We live in difficult times. Inflation has hit a 40-year high, the stock market is fluctuating wildly and consumer confidence is low. Experts expect several quarters of negative growth and higher unemployment rates. For many businesses, survival is not a certainty.
In a softening economy, businesses need to be especially vigilant in managing their finances, reducing costs and conserving cash wherever possible. However, that doesn't mean you should try to cut costs indiscriminately. The savviest organizations lean on the data to determine when to trim and when to ramp up spending to capitalize on new opportunities.
One in-demand opportunity that businesses are jumping on is Finance-as-a-Service. FaaS can replace traditional approaches to your accounting strategy, giving you access to the right expertise, at the right level, at the right time, with a model that can shift with unprecedented speed and scale.
Here are five ways in which FaaS can help your business weather an economic downturn.
We learned from previous slowdowns that a surprisingly high number of companies continue to build their budgets and cash flow projections on the assumption that they will return rapidly to previous performance. They may or they may not. But one thing is certain – it’s important to critically challenge your assumptions on performance to ensure you are prepared for the months ahead.
FaaS can give you that critical edge. Using the as-a-service model, you’re given access to a consulting CFO whenever you need one to serve as a confidential sounding board and a neutral voice in the room. Your CFO can take a critical look at your business and ask uncomfortable questions like:
They can even be the fall guy for unpopular but necessary decisions, allowing your executive team to sustain existing internal relationships while still making the tough calls.
In an economic downturn, businesses need to be extra vigilant about managing their cash flow. This means having a clear understanding of what's coming in and going out, daily if possible. It also means having a strong handle on your relationships so you're not extending terms to customers beyond what is prudent, are prioritizing which vendors should be paid more slowly (or quickly), and are well placed to survive a dramatic uptick in nonpayment.
FaaS brings both tech and team to the table. The tech pulls all your information together and gives a real-time view of your cash flow, so you can access your financial position at any given moment. The team is a cross-functional task force of accountants, financial planning and analysis experts, AP/AR specialists and other specialists. They act as your war room to examine cash flow-related mechanisms and help you make informed decisions about where to allocate resources. These insights can give you a competitive advantage over others that are making off-the-cuff or reactive decisions throughout the downturn.
What's more, your FaaS team is built to be nimble. They can rapidly bring in the right specialist and adjust their focus as new information arises or priorities change on a dime — something that a conventional outsourced accounting service cannot do.
In uncertain times, businesses need to be able to adapt their forecasting models on the fly. This means having a flexible system in place that can anticipate the short and long-term effects on your organization and accommodate different scenarios and "what if" planning.
This is an area where FaaS shines. Unlike regular outsourced accounting services, which are fundamentally about recording the past, FaaS is focused on planning for the future. Seasoned FP&A specialists can utilize current financial data and industry knowledge to simulate and plan for a variety of possibilities that your company may encounter in the future months and years. These plans might assist in decision-making about cutbacks, right-sizing the workforce, and when to make planned business investments. Business leaders can use these projections to better position the businesses ahead of economic shocks.
Many companies choose to outsource their entire finance function to a FaaS provider like Ventura. This can be especially helpful if you don't have the internal resources or expertise to build an agile forecast model and steer the ship to maintain it long-term.
A FaaS provider can help you identify inefficiencies and process improvements in your organization. They will work with you to design and implement solutions that can help improve your bottom line. In some cases, these solutions may be as simple as automating manual processes or implementing new accounting software. In other cases, they may require more complex changes such as redesigning your organizational structure or changing the way you do business.
Operational improvement is not one job but many, and it's not often possible to find a role in one person. FaaS can give you two or three people to fill the need, augmenting the skills you already have in your finance team.
For every company that's entering survival mode, there's another that's using the downturn as an opportunity to seize market share. To do this, you need to have a clear understanding of your financial position and be able to make informed decisions about where to allocate resources.
With the full range of financial specialists on hand to assist you, FaaS is designed to support a range of strategic initiatives whatever your situation. Instead of just keeping the books, we can help you orchestrate funding, recover receivables, extract value from suppliers, streamline investments, reevaluate your portfolio, develop counter-cyclical approaches to R&D, and evaluate acquisition targets so you're ready to pounce when the time is right – these are just some of the things we do.
You won't overpay for services either, as we put the right people in the right roles. You only pay for the level of assistance you need, when you need it. You're not paying an inflated fee for a CFO you're not using, for example. The ability to save costs is another way that FaaS can help you weather the storm.
