As the enormity of the coronavirus crisis became clear, businesses throughout the world began immediately to preserve cash and cut expenses. Although an influx of funding from the Paycheck Protection Program (PPP) and similar programs has helped significantly, most businesses remain understandably cautious about making new investments.
As McKinsey and Company pointed out, however, highly resilient businesses tend to be early to invest in recovery. They get a leg up on the competition, launch new innovations, and benefit as the economy moves back in a positive direction. While it may have been appropriate to defer planned capital investments when the crisis began, smart businesses will be willing to allocate funds to projects that show high potential for return.
CFOs have an opportunity to play a key role in positioning their companies for a successful rebound by carefully assessing return on investment (ROI) and helping the C-suite make the right capital investments. That process starts with having robust analytical capabilities in the finance and accounting department.
Investing in Financial Intelligence
There are some inherent differences between business intelligence and financial intelligence. At its core, the financial intelligence paradigm is about taking a strategic view of data as a corporate asset. It has been said that “data is the new oil.” There is tremendous value locked up in your company’s various business information systems. To capitalize on that value, you need to be able to extract it and refine it.
Financial intelligence starts with breaking down silos and eliminating dependencies. During times of uncertainty, business leaders need to be able to assess the situation rapidly and move decisively to survive and thrive. Unfortunately, when it comes to accessing and analyzing their business data, most businesses are still operating in first gear.
Effective analysis tools access data in real time from multiple systems, and they allow end-users in the finance and accounting department to own the reporting function. They eliminate the dependency on IT experts to get actionable information from your valuable corporate data without delay.
Once you have strong analytic tools at your disposal, how do you approach the big-picture question of where to invest your precious CapEx dollars? During normal times, a proposed project or new initiative would be accompanied by a business case that lays out the costs, timeline, and expected benefits of a particular investment. That involves making certain assumptions that cover a wide range of data points, including customer demand, industry growth, competitors’ activities, staffing levels, and interest rates.
During uncertain times, however, those underlying assumptions may be subject to considerably more volatility than in the past. Effective ROI modeling will incorporate best-case and worst-case scenarios, alongside a most-likely prediction of those underlying numbers.
When the situation changes rapidly (as it certainly has in recent months), financial analysts must be able to rapidly develop new models and update existing models with real-time information from the various source systems that produced that information.
Investing in Automation
There is been a good deal of talk recently about the importance of automation. As much of the workforce has shifted to home-based offices, many companies have realized the benefits of a strong technology foundation that includes some automation components. Companies that started with good collaboration tools, cloud infrastructure, and secure remote access capabilities were at an advantage when COVID-19 hit. Those that relied on manual systems and required most activities to take place at the office were challenged to move quickly and adapt.
Automation capabilities typically encompass technologies that move toward digitizing information and processes, and which reduce or eliminate dependencies across departments or locations. Document management and accounts payable automation, for example, make it easier for companies to process invoices and other documents without passing physical papers or folders from one department to the next. Even more importantly, these kinds of systems automate workflows and reduce the need for time-consuming exception handling.
Shifting Business Models
Restrictions imposed as a result of the coronavirus crisis have altered the way many businesses operate. Many producers of consumer goods, for example, shifted to a hybrid “click-and-mortar” strategy as buying habits abruptly changed. L’Oreal adapted quickly to accommodate a surge in demand via ecommerce channels at a time when its sales through brick-and-mortar retailers was plummeting. Others have similarly adapted quickly. In a volatile environment, agility is a game-changer.
Many industries have no choice but to change the way they do business, and they will need to develop new strategies for surviving and thriving in the post-COVID world. Others may be under less immediate pressure, but should consider how their businesses might need to change to work better in the new reality.
All of this points to the ability to support strategic planning with rapid financial analysis and modeling that can be updated and adjusted as the situation changes.
Diversification and Risk
Recent events have underscored the importance of factoring in uncertainty for ROI calculations. In good times, risk tolerance is relatively high. Investments that do not deliver predicted results can be written off without creating an undue impact on the business. When the business climate is volatile, however, every ROI calculation should incorporate a risk variable. In other words, what is the likelihood of success or failure in delivering predicted results? An alternative is to develop best-case, worst-case, and most-likely scenarios and to assign probabilities to each of those cases.
Diversification is an effective risk mitigation strategy in the investment world. Likewise, diversified business operations have enabled many businesses to more effectively weather the coronavirus crisis. Pure brick-and-mortar businesses suffered greater disruption than those with an ecommerce presence.
Factoring in these kinds of “what if” variables can introduce additional complexity into ROI calculations, but when the survival of your business is at stake, the additional effort required for sophisticated modeling can pay off.
To adapt quickly and make smart ROI decisions, the finance department needs tools that make it easy to access data from multiple systems such as ERP, CRM, and specialized billing and operations software. They need to be able to access that data in real time, rather than relying on static reports generated from each system and consolidated using tedious manual copy/paste processes. Finance and accounting needs to own the reporting function as a key prerequisite to analysis. That means having the flexibility to create reports from scratch or modify existing reports without relying on the IT department or expensive outside consultants.
With powerful analysis tools in hand, the finance team will be better positioned to support a smart investment strategy. Plan your COVID-19 investment response with help from our Resource Center.