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Lessons Learned for the Finance Function from Past Crises

Lessons Learned for the Finance Function from Past Crises
Risk Management and Liquidity Are Crucial Right Now

It has been said that those who don’t learn from history are doomed to repeat it. While COVID-19 is undeniably a moment of crisis for many organizations, the good news is that the finance function can leverage a range of lessons learned from past crises like the 2008 recession. These events have taught finance leaders a lot about the importance of liquidity, the benefits of risk mitigation, and the value of being poised to take advantage of new business opportunities.

As part of its mission to find and disseminate best practices, APQC conducts both primary and secondary research to help surface best practices for the finance function and help organizations improve their finance processes. To that end, we recently scanned the current advice being offered to finance leaders, along with lessons learned from past crises, to understand the role of finance in helping organizations navigate through the COVID-19 crisis and beyond. We have grouped this advice into three themes: liquidity, risk, and innovation. 

LIQUIDITY
Organizations are scrambling for liquidity in the midst of COVID-19, much as they did in previous crises. Some of the strategies and lessons that organizations have leveraged successfully to boost cash reserves and control costs include:

  • Track key liquidity measures, such as DPO and DSO, and modify as appropriate. DPO reflects the average number of days it takes an organization to pay its creditors and is directly linked to liquidity. Feeling pressure to improve their organizations’ working capital positions in 2008, for example, many organizations began extending their DPO as long as possible. Organizations paired this move with a decrease in their DSO (which measures the average number of days it takes organizations to collect on their invoices) to bring cash in more quickly. CFOs will need to weigh the risks of extending DPO and aggressively moving to collect invoices for a better DSO: The former can be damaging to supplier relationships (and lead to credit restrictions or higher prices), while the latter can damage customer relationships if the customer feels threatened by an overly aggressive collections effort.

Another key liquidity metric that organizations should monitor is Days Cash on Hand, which measures the number of days that an organization can continue paying its operating expenses with the amount of cash currently available. If sales revenue suddenly dried up or an unexpected catastrophe interrupted the business, organizations with more cash on hand will be able to keep the business running longer without incurring additional debt or having to raise additional funds. This liquidity metric is a valuable one for any CFO, especially those in a moderate-to-high expense environment.

One area in which finance experts are not recommending cost cutting is digital transformation, including automation and digitization projects. These initiatives should remain ongoing as much as possible, not only to address the immediate necessity of remote work, but to streamline and optimize processes so an organization can do more with less. Organizations that embraced digital transformation before COVID-19 are reaping the benefits now, and organizations with initiatives currently underway are making sound investments in their future. Finance leaders should be championing these efforts. McKinsey writes that "the finance team's use of digitization to help the company manage the crisis should not be considered a onetime event...The CFO and finance team should take a leadership position in advocating for the use of digitization across the organization, long after the crisis has passed."

Some finance experts also recommend setting up a dedicated team to manage cash reserves, cost control, and balance sheets as an organization navigates an economic downturn. This "cash war room" is a cross-functional task force that includes members of the finance function along with the organization’s sales, supply chain, production, and business management functions. The cash war room should monitor and manage payment flows, operating profitability, investments, and funding activities to prioritize payments and impose reporting metrics to track liquidity in real time.  

  • Prepare an asset liquidation schedule and an inventory of financial mobility resources. Finally, organizations need to understand the assets from which they can draw for greater liquidity as needed. An asset liquidation schedule lists the most liquid unencumbered assets, their expected value, and the time it will take to convert them to cash, while an inventory of financial mobility resources articulates “the full range of alternatives open to a business in meeting an unexpected deficit in funds flows. The resources will include instant and negotiable reserves, a reallocation of certain budgeted flows, and the liquidation of idle and earning assets.” Each organization will need to decide how large its reserve of these resources should be—The uncertainty posed by crisis situations suggests that it may be prudent to retain some resources in order to respond to new circumstances with greater agility. 

RISK MITIGATION
Disasters and times of economic downturn like the Gulf War, the September 11 attacks, and the 2008 recession have also taught the finance function important lessons about risk mitigation. One of the most important roles for finance in these situations is developing risk-mitigation strategies by stress-testing the business and financial plans against recession scenarios and making sure that leaders are building and committing to contingency plans. CFOs should also prepare a range of scenarios based on different macroeconomic assumptions, from best to worst-case scenarios, along with action plans that can respond to these scenarios and thresholds that trigger each action plan. In response to previous moments of crisis, leaders have learned to plan for a much wider range of scenarios as they assess their organizations’ disaster response capabilities.

INNOVATION AND FINDING OPPORTUNITY
Finally, it is important not to forget that crisis often brings opportunity. Leading organizations have learned to look beyond core areas of the business to expand their portfolio as a key recession-proofing activity, and find ways to turn crisis into competitive advantage. In previous downturns, some organizations “took a countercyclical approach to capital expenditures, R&D, and advertising: Just when all these were least expensive, companies that had enough money outspent the competition, building strong positions for the day when the economy recovered.”  

Supply chains can also play a role in navigating downturns and crises through demand shaping, a strategy through which an organization leverages price incentives, product substitutions, and other tactics to encourage customers to purchase specific items. As demand spikes significantly for some products and declines precipitously for others during COVID-19, many supply chain organizations will (if they haven’t already) be leveraging this approach just as they have for previous downturns. 

CONCLUSION
While COVID-19 is unprecedented in many ways, lessons learned from past crises and emerging insights from finance experts can help CFOs and other finance leaders think more deeply about their strategy as they work to ensure their organizations’ survival. Any organization will be well-served by applying these lessons as they consider issues of liquidity, risk mitigation, and readiness for new opportunity.

APQC is here to help you navigate through the current crisis and beyond. Our Open Standards Benchmarking® database―including the links above to more information about DPO, DSO, and Days Cash on Hand―can help organizations better understand areas of impact to their finance function in terms of key liquidity measures; how an organization's performance compares to its peers and competitors; and how to better manage performance for an organization’s key measures. In addition to these resources, APQC offers a wide range of finance-related case studies, webinars, white papers, and industry data through its Resource Library. If you haven’t done so already, visit our COVID-19 strategic guidance page, and stay tuned to APQC as a key resource to help your organization work smarter, faster, and with greater confidence.