If you're feeling the effects of the current economic climate, or are concerned about what the future may hold, now is the time to consider how the FaaS model can help you thrive. By refocusing on a playbook of best practices, you can minimize expenses, optimize profits, and continue to perform well in every economic climate.
There is no getting around it: a full-time, in-house CFO is a prohibitively expensive resource for most small and early-stage businesses. So the founder assumes responsibility for managing the company’s strategic financial challenges, and a finance manager (or external bookkeeping firm) keeps the IRS happy as well as getting the invoices issued and the bills paid.
At some point, though, the business will outgrow these arrangements and need a deeper financial perspective. That’s where a virtual CFO comes in.
But what is a virtual CFO? Why do you need one? And how do you find one that’s right for your business? Read on to find out.
For those who don’t know, a virtual CFO is a senior financial executive who offers strategic financial guidance to businesses. They work as an external adviser, usually on a part-time or time-limited basis, and they work virtually – meaning they operate outside your office, interacting through phone calls and technology. A virtual CFO offers exactly the same support as a conventional chief finance officer, but you won’t need to hire them as a regular employee.
As for what they do, this actually is not a simple question to answer. The role of the CFO will adapt to whatever growth stage your business is at, and whatever challenges it is facing. With access to accounting automation tools, the role is less about number crunching and more about looking at strategies, uncovering potential, and translating the numbers so that you can understand the story. Broadly, their job is to help you make the choices that will lead to greater profitability.
For a startup or SME, this may not warrant a full-time role. A virtual part-time arrangement gives you all the benefits of a senior strategic financial resource without the full-time overhead. Not only is it more affordable, but you can choose the exact level of strategic support your business needs.
The trigger for investing in a virtual CFO will vary from business to business. Generally, most companies will start to explore this option when they hit one or more of the following problems:
Lack of strategic financial management expertise – either there is no one in the business who can fulfil this role, or trying to manage the finances is preventing you from doing what you do best – growing the business. A virtual CFO provides the financial insight to help you steer the ship towards important goals.
Poor cash flow – poor cash flow can quickly bring a business to its knees, especially in the early revenue-generating years. A virtual CFO can develop a cash flow management strategy to stabilize the situation and make sure the cash runway is as long as possible.
Can’t see the wood for the trees – A virtual CFO is a fresh pair of eyes to see what you are too close to the business to see. They will not be caught up in the day-to-day operations like you are, and can be laser focused on the priorities that keep you awake at night.
The business needs investment – Raising a round of funding takes a lot more time than most business owners expect; sometimes access to a quality CFO is a prerequisite. A virtual CFO can guide you towards the most appropriate type of funding, prepare the financial information, and steer the business through due diligence and beyond.
Poor management reporting – For fast-growing companies, a key challenge is structuring the chart of accounts in a way that puts meaningful information at your fingertips now, and lays the groundwork for critical information delivery in the future.
There’s a special project on the horizon – Expanding into new territories, a capital raise, merging, acquiring another company or selling the business – a virtual CFO can support your deal negotiations, guide you through the unknowns and stay with you until the dust has settled.
First and foremost, don’t let the term ‘virtual’ put you off. Despite the distant and robotic-sounding job title, a virtual CFO is very much a human element in your business. You will be working with a trusted adviser – someone who will act as a combination of counsellor, sounding board, business coach and strategic consultant to your company. That means you need to trust and respect your CFO.
Beyond that, a virtual CFO needs a range of qualities to be effective and outstanding. When reviewing your options, look for someone who:
It depends whether you want to hire a CFO as a standalone option, or you want full-service financial expertise. For the first option, you can source independent CFOs through the usual freelancing platforms, or speak to a staffing agency that specializes in placing part-time CFOs.
For the second option, our Finance-as-a-Service model is ideal. FaaS gives you access to a range of financial experts, on a cost-effective subscription basis according to the growth stage and needs of your business provides. If you have a finance team already, we can work with them on your accounts as well as providing more in-depth, high-end CFO strategy and management reporting. If you don’t have a team or a bookkeeper in place, we can take care of this while bringing you all the benefits of a CFO and a cloud-based approach to your accounting.
