CFOs can use the current crisis to identify and mend weak or ineffective processes in the finance division, Bain & Co advised in a recent publication.
See all Private Funds CFO‘s coverage of covid-19 and its impact.
CFOs and their teams have been forced by various factors to evolve from focusing purely on back-office processes to become value-adding strategic arms of PE businesses. But the covid-19 pandemic, which is affecting everything from firm strategies to the rudiments of business continuity planning, could expose weaknesses in the processes supporting that shift.
“The disruption created by the coronavirus will test how much progress CFOs and their teams have really made,” said Michael Heric, partner at Bain & Co in New York.
Heric and his colleagues suggest that processes that rely on “tribal knowledge” or “workarounds” will stand out amid the crisis and CFOs should not pass up on the opportunity to fix them, creating value when things normalize again.
Finance should move beyond just reacting to the numbers and partner with business leaders to accurately predict what’s going to affect the businesses, and to anticipate the consequences of key events. “Leading indicators like new orders will be far more important than lagging indicators,” said Heric.
Bain & Co also suggests finance teams who have already been through zero-based budgeting programs apply the same discipline to the top and bottom lines, helping to identify specific needs and costs over a specific period.
Cashflow management will also play a critical role in business continuity, as pressure on portfolio companies mounts. CFOs can take the immediate steps by expediting receivables, extending payables in certain circumstances and tightly managing inventories where necessary, according to Heric and his colleagues. For many CFOs, this could mean reducing late payments, lengthening credit terms or extending forecasting past the usual time period.
Among other guidance, Heric said finance teams can also take it upon themselves to work with business leaders to revisit capital investment plans. Treasury should test funding sources for resiliency, then diversify contingent sources. Treasury may also need to prepare to renegotiate short-term debt to reduce the pressure on cash.
Heric and his colleagues suggest that financial planning and analysis teams should work with businesses on scenario planning, putting into effect existing contingency plans or, where they don’t exist, working with businesses to identify the steps and trade-offs needed to manage through the crisis, including cutting costs, and finding new revenue sources.
They also recommend setting realistic expectations with LPs, widening guidance, sharing early views of the quarter with them and providing regular updates.
Heric told Private Funds CFO that one upshot from the crisis will likely be that more firms look to automate more back-office functions, and faster. “For many finance organizations, they wanted to automate this work,” said Heric. “They just haven’t gotten around to it because they didn’t have the investment or they just didn’t have the time or the skills internally.
“What you’re going to see is an acceleration in the level of automation, just for business continuity reasons,” he adds.
Bain & Co has also released an interactive risk assessment tool to help private equity backed portfolio companies facing covid-19 associated risks.