International and local governments’ stay-at-home orders in response to the COVID-19 pandemic have triggered an unprecedented drop in consumer demand, deeply impacting all the businesses in the high-touch service economy. Any businesses surviving this first phase of the economic downturn will now face new operating restrictions that will require a strategic corporate re-think of their business model to safely bring their customers back.
In times of financial crisis, the role of the CFO could not be more important to a business. And to ensure the survival of their business, CFOs will need to have the right tools and trained staff to allow data-driven decision through each of the coming phases of recovery caused by this unprecedented economic shock.
Most CFOs have already passed through the first phase of the COVID-19 economy – Survival. CFOs have made difficult financial decisions to ensure business longevity and liquidity in the near term, which have likely impacted staff and most of the major expense categories. While it is highly likely these survival decisions where tactical, the next two phases are likely going to require more strategic thinking on the part of the CFO: the pre-vaccine low touch economy, and the next normal that will follow post-vaccine.
While there are more than 100 vaccine candidates being evaluated on a global basis, there has been no known vaccine for a virus of this type that have ever been developed in less than 24 months. The macro-economic environment is likely to be characterized over this pre-vaccine period by limited re-openings followed by viral flare-ups and intermittent decisions to shut down and quarantine again. This will require CFOs to dig-in and commit to a low touch economy for the foreseeable future.
This low touch economy will be based on moderate to no contact between the serving business and its customers. Crowd-free environments require a new type of marketplace, and nearly every industry has been impacted by this change. With this economy likely to be in place for some time, it’s imperative for CFOs to re-evaluate their financial model from its fundamentals to ensure continued survival and potential areas for growth.
The good news for CFOs is that financial modeling has not changed. It’s still based on three iterative phases: Forecast, Plan and Execute.
Forecasting tools, and the staff with expertise to use them, will be critical in evaluating the impact of tactical cuts made during the preliminary survival phase, as well as assessing changes in demand. Take the intuitive case of the NBA and the NHL. Both sports leagues had to suspend operations due to government imposed COVID restrictions preventing gatherings of more than 5 people. But with fans restricted to their homes, there was an increase in demand for live entertainment. However, if players had gone back to playing in empty stadiums, owners would have been forecasted to go bankrupt without any stadium ticket revenue. Forecasting in the low touch economy requires sports CFOs to create a new business model and predict how that will impact current relationships with players, fans, media partners and staff.
Tools, such as Corporate Performance Management (CPM) software can play a huge role in forecasting. By calculating the Key Performance Indicators (KPIs) for the new business model, and tagging the associated financial inputs, the CFO will be able to manage the business financial health against the new business model’s targets.
Planning, the next phase in financial modelling, is about figuring out how to operate in the new financial model. Part of this is strategically reviewing the three C’s: Cuts, Controls and Continuously Improvement. It’s a widely shared rule of thumb that for every $1M in revenue, a business should be able to conservatively trim $10K-$20K of expenses. The challenge, again, is having the tools and the staff to perform detailed expenditure analysis on suppliers that may not be critical to the business in the low touch economy.
Continuing with the planning dilemma of the NBA and the NHL, CFOs for the league and the teams have to figure out what expenses they can cut. During the survival phase of the pandemic, many teams immediately released stadium staff, but then faced a large backlash from fans upset that teams choose to terminate their lowest paid employees. By ultimately settling on direct support from players and owners, teams were able to effectively get owner payouts and player salaries reduced without impacting team support in the community, a key measure of success.
With probable staff reductions taking place across the business, including the office of finance, it is important to understand that financial controls can become lax, opening the door to financial errors, omissions and potentially fraud. Fewer headcount in finance may mean the separation of duties in certain areas of accounting are no longer possible, requiring the implementation of additional signoffs and monitoring by senior staff to ensure fiscal integrity.
Sticking with the examples from sports leagues, a shocking example of a lack of controls in the NHL was during the long tenure of Alan Eagleson, the head of the NHL Players Association (NHLPA) from 1967-1991. With no proper financial controls in place at the NHLPA, Eagleson was able to expense vacation trip, embezzle players insurance money, and make loans to his friends out of the pension fund. It goes to show that only with tight financial oversight can organizations ensure their own financial integrity.