The takeaway is this: if your business needs to cut waste, deploy cash efficiently, or is on the brink of a scale-up, you need the right foundations to build on. A big part of this is about creating a viable financial model that has the people, tech stack, efficiencies, and systemized processes needed to meet your long-term objectives. A virtual CFO is part of this picture – bringing you clarity of understanding, far more timely advice, and strategic guidance to help you step ahead of other businesses in your industry.
One of the first things you learn in business school is that a detailed and realistic budget is one of the most important tools for running a business. This document is your North Star, providing the guidance you need to act with the resources available. Without budget planning, it can feel like you’re shooting in the dark.
In recent years, however, budgeting has lost its luster for a growing number of businesses. According to a 2017 survey by PWC, the majority of companies reported either ‘no link’ or a ‘weak link’ between the corporate strategy and the budget processes, suggesting there’s a huge disconnect between what a company needs its budget to achieve (strategy), and what it’s actually achieving (value). Managers also complained that completing an annual budget took too long and was too expensive. These are just some of the reasons why companies like Unilever have been abandoning their annual budgets, with no tears.
Now, the pendulum is swinging back in favor of rigorous budgeting. After months of improvising through the COVID pandemic, business leaders are recognizing that they need real budgets—and a much better budgeting process—to guide them through the coming year. Call it a sign of the times, literally.
With that in mind, here are three strategies to help you budget more flexibly and navigate through fast-changing times.
Most budgets use last year’s budget as a base, with adjustments built around what is needed for the upcoming period. Each department reviews its annual expenditures, and this sets the tone for their funding in the next budget. This is a quick and cost-effective way to build a budget—but sometimes it is necessary to take a step back and look at the key drivers for your business.
Especially in unpredictable economies, where both your spending activities and the reactions of competitors are changing, it’s worth performing a back-to-basics analysis of the products and markets that drive the company in order to create closer links between strategy and operations. The extreme method here is called zero-based budgeting. With this technique, every single line item must be justified for each new period, and every function within the business is analyzed for its needs and costs. Essentially, you start each period with a clean sheet.
Companies often balk at such a drastic method because it is so time consuming. But in the wake of COVID, the question facing leaders may not be how much to spend, but rather the more fundamental choice of where to spend. For instance, a company may cut its travel and entertainment budget (or even its real estate budget) to zero and reallocate the money to working-from-home.
You don’t have to go to the extremes of zero-based budgeting. But refocusing on your key business drivers is a chance to reset and stress-test your assumptions against what really matters. This can result in a much better prioritization of projects, better metrics, and a functional budget that’s much more in sync with business strategy.
Collating and syncing information across all the departments and cost centers in your business can be a monumental task. If you’re still relying on a proliferation of ad hoc reports and spreadsheets for your business insights, then you’re going to struggle. Even small errors can have a major impact on the allocation of resources in the budget.
Cloud-based corporate performance management (CPM) software can go a long way in making the budgeting process less time consuming and will improve your accuracy significantly. CPM tools are designed to integrate all your financial and non-financial data into a single version of the truth, and in real time, allowing for much more realistic budgeting than manual options. Doing the heavy lifting on the front end through tech means less work during subsequent budgets and can reduce budget variance dramatically.
Expert financial planning and analysis from an experienced advisor, combined with the latest digital tools, is the gold standard for making high-stakes budgeting and forecasting decisions. If you’re hiring an outsourced accounting team, make sure they offer FP&A.
Do you create your budgets before the start of each financial year, based on the numbers and economic situation at the time? Many businesses do this. But if there’s one thing 2020 has taught us, it’s that rigid budgets aren't very helpful. Things can change very quickly and continuing to base decisions on the ‘best guesses’ you made 6 or 12 months ago can lead to some faulty decision making that can be harmful to your business.
The best way to keep your budgeting flexible is to implement rolling forecasts based on actual results and revenues, not what a department head thought would happen a couple of quarters ago. With a rolling process, forecasts are made each quarter to improve the accuracy of your projections as they’re melded to these latest trends. The result is a better management of resources as you stay on top of any changes, good or bad, that could have consequences for your business.
Rolling forecasts also allow you to stress test many scenarios and pivot as needed based on any new data presented. So, all decisions are based on what's happening now and not on what happened the previous year.
The disruptions of COVID-19 are causing businesses to fundamentally rethink parts of their budget and the processes they use to create them. But it’s also an opportunity to look at expenses with fresh eyes, and with a tight focus on strategy. In our experience, this can only lead to more flexibility and control for your business.