Deep Dive: 4 Steps to Achieving Finance Agility

As the business world shifts towards recovery and the concept of a new normal, agility is fast becoming priority number one for finance teams. Here, we take a closer look at four elements of finance agility and how businesses should be thinking about them today.

There’s a lot of attention being paid to the concept of agility right now. Given the world we’re living in, that’s hardly surprising. Against a backdrop of uncertainty, agile businesses have the ability to rapidly adjust their people and processes to create more value and react quickly to changing conditions. Yet, from a finance perspective, defining what we mean by agility can be tricky.

In the previous article, we looked at five key areas for finance leaders to explore in order to guide their businesses through persistent change. Below, we dive into four specific elements of business agility, exploring finance’s role in aligning data, processes and technology to support continuous change.

Perform Continuous “What-If” Scenario Modelling

Volatile conditions demand rapid scenario modelling to help companies respond with speed and insight to market disruption. My colleague, Kinnari Desai, has previously discussed best practices for financial scenario modelling and it remains a crucial component for businesses looking to make data-driven decisions that help them grow and thrive as the world of work continues to evolve.

According to McKinsey in the article “No Longer on Autopilot: Lessons for CFOs from COVID-19”, finance leaders should be focused on three or four independent scenarios that reflect short-term and long-term revenue and cost outlooks: “Each scenario should have a perspective on the length of potential economic decline, the depth of the decline and the ramp-up to the next normal. Among them should be a momentum case – or a do-nothing scenario – that accounts for country-specific macroeconomic outcomes and sector-specific implications but excludes the execution of any strategic initiatives or the allocation of resources toward those initiatives.”

Scenario modelling greatly improves the agility and flexibility of the planning process by providing some clarity on how the world could look against a range of potential paths. Armed with this data, FP&A leaders should be looking to inform critical decision-making with what-if analyses powered by multidimensional, driver-based modelling. Put simply, how can finance use operational metrics to understand the contextual relationship they have with financial outcomes and, ultimately, the balance sheet?

Driver-based models that incorporate a wide array of financial and operational metrics – from subscribers and average selling price to productivity and utilisation – enable organisations to run the holistic what-if analyses necessary to support critical and timely decisions. Sensitivity to and analysis of these key drivers allows finance to test the impact of various what-if scenarios and explore multiple courses of action. This creates a dynamic and agile finance-centred process that helps stakeholders gain insights and make informed decisions tied to strategic and operational goals.

Continuous planning also opens the door for finance to be able to reforecast quickly and easily with access to live accounting actuals. A dynamic business environment requires the ability to reforecast easily. If a business creates a single annual plan with a budgeting process that took months to execute, any plan will be out of date by the time it’s approved. With the capacity to reforecast easily, businesses can save time and decrease gaps between their assumptions and actual market conditions.

Finance leaders must have multiple scenarios in place when it comes to liquidity and understanding the company’s cash position.

Stress-Test Cash Position to Identify Liquidity Risks

In times of uncertainty and a rapidly changing business landscape across industries, the phrase “cash is king” comes into sharper focus. For example, according to the Wall Street Journal, as early as February 2020, businesses with operations that could have been affected by the COVID-19 outbreak began taking a closer look at the potential impact of the virus on their cash reserves and associated issues, such as downgraded credit ratings.

According to the survey “Making Good Decisions in Bad Times” from global management consulting firm Oliver Wyman, 78 percent of corporate treasury professionals indicated that enhancing liquidity and cash management is a top-three priority for their company when working to overcome a crisis.

Crises without a clear end in sight can place significant pressure on a company’s overall financial situation and force it to rely on liquidity reserves, raise additional capital or cut costs to offset reduced income. Such uncertainty means that finance leaders must have multiple scenarios in place when it comes to liquidity and understanding the company’s cash position in the near-, medium- and longer-term. Finance must also ask the questions, “How much cash do we have?” and “What cash can or cannot be used?”

In the article “Crisis cash management: Creating valuable breathing space in a COVID-19 world”, Blair Nimmo, KPMG’s head of insolvency in the UK, discusses the importance of understanding cash controls and management. “In troubled times, even the most profitable business can swiftly become unsustainable if cash controls are weak and visibility over cash is limited. At a stroke, financial institutions adopt stricter conditions for funding. Robust, sustainable crisis cash management buys valuable breathing space to restructure and/or refinance. In the longer run, an improved cash flow can reduce debt, fund growth and provide better stakeholder returns.”