Proven Computer Aided Audit Tools (CAATs) exist that can perform analytic analysis around both cuts and controls. Integrated as part of month end book closure procedures, or quarterly and interim reviews, these tools can quickly help a CFO assess where cuts can be made in a businesses’ finances as well as provide confidence in the financial integrity based on the separation of duty rules in the office of finance.
While these first two planning processes are centered around playing corporate financial defence, the last one, continuous improvement, allows the CFO to help the business go on corporate offence.
As shared in our first blog post, even before COVID-19, CFOs were under pressure to find ways to boost their impact on the bottom line, in particular by reducing expenses in the office of finance. With the rapid digital transformation that has occurred in most businesses over the past 10 years, it’s clear that there is more financial data to manage and analyze than ever before. It’s due to the implicit size and requirement to analyze data quickly that businesses will require the support of artificial intelligence (AI) to continue to be successful.
By integrating CPM software, analytic analysis and AI, there is an opportunity to drive continuous improvement within even the most difficult of circumstances. AI tools provide 100% data analysis and risk calculations that augment both CPM and CAAT tool capabilities to provide a more detailed holistic picture of the business. As Satya Nadella, the CEO of Microsoft shared, “The core currency of any business will be the ability to convert their data into AI that drives competitive advantage.”
Dwight Eisenhower is quoted as saying, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” Execution puts in motion the plans of the business, and also generates the financial data that will allow a CFO to measure the success of that plan. By collecting the right financial data in a timely fashion, you can ensure that demand levels are aligned with your capabilities to deliver service your customers in the low touch economy.
Take the great example of Michael Jordan’s famous pass to Steve Kerr for the series clinching basket at the end of game 6 of the 1997 NBA finals to lead the Chicago Bulls over the Utah Jazz, detailed in the Netflix documentary “The Last Dance”. As Jordan recounted, “When Phil drew up the play at the end, everybody in the gym, everybody on TV knew it was coming to me.” Meanwhile, Jordan knew that after the ball was inbounded to him, they were likely to double team him to prevent him scoring. Knowing this, he knew it would be John Stockton of the Jazz that would move to double team him, leaving Steve Kerr undefended. As Kerr recalled in the huddle, “Jordan turned to me and said, ‘You be ready. Stockton is going to come off you.’ And I said, ‘I’ll be ready, I’ll knock it down.’”
Kerr hit the shot, winning the title for the Bulls, and showing that executing on good intel on your competitors can beat the best drawn up plans from a great leader, in this case, Phil Jackson, on any given day.
Which also goes to prove that any tool, plan or process is useless without the right trained staff. And like Jordan and his supporting cast on the Bulls, it was hard work every day that made those championship moments look easy. But where can a CFO find staff trained to use the latest CPM tools, CAAT tools and AI?
It takes 12-18 months to introduce new technology into the office of finance and apply it to your desired plan. This is where you need to look outside the organization to help augment your staff to immediately impact your firm’s performance. Just like the Bulls went out to find Steve Kerr and Denis Rodman to get consistent 3-point shooting skills and rebounding to support Jordan and Pippen, you will need to find the right outsourced firm to help you make an impact.
Your current accounting and advisory firm may be able to offer 1, or maybe 2, of the services described above. That’s where Vigilant AI comes in. We have skilled CPA resources seasoned in using CPM, CAAT and AI to achieve known outcomes, and we are ready to get started, working directly with you or your advisory firm as required.
With the likelihood of one to two years ahead of us in the low touch economy, it will be up to each business to continuously monitor and re-evaluate their financial model using the right mix of tools, in-house and outsourced staff to ensure they can survive and strive.
The next big economic shock will occur when a vaccine for COVID-19 is approved for use on a global basis. However, that doesn’t mean that the world will necessarily revert to the way it operated before the pandemic. Many businesses, and customers, will likely want to retain the best practices implemented and learned during the low touch economy, and the next iteration of financial modeling will incorporate that accordingly.
The CFO playbook for the low touch economy and the next normal will be drawn up using CPM, CAAT and AI tools combined with the right mix of in-house and outsourced staff. In doing so, CFOs will be able to implement continuous expenditure analysis that will ensure the survival of their business and allow them to find ways to boost corporate performance.
Outsourced Vigilant AI resources are here to make this a reality for even the most skeptical CFOs. We can be contracted for one-time financial analyses or can be contracted to manage the data, analytics and dashboards for continuing use within your business. We look forward to helping you answer your most pressing financial issue using the latest technology.
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