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How CFOs can create long-term financial stability

  • August 17, 2020 by hamiltontharp
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CFOs are playing more pivotal roles in modern corporations than ever before, and the impact of the COVID-19 pandemic is shedding light on how CFOs can impact short and long-term financial stability. While growth is frequently considered the ultimate goal for a business, economic downturns like the one created by the pandemic show us that CFOs with eyes on long-term financial stability, and not just on growth, will be able to better help their organizations weather the storms of an economic crisis.   

A CFO’s strategy for long-term success should incorporate thorough cost management protocols, a comprehensive and holistic approach to increasing value, and stewardship and championship of the bigger picture. Here’s what that means. 

How CFOs impact direct costs 

As the financial head of the organization, the CFO naturally serves as the rightful guardian of business’s expenses. It’s through these direct costs that CFOs can implement stronger internal controls and recover lost revenue for long-term benefit. A CFO can improve long-term viability by analyzing:  

Cost of Goods Sold (COGS) – COGS are a key area for reduction as they represent the largest operating expense for the business. Depending on the industry, these costs can be complex, and the biggest expense can come in the form of purchased components and materials. CFOs can optimize this area with help from sourcing programs that consolidate costs by choosing more goal-aligned suppliers. 

Indirect Taxes – Indirect taxes are aoften-overlooked area of opportunity for many businesses. These taxes can be found in areas like R&D, procurement, labor, utilities, and manufacturing and can represent 25% of personnel expenses. Making indirect taxes a regular component of your tax strategy allows you to reduce costs in this area by 10-20% with quick realization rates. Bonus: “Look-back” provisions can help you save even more. 

Real Estate – With real estate, take a holistic inventory of your business and consolidate where possible. The COVID-19 pandemic showed us how much can be done at home or in fewer locations. Consider whether you need all your locations, your facility management costs, and negotiating your contractsAlso, plan for a future workforce that may expect a more flexible work-from-home situation. Just because you‘re growing doesn’t mean you will actually need all that extra space. 

Product Optimization – If you haven’t invested and implemented benchmarking and KPIs for your products, you need to now. Data and analytics are key to understanding how you can improve margins and grow profit. With product rationalization, you can drill down into what is really profitable and make decisions on what to cut and what to expand. Look at customer buying habits and your company overhead and determine what’s really worth keeping on the shelves.  

Labor – The key to optimizing labor costs lies within efficiency. Do you have the right people in the right seats? Can current employees be retrained to fill open needs? Consider where you can use automation and outsourcing to save on salaries/benefits and overhead.  

Working Capital – Assessing your working capital for cost efficiency involves taking a look at:  

  • Cash flow – Know that cash in the bank doesn’t equal good cash flowUnderstanding cash flow is key to making short and long-term projections through times of prosperity and crisis. 
  • Supplier/vendor relationships  Reconsider and negotiate vendor/supplier terms where necessary while preserving valuable relationships.  
  • Accounts receivable – Your AR should have set policies for payment plans/terms, follow up procedures, and multiple available payment methods. 
  • Accounts payable  Assess your AP for opportunities to free up cash flow such as automating electronic payments and diligently checking for discrepancies. 

 How CFOs impact value 

CFOs not only help to optimize costs, but they are also integral in increasing company value because of their instinct and insight into the finances, the business, and how everything relates. Value is the ultimate determinate for long-term success in a business as it is the final measurement taken into consideration at the time of succession or buy-out. And, as any good business valuation professional will tell you, the business is not worth what you think it’s worth. The consensus among international accounting organizations is that value is defined by your customers/stakeholders and created and sustained through the responsible management of your organization’s tangible and intangible assets, resources, and relationships.: 

One can clearly see how the areas of impact for CFOs listed in the costs section above directly relates to value creation in a business and the management of financial resources. The CFO is the gatekeeper for value creation and thus long-term viability.  

How CFOs champion the big picture 

Because the CFO is intimately connected to the financial health of the organization, they are also the eyes of the market. They see the trends and shifts directly in the numbers and can advocate for the right kinds of measurements to make long-term decisionsCFOs should take an active role in their organization’s strategic planning process and use their knowledge to translate the ebbs and flows of the business into scalable growth.  

Now more than ever, CFOs are at the forefront of business viability and growth. Their knowledge is invaluable in times of crisis and prosperity, and their voice and action are essential for long-term financial stability.  

Our outsourced CFO services can help you establish and maintain a long-term financial strategy for your business. Contact us for more information. 

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