3 strategies to help CFOs thrive in an uncertain economic and financial environment

Uncertainty about the economic and financial market situation is increasingly prolonged after the upheaval in the banking sector along with the fight against inflation has created a series of challenges for CFOs.  

For example, in the case of banks, CFOs face difficulties in liquidity, liquidity and profitability of operations. On the other hand, CFOs in the technology sector face competition and continuous innovation following trends. Regarding production, CFOs face many challenges with costs, supply chains as well as human resources. 

To thrive in this environment, CFOs need to underpin their strategies with forecasting and FP&A scenario planning, auditing their portfolios and ensuring the balance sheet is optimized to support the organization's future development strategy. 

Let's Bizzi Learn about the above issues through this article! 

3 strategies for uncertainty

Build resilience and flexibility with scenario analysis

The business landscape in the current global economy is still difficult to predict. Not only are there significant differences between countries, but even within each economy, sectors do not grow at the same pace. The combination of persistently high inflation, higher interest rates and tight credit conditions is reducing private sector purchasing power.

Interest rate-sensitive sectors, such as housing and banking, have experienced a significant amount of stress. While generally healthy consumer and business balance sheets have provided some cushion to date, we cannot underestimate the risks from non-linear spending and investment decisions that could can lead to economic recession.

CFOs looking to deploy agile strategies amid this increased uncertainty may consider developing forecasting and scenario analysis frameworks to inform consistent and objective decision-making, backed by data insights.

Economic forecasts based on powerful models and comprehensive scenario analysis help CFOs make informed strategic decisions. Thereby, you can quickly find new growth opportunities, adjust pricing strategies, manage talent costs and provide financial advice for new products or services in line with market changes. .

CFOs can place emphasis on a dynamic and adaptive strategy. As such, simply pulling out the playbook from the 2008-2009 financial crisis or the pandemic shock will not be enough to navigate today's unique business environment. By leveraging macroeconomic forecasting and scenario planning, CFOs can effectively manage risk, communicate financial performance to stakeholders, and help the organization gain a competitive advantage in the future. volatile economic and financial market environment.

CFOs can leverage these macroeconomic insights in two distinct ways.

They can build financial strength and resilience by ensuring they are ready to adapt quickly to changes in inflationary dynamics, higher and volatile capital costs, and changing labor market dynamics. Financial market volatility and volatility increased.

CFOs with a realistic understanding of the risks and opportunities associated with various potential economic developments can easily manage the strategic narrative for their business and communicate it to the wider public. than.

Perform regular portfolio reviews

CFOs need to regularly evaluate their current business or product portfolio to identify strengths and weaknesses, as well as opportunities to improve, refine or reposition the portfolio. This assessment needs to be done objectively to provide a basis for decision making.

However, CFOs also need to consider the following factors before embarking on portfolio evaluation: 

• Financial performance of each category, including revenue, costs, profits, cash flow and return on investment
• Market demand for each category includes market development and competitive trends. 
• Industry trends that may impact each category include industry growth and innovation
• Other factors include the company's strategic goals, environmental, social and governance (ESG) factors.

In addition to the initial assessment, CFOs should also assess broader risks to the business and challenge the status quo by examining the expected impact of decisions on strategic portfolios and cost allocations. stranded, financing needs, quotas, performance improvements, stakeholder analysis, talent and redeployment of proceeds.

In addition to conceptualizing, planning, and executing strategic portfolio decisions, CFOs also need to help build and communicate a clear and effective communications strategy to internal and external stakeholders. outside. By performing regular and robust portfolio reviews, CFOs can react quickly to drive long-term value creation for the business in today's volatile business environment.

Some examples of how CFOs can use the results of portfolio assessments to make decisions: 

• A company may decide to invest more in portfolios that perform well and cut back on investments in portfolios that perform poorly.
• A company may decide to restructure categories to improve efficiency.
• A company may decide to sell categories that no longer fit its strategy.

Optimize your balance sheet to support your future growth strategy

CFOs who improve their balance sheets and establish flexible capital allocation strategies can easily shift capital to meet fluctuating needs, find attractive financing options, and plan early for M&A. and minimize risks.

