Stopping the finance function from floundering

Stopping the finance function from floundering

April 29, 2020

The Pandemic is disrupting every aspect of businesses, but probably none quite as fundamentally as the lives of those in the accounts department. These places are havens of routine; they keep score and churn out an orderly stream of budgets, forecasts, management information and annual accounts. They speak the universal business language: numbers.

This crisis has pulled the rug of normality from beneath them and is taunting them with it like a red rag to a bewildered bull. All rationale assumptions have gone out of the window, while likely scenarios change daily or even more often.

All this is happening when they are being called on to play a far more central role in the management of the business than is sometimes the case. Their challenges include ensuring that the cash needed for survival is available, updating plans against a background of overwhelming uncertainty, revising previously valid information and monitoring financial needs around the business, interacting with the rest of the management team and of course maintaining their core activity of keeping proper accounts. The circumstances are utterly unfamiliar and the data available to them may be poor.

This guidance note aims to provide some key focus areas for finance executives and staff in this crisis and an understanding for other managers of the challenges facing them.

Finding reliable data sources

The finance function’s credibility in an organisation is based on the comfort blanket of providing definitive information based on hard facts, with a small dose of cautious speculation thrown in for budgeting and forecasting purposes. Now it is faced with a plethora of dubious data and poor evidence and a worrying lack of reliable external input.

The new watchwords are: be wary of useless speculation, reject unsubstantiated facts and resist attractive but uncertain analogies. All information coming into the department needs to be reviewed. Some of it is now unnecessary, some added information is needed and timescales must be adjusted, or more realistically, be shortened. This is a wonderful opportunity to reshape the inflows to eradicate unnecessary pre-crisis data. Finance functions must only rely on what they know to be true.

Staying in touch with the crisis

In this new world of isolation, the finance function must avoid becoming an ivory tower, remote from the rapidly changing commercial and behavioural realities of the crisis. It will be tested constantly about its awareness of what’s going on with immediate competitors, its business sector more generally and in the UK and global economy. This means not just assessing economic statistics, but judging some much more nebulous factors, such as mood and confidence.

You need constantly to push yourself along the crisis timeline and be aware of the ever-widening ripple effect of the crisis throughout the business and its stakeholders. What is happening in your industry’s supply chain? How are competitors and customers reacting? It is important to find other people and organisations with similar issues to yours, even if they might not be in the same industry. Look also for similar countries that are ahead of the UK along the Pandemic curve. What can you learn from them? Many finance issues cross sector and national boundaries.

Judging the risk appetite of your business

The basic human reaction to catastrophe is usually to eliminate all risk and hunker down until it is over. Counter-intuitively, the sensible approach in business now may be to take more risk, but on an informed basis. There will certainly be opportunities for those with the nerves and the resources to exploit them. The finance function needs to find a way to establish an apparently simple truth: how does our firm feel about the crisis and how do we feel?

This will help guide the setting of assumptions and it will help eliminate a curious but dangerous aspect of the sort of situation facing businesses at present. Judgments start to be affected by confirmation bias, where people accept the information that they agree with and reject anything that conflicts with their views. Accounts has a role to play in bringing these biases out into the open and a duty to make sure their own does not compromise their credibility.

Choosing the right scenarios to model

We all know that the past is now no longer any sort of guide to the future and old habits of looking at a limited range of sensitivities in putting together budgets and forecasts are redundant. Computer models created in normal times and reliant on past patterns and interactions should be reviewed. There is no ‘normal’ at present.

Firstly, you need to throw away this year’s budget. It was probably signed off late last year when the world was a very different place. It was probably calculated quarterly, but even monthly may no longer be sufficiently flexible. Some areas of revised forecasts, especially cash flow may need to be reset to a daily basis. One approach might be to plan with graded timelines – for example on a daily basis, then weekly, then monthly with detail decreasing as you push out into the future.  All forecasts should be updated on a rolling basis, resetting the start point to known actuals.

In the early stages of the crisis, the economic and social effects of the virus are still both uncertain and fluctuating. But as it progresses, the foundations of the assumptions you use in forecasts will harden so that the planning horizon can be extended and the time sequencing reduced.

In terms of assumptions and comparative scenarios, almost the only reality that hasn’t changed is that your choices will be wrong; the only question is by how much and in which direction and how you react to the variations. The trick may be to forecast on the basis of a range of assumptions in terms of key factors such as volumes and margins, presenting management with three potential outcomes: best case, worst case and the mid point.

Clear and concise communication

Whatever decisions you make on frequency, scenario ranges and sensitivities, the output to management must be readily understandable, highlight the key points and as brief as possible. Management information that maxes out people’s Inboxes has long been a curse, indeed some have suggested it was one of the inspirations behind DropBox and other remote filing and data access systems. Now, it is a much worse sin than that. Management are overwhelmed by the challenges of the crisis. Not only will they not read overly complex management data, they will actively distrust it. Better to provide a summary of the financials and the key assumptions, plus a user-friendly option to interrogate the information in more detail for those who have the time and inclination.

These guidelines cannot cover the many different scenarios faced by businesses; they are intended to steer finance functions towards playing a positive role for their firms in steering a safe course through the crisis. We will be delighted to provide further input if required.