID-19?

Agrawal: Yeah, Drew. I think this has been a call to action for many CFOs, and frankly, many CEOs. First and foremost, taking care of employees and working in teams very differently, demonstrating empathy and personal leadership in a way which was always important but even more important today. I think that is one way fundamentally finance teams and CFOs will work very differently.

Second is around challenging the status quo, right? If I go back to my example of telehealth where customers, providers, payers are adopting technology at a pace which was unheard of, and therefore, taking a very hard look at each and everything we do to sort of really strive through recessions and even driving responses I think would be a way for not only CFOs, but each and every sector leaders, company leaders, to really reimagine the way they do business.

And then finally, I think the purpose of what we do, how we do it, is at the front and centre of the debate and dialogue. At least for us, when we work with our clients, that's how we are seeing them respond in a very courageous way. So I think that dialogue and debate around the purpose of what we do each and every day will help companies and CFOs reimagine the future.

Adamek: Will you talk about how important communication is now for CFOs, and how it's changing, or how it should change?

Agrawal: Yeah. I think that first and foremost, the communication is very, very important in times of crises, both the frequency of it, which is, let's take investor communication, as an example. Investors are looking for transparency, and honesty, and trust, and what CFOs share, and by the way, not share which they don't know is equally important. So communication with investors is at the core part of it. And then networking and connecting with peers and understanding how other CFOs are responding, other partners are responding in crises, their customers, their suppliers, their vendors.

I was at a roundtable yesterday where there was an honest dialogue among CFOs across the health care value chain on how they can be helping each other on actions they're taking, which was very heartening to see. So that communication broadly and across, I think equally important.

And lastly, I would say communication within the management teams. The CFOs have been part of the planning and strategic planning efforts, performance management efforts, but probably the intensity of it, and the debate and dialogue, and helping establish a framework by which the management team can take decisions in uncertainty. I think that is another important aspect of communication.

So I think if I can summarise, I would say, look, CFOs have to be more front and centre of the dialogue and shape the debate even if they don't know the answers already.

Adamek: Ankur, thank you so much for joining us.

Agrawal: Thank you, Drew.

Adamek: I'm FM magazine senior editor Drew Adamek and you've been listening to my conversation with Ankur Agrawal, a partner in McKinsey's New York office, about the CFO's role in helping organisations navigate the COVID-19 crisis.

For more news and reporting on the coronavirus and how management accountants can handle challenges related to the outbreak, visit FM's coronavirus resource page. Thank you for listening.