What lessons can CFOs learn from the impact of the corona crisis?

How much impact does the crisis have and will continue to have on the finance function? There are some lessons to be learned from the most recent CFO Barometer.

COVID-19 is forcing change throughout the economy, but the impact varies from sector to sector and company to company. While many corporations have painstakingly tried to lessen the damage, others are doing good business. The results of the most recent CFO Barometer illustrate this clearly. Finance professionals across all sectors should heed these insights.

Revenue and costs in times of COVID-19

The impact on revenue and cost vary greatly. Roughly 37% of survey respondents expect a loss of revenue of over 30%. Meanwhile 12% see only a 5% revenue loss and 6% even state to lose no revenue at all. But what is even more noteworthy, is that 64% state a minimal impact on costs. This is remarkable considering the current situation where companies need to invest in digital solutions, safety measures and more. But it is likely that this view will change once business reopens. CFOs seemingly think that this crisis will be short term. As if we can continue as we were once the virus diminishes. A follow-up survey will have to show whether they are right.

The cash position

On average, CFOs experience a medium impact on the cash position of their companies. However, when we take a more detailed look, 37% do experience a severe impact. The number of companies that experience little to no impact, and are not located in a sector that is benefitting (i.e. supermarkets), can be explained by the clear efficacy of government measures to maintain market liquidity. Another noticeable result is that most companies expect a bigger impact on the cash position in the near future. This can only be explained by a fear for bad debtors.

Cash planning and forecasting

It is quite positive news to see that 7 out of 10 CFOs can make an adequate cashflow forecast. But looks can be deceiving, because if we analyse the numbers in more detail, we can conclude that over a quarter of the companies are not actually capable of making a sufficiently adequate cashflow forecast. Only 28% is doing well in terms of choosing the right amount of time that their cash forecasting needs to cover. Roughly 53% covers a period of six months to a year. That period is inadequate to monitor cash. A state-of-the-art cashflow forecast covers a three-month period, whereby the first month details each week. To manage the impact, weekly updates are the right frequency.

Using tools for cash forecasting

Excel remains the most popular tool for cash forecasting. But while the arguments for Excel are plenty, the choice for this tool has more to do with insufficient maturity of the forecasting process. If the cashflow forecast becomes more important after the crisis, then digitization will soon follow. We also often see that companies that have a treasury management system, do not integrate it with the forecast, despite the fact that most CFOs think that they have the know-how in house to make adequate cashflow forecasting. Not even those companies with more advanced tools.

The real key to a good cashflow

But tools are not the priority here. The key to a good cashflow forecast is communication between all departments of the company with at its center the finance department. Part of that communication is to continuously adjust, improve and optimize the forecast. All too often we see treasurers making cashflow forecasts isolated from the rest of the company. This can never lead to accurate forecasts.

The cashflow forecast is on the brink of becoming a real management instrument. But a future follow-up survey will have to confirm just how well established this practice will actually be. Because, for instance, not even half of the respondents say that the cashflow forecast will be the driver of the budget. Which contradicts the level of importance they attribute to cashflow forecasts for management. Perhaps CFOs truly reckon this to be a short-term crisis.

The relationship with the banks

Whoever feels an impact on revenue and costs, fears loan covenants. 22% of companies surveyed believe that the banks will want to review the covenants. But from our conversations with bankers, it is clear that they simply prefer a better follow-up. They want more transparency, but they are not immediately thinking about doing reviews and making new demands. Meanwhile the survey shows why CFOs are not always willing to lend more information to the bank. The primary argument is workload combined with not seeing the need to give more.

The risk of debtors

There was not much fear of non-payment at the moment of the survey. Probably because credit management and follow-up of debtors belongs to the more mature processes. Momentarily, deferrals remain mostly out of the question, but many of the respondents do anticipate them. But only one out of three companies are credit insured, with the remainder having no clear view of the creditworthiness of their customers. Credit checks are seemingly not integrated, save with those who have factoring programs.

Companies that are credit insured are least worried. The impact with over 80% of them is expected to be minimal. The majority of those who only think of insurance now, fear expensive insurance premiums. Because of this, there remains a risk of non-payment.

The role of the finance function

Finance is rarely an early adopter of new techniques or systems. However, the crisis forces Finance to change as well. And that will no doubt lead to a reassessment and optimization of processes, functions and roles. Again, the follow-up survey will have to show how much change is permanent.