This capital structuring strategy can also help businesses achieve larger goals, ensuring the organisation has “rainy day” cash set aside; in the case of Workday, we restructured our existing credit facilities to strengthen our balance sheet and help improve our liquidity position.

Colin Mansfield, an associate director in the U.S. corporate finance group at Fitch Ratings Inc., told the Wall Street Journal: “Finance teams are likely to analyse and more frequently discuss revolving credit facilities and cash on hand as well as the ability to pause planned share repurchases. These are the first levers companies consider amid declines in cash flows.”

Yet, while having a consolidated view of cash may be the goal for finance, achieving that vision is a real challenge. For most organisations, having visibility across all disparate cash sources requires a great deal of manual effort and reconciliation. Given the speed at which things change in the world of business, inability to quickly assess your global cash position becomes a real barrier to finance agility. Finance should be equipped to provide real-time insight into a company’s daily cash position to optimise investment strategy and fund critical business needs.

An organisation’s ability to move its two most valuable assets – people and money – to where they are most needed cannot be overstated.

Monitor Vendor Performance, Assess Risk and Pivot to Optimise Supply Base

Beyond cash flow and liquidity, businesses must also take a closer look at the agility of their supply base during challenging times. A lack of current insight into supplier relationships, performance and terms hinder procurement’s ability to execute effective contingency plans and drive immediate business impact.

Optimising these processes becomes increasingly important when suppliers are feeling the effects of a crisis. Sourcing teams should be looking to determine which partners are strategic and which are not. In fact, increasing alignment and collaboration not only with other teams but also with the wider supplier community is also hugely significant to managing the success of the supply base.

A recent article by Scout RFP, a Workday company, cites a Gartner study: “50% of procurement professionals believe that it is likely or highly likely that remote work will become the norm. Sourcing teams with collaboration technologies like team chat, videoconferencing and document-sharing are able to update stakeholders and communicate with suppliers from anywhere.”

With these partners identified, sourcing leaders are able to strengthen their relationships and work with their suppliers to come to mutually beneficial solutions like renegotiated minimums or extended payment terms. The power of human connection in supplier relationships cannot be overstated, as having stronger relationships with suppliers typically results in better outcomes for their business. With real-time collaboration technology, sourcing teams can strengthen their relationships not only with the business, but with each other and their suppliers as well.

Quickly Implement Policy and Programme Changes

Change happens fast, often with very little warning. An organisation’s ability to move its two most valuable assets – people and money – to where they are most needed cannot be overstated in times of crisis. We live in a world where instant gratification is a prerequisite, yet many legacy finance systems can’t come close to supporting the needs of a rapidly changing business. They lack the agility and flexibility in their foundation and tools to quickly and easily support change – and in today’s world, that’s a huge disadvantage.

Organisations have to be ready not only to support their employees as circumstances change, but also to pivot and change direction in real time. If your architecture and processes are not built to do that, then you have a problem. For businesses bound by legacy system constraints, many of these changes – such as amending workflows, changing reporting dimensions, organisational structures, payroll and general business reporting – require the intervention of the IT department. These potentially time-consuming, complex IT projects are both resource-sapping and frustrating.

For example, what happens if finance needs to quickly create a dimension to capture cost related to emergency spend? How quickly can that happen in legacy systems and processes, and more importantly, what is the impact on the business of not being able to execute on this in a matter of hours?

Beyond individual crises, business-as-usual dictates that finance requires more real-time data and the ability to build and maintain financial parameters. As the strategic guide to the rest of the business, finance needs to be empowered to easily create new dimensions within its system in order to analyse and report on these elements. Finance should also be able to establish new controls as well as maintain the existing controls and workflows for these new dimensions – without the need for IT. This is about changing the traditional paradigm and empowering finance with a system that is both intuitive and built for change – two cornerstones of financial transformation.

Discussing how his organisation uses Workday to navigate organisational changes, Shome Mukherjee, financial applications manager at Netflix, says: “Everytime we have an original show or new original movie, we have to create a legal entity for that company and set up the banking and everything. Again, that takes literally minutes to set up and add to the consolidated framework we have.”

In times of challenge, organisations are finding new ways of operating with agility. This may be “fight or flight”, and it may be born out of necessity, but the ability to get the job done leads businesses, and in particular the finance function, to put agility at the top of the agenda.

In the next article, we take a closer look at how C-suite leaders are increasingly looking for deeper insights from a wider range of data sources to help them make better decisions and keep the organisation aligned and informed.