CFO challenge focus: Market and industry volatility

Heraclitus (c. 535 BC – 475 BC) wasn’t wrong with his assertion that the only constant in life is change. In just the last three years, the world has seen events like the global pandemic, the supply chain crisis, and “The Great Resignation” change the course of history. Fast forward to today, global geopolitical tensions are still intensifying, and technology continues to evolve at lightning speed. In the face of these shifts, change might feel like the one thing we can predict with any certainty.

Chief Financial Officers are at the forefront of steering their businesses through this sea of change. As trusted advisors to the C-Suite and mitigators of risk, CFOs are expected to both protect against the ravages of market volatility and invest for growth.

We have previously written about the challenges posed by macroeconomic volatility but viewed from a market and industry perspective, the financial topology is no less turbulent. Stock and capital market volatility have flowed naturally from macroeconomic impacts, compounded by central bank interest rate hikes and spiralling inflation rates.

Dramatic industry volatility was also seen as a result of the pandemic lockdowns. Consider the tech industry for example, remote working created a surge in demands for technology to connect and collaborate from home. This boom is now over, with tech companies projecting a decline in revenues as a result. Hospitality and entertainment saw the inverse, with venues shut and revenues cut off for months at a time, followed by a return to normality in 2022.

With a global trend towards inflation and some countries teetering on the brink of recession, it looks likely that the next few years will see consumer spending drop, impacting businesses across the board. As prices rise and demand for products and services drop, industry and market volatility may not calm down to pre-pandemic levels for some years yet.

As a CFO, this volatility presents fundamental challenges across the source-to-settle continuum. Supply chain pricing fluctuations and changes in customer demand, as well as customers’ ability to pay, place pressure on the cash conversion cycle and uncertainty in cash flow forecasting.

Mitigating risk and financing growth initiatives in these challenging times requires finance leaders to adopt a range of financial strategies that may not have seemed relevant at the turn of the decade. Let’s explore some of the most popular approaches to dealing with volatility.

• • Lock in pricing through procurement contracts that offset inflationary rises. Strategic sourcing and spend analysis can help identify where the biggest risk and gains lie.
  • Conduct a cash flow analysis to assess your working capital and then establish rolling forecasts to help you dynamically adapt to market and economic changes.
  • Liberate working capital by fixing DSO at a lower number of days and prevent exposure to delays in payment timeframes.
  • Maximize cash on hand by financing debt at favorable fixed rates now so businesses are able to access money without the risk of higher costs in the future.
  • Know your liquidity options by lining up capital sources before you need to access funding, to ensure you are better positioned to get favorable terms.

The rise of managed services in tackling volatility

The role of the CFO has brought about much change in recent years, with digital transformation across the finance function, from automation to real-time analytics facilitating faster and better-informed decision-making and profitability improvements to the bottom line. This improved agility and insight is vital for timely reactions to volatile market conditions.

Today’s CFOs are using digital technologies for value creation through changes to operating models to improve business performance, but investment in new technologies isn’t enough on its own. Investment in skills sets and retention of these needs to run in parallel with technology investments. As a result of this, many businesses look to managed service providers, including financial service providers, to support their digitalization agendas for competitive advantage.

Respondents to a PYMNTS.com research into CFO spending on digitization – Digitization Strategies: How CFOs Are Prioritizing Digital Payments To Maximize Efficiency – revealed the actions that CFOs and finance teams take to improve cash management and financial operations. One of the key takeaways from this is the increase in spending on both AR and AP processes, as well as the associated areas of DSO and DPO. This insight can be given further context when considering findings from the Forrester study commissioned by Corcentric – The Future of Finance: 360-Degree Cash Flow Visibility and Control – where 85% of companies surveyed are engaging or plan to engage a managed service provider to guide their efforts to attain holistic cash forecasting across AR and AP.

Finance executives with a top priority for improved financial management and financial reporting in the short term can use the managed service provider business model to accelerate time to value by allowing these business partners to own cybersecurity, risk management, technology development, and integration. Therefore, allowing finance executives to focus on strategic decisions and set the benchmarks for managed service providers to hit.

Going back to the aforementioned survey with PYMNTS.com, CFOs were also asked for their input on how current economic conditions — including volatility in capital markets — is likely to affect their financial performance and well-being in the years ahead. The response was quite clear-cut:

Four out of five CFOs plan to continue investing in digitized technology for their financial operations. For the majority, concerns about economic uncertainty are key to their investment decisions.

If Heraclitus really was right and change is the only constant, it makes sense to empower your business to embrace volatility in the long run.

Talk to Corcentric to find out how our winning combination of managed services, technology, and finance can significantly reduce your exposure to risk from volatility across the source-to-settle continuum, from locking in favorable pricing through procurement to fixing DSO as low as 15 days to liberate working capital from your receivables ledger. Contact us to get started.