Tighter financing pressures and higher credit standards have led business executives to focus investments on segments with the strongest growth opportunities. Capital costs and interest rates are unlikely to decrease rapidly in the near future. Therefore, CFOs may need to continue to focus on cash conservation and generation.

CFOs may need to regularly review working capital trends, cost control through automation and process improvement, appropriate tax regulations, and go-to-market tactics. It is necessary to introduce new perspectives and challenge and reconsider previous ideas. With the inherent efficiency of internal cash flow, CFOs can aggressively attack market opportunities to drive growth and deliver investment returns.

If external capital is needed to support business goals and growth aspirations, developing an independent perspective on funding options is critical in volatile markets. CFOs can ensure that capital structure supports and enhances strategic goals rather than hinders or constrains them. It is equally important to promote competition among financial providers and maintain multiple pathways to success.

Options allow for effective maneuvering if market volatility worsens. Business leaders are still waiting for more reliable signs of a recession or recovery, with these likely to vary by sector.

In this volatile environment, CFOs prioritize forecasting and scenario analysis, maintain flexible capital allocation, and enhance existing portfolios that can utilize alternative financing options when necessary. . At the same time, reallocate capital effectively and prepare for inevitable macroeconomic and financial market fluctuations.

Evaluate the effectiveness of strategies

To measure the effectiveness of these strategies, CFOs need to identify appropriate key performance indicators (KPIs). These KPIs should be selected based on the strategy's goals and their measurability.

CFOs can use financial metrics, such as return on equity ratio (ROE), debt-to-equity ratio (D/E), and free cash flow-to-sales ratio. revenue (FCF/Revenue).

CFOs can also use non-financial metrics, such as customer satisfaction and employee retention.

For strategies that build resilience and flexibility with scenario analysis, KPIs may include:

• Debt to equity ratio: This ratio shows how much debt a company has relative to its equity. A high debt ratio means the company is more at risk if economic fluctuations occur.
• Free cash flow: Free cash flow is the amount of money a company can use to pay down debt, invest in growth opportunities, or pay dividends to shareholders. A strong free cash flow gives the company more flexibility in dealing with economic challenges.
• Liquidity coefficient: Liquidity ratio is a measure of a company's ability to meet its short-term financial obligations. A high liquidity ratio shows that the company has plenty of cash and cash equivalents to meet its obligations.

For a strategy that conducts regular portfolio reviews, KPIs may include:

• Return on investment (ROI): ROI is a measure of the effectiveness of a company's investments. A high ROI shows that the company is generating high returns on its investments.
• Increase the revenue: Revenue growth is a measure of a company's overall performance. A strong revenue growth shows that the company is growing and successful.
• Loyal customers: Loyal customers are customers who continue to buy products or use a company's services. Loyal customers are a valuable asset to a company because they are more likely to continue spending in the future.

For balance sheet optimization strategies to support future growth strategies, KPIs may include:

• Financial leverage ratio: This ratio indicates how dependent a company is on debt to fund its operations. A high financial leverage ratio means the company is more at risk if economic fluctuations occur.
• Free cash flow: Free cash flow is the amount of money a company can use to pay down debt, invest in growth opportunities, or pay dividends to shareholders. A strong free cash flow gives the company more flexibility to respond to economic challenges and fund growth opportunities.
• Liquidity coefficient: Liquidity ratio is a measure of a company's ability to meet its short-term financial obligations. A high liquidity ratio shows that the company has plenty of cash and cash equivalents to meet its obligations.

CFOs need to monitor these KPIs regularly to ensure that their strategies are achieving the desired results. If KPIs are not improving, CFOs need to consider adjusting strategies or taking other actions to improve efficiency.

In addition, CFOs can also use data analytics tools to better understand the effectiveness of strategies. These tools can help CFOs identify trends and correlations that are invisible to the naked eye.

Measuring the effectiveness of strategies is an important part of the management process. By tracking KPIs and using data analytics tools, CFOs can ensure that they are using company resources most effectively.

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