Financial metrics to watch, analytics you need, and how to prioritize your efforts.

The impact of this pandemic has been wildly different from business to business. Some companies have performed better than ever, while others have experienced declines in revenue, and some have had to close their doors completely. Although industry, geography, and other factors have contributed to how these companies have fared, inherent financial resilience or “readiness” needs to be explored and strengthened in all cases.

As a CFO, I tend to be the conservative one in the group, making sure our processes are automated where possible, our cash flow is good, and our reserves are adequate. Readiness is a constant practice that needs to be in place for the next downturn, whether it be pandemic, economic, or industry/trend related. Businesses need to “hope for the best but prepare for the worst” to mitigate these downturns.

This preparation has another benefit—identifying where and when to spend those reserves is also necessary for company growth.

Four Financial Readiness Factors

Readiness factors will differ between companies but here are some important areas you should focus on:

1) Make sure you have a healthy cash flow: Although many items affect cash flow, Accounts Receivable is a big-ticket item. If your company has Accounts Receivable, you must keep this healthy. Double down on collection efforts and monitor your customers’ outstanding receivables and creditworthiness continually. Consider shortening terms, increasing your frequency of invoicing and do not let anything delay getting those invoices sent. It goes without saying that you should use email for invoicing and electronic payments instead of checks to speed up the process.

2) Buffer reserves with good banking relationships: Every company should begin with at least one solid banking relationship.  Not just a name, but a relationship with someone who understands your business and financials and can act quickly to get you additional funds if needed. A line or multiple lines of credit should already be established and available if possible. Obtaining funds over and above lines of credit can be a fluid process. Improving financial situations or new, promising opportunities can open up access to resources that were not previously available.

3) Think creatively about how to run lean: In crisis mode, certainly the CFO’s first response is to stop the bleeding by cutting discretionary spending, applying for government programs, and placing focus on nurturing existing relationships and customers. Companies should take it a step further by analyzing internal processes and their effect on profitability. For us, we prioritized getting our data infrastructure and systems firmly established in the cloud which has provided our company great flexibility and indirect cost savings.  We were able to seamlessly support our remote workforce with full faith in all our critical systems, allowing us to cut spending in areas related to office expenditures (a large item for us) which helps offset any revenue declines in a painless manner.

Everything You Need to Know to Migrate Your Data and Analytics Workloads to the Cloud

4) Use data and analytics to monitor and predict: Strong analytics will not only help you understand vast amounts of financial data; it equips you with the knowledge you need to quickly react, adapt, and proactively plan for the future. Here’s how to get the most from your financial analytics:

  • Set up self-service financial analytics: While financial analysis is often done in Excel, a modern BI tool incorporates disparate finance and accounting data so Finance teams can uncover hidden insights buried in spreadsheets. A BI tool empowers your Finance team to spend less time manually compiling data (and fixing errors) and more time on analyzing, budgeting, planning, and forecasting.
  • Know your basic metrics and KPIs: Know what metrics and trends are important to track and quickly reference. As a consulting organization, we need the ability to quickly monitor items such as a % change in utilization, a dollar change in average rate, an additional billing day in the cycle, or benefit of adding a consultant. We need the ability to measure these metrics continually, so if a change occurs we can quickly adapt and remain stable.
  • Analyze the cause of backlog revenue:  In our business, backlog revenue (revenue sold but not delivered or recognized) is low hanging fruit that can be shifted to the P&L. While this metric can be tracked in Excel, a BI tool allows you to easily measure and analyze that metric against different dimensions, such as project type, available consultant skillsets, or amount. Knowing these dimensions can help you prioritize where best to begin recognizing this asset. For example, if a large amount in backlog is related to data strategy work, the consultants with those skills are available, and that customer is ready to move forward, that work can begin immediately.
  • Do more accurate cash flow forecasting: Moving from manual to automated calculations on incoming accounts receivables and outgoing accounts payable cash provides us the flexibility to do weekly cash forecasting. We are also able to easily adjust the weekly amounts if due dates are not met.
  • Analyze what-if scenarios with machine learning: There’s great potential with applying advanced analytics to your financial data, such as building machine learning models that perform what-if analysis. Explore and predict possible outcomes when one or more measures change, like seeing what cash flow would look like with shortened terms and/or increased invoice frequency. A word of caution, though – data science and machine learning requires the right preparation and can be costly if not done correctly.

Machine learning helped this company improve operations and customer service

Prioritize Activities that Will Improve Your Financial Readiness

When deciding priorities, first examine what affects your cash flow significantly, and then do the same with your income. Solicit input from stakeholders from the respective business functions about where they feel efficiencies can be gained. They are after all the experts in their areas. At this point you will likely have a list of initiatives that will help you become more resilient.

Because data and analytics is the backbone for measuring your success, next assess if you have the data you need for each initiative. Rate the expected benefit of each.  Start researching in the area where supporting data exists and the expected benefit is high. For example, with customer profitability, data may be accessible as to who your largest customers are and what your best products/services are, but combining those datasets may give you additional insight. Cutting a less profitable line of business for example, may be a mistake if it is desirable to your best customer. Data must be viewed in context with related data. Understanding which initiative may significantly affect income or cash flow (business benefit) and having the data available, gives you a great place to start.

Tracy Stanard Tracy is Analytics8’s CFO and has 20+ years of experience managing accounting and finance. Tracy is constantly working to identify opportunities for accelerated growth, streamlining, and making productivity improvements. In the summer, she loves to go boating on Lake Michigan.
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