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The balance between control and empowerment

The rising currency volatility, the increase in cash reserves and geopolitical imbalances are posing challenges to CFOs who are otherwise optimistic about the economy

Manoj Adlakha 

The combination of a global financial crisis, economic downturn, increased uncertainty and greater regulation has dramatically expanded the role of the chief financial officer (CFO). The belt-tightening through this phase has taught companies to be disciplined in managing expenses and controlling costs; two factors on which they have complete control. Many companies have successfully taken the most obvious cost-control measures: they’ve reduced payroll expenses and trimmed direct costs and capital expenditures. Operating more leanly than ever, the large-sized companies of the future are looking at ways to manage their indirect expenses aggressively in order to boost profitability.

The fifth annual American Express/ CFO Research Global Business & Spending Monitor is an indicator on the trends to expect in the coming year. The study was conducted amongst finance executives in North America, Europe, Latin America, Asia and Australia, who shared their views on several economic, geo-political and regulatory issues that impact their business and the manner in which they plan to address them. In such a challenging environment, the role of the CFO is not only paramount; it is for them to devise a sustainable strategy for their companies to wade through this phase without getting hurt.

I have come across some seasoned CFOs confessing to the past few years being the toughest in their careers. It is true that the challenges CFOs face are more multidimensional than in the past — they need to face a lot of headwinds on many fronts. But if there has been a silver lining to this difficult period, it may be that the importance of the role of financial executives has been underscored, appreciated and respected. Indeed, those companies that weathered the downturn most successfully undoubtedly had highly resourceful financial leadership at the helm.

Indian finance executives today are confident about meeting their growth targets as stated in the American Express/CFO Research Global Business & Spending Monitor, wherein India-based finance executives (86 per cent) were optimistic about the outlook for economic expansion in their country over the next 12 months and, in addition, three-quarters of India-based survey respondents have set more aggressive growth targets in 2012 than those they had established in 2011, with 91 per cent of the senior finance executives saying they are confident about meeting their growth targets. As the economy recovers, financial executives will be on to their next challenge of fuelling and sustaining growth for their company

Top challenges facing CFOs
Doing more with less is a CFO’s forte who is accustomed to dealing with a constant stream of changes. Finance executives must meet a growing number of complex demands and challenges if their companies are to reach the next level of profitable growth. The global economic environment has required CFOs to use every tool available to guide their companies through business challenges of unprecedented scope.

As per the survey, the usual challenges faced by finance executives revolve around financial risk management, which has only escalated in the wake of the economic events and the geo-political environment, which are driving boards and executives to focus on their organisation’s approach towards risk Operational excellence around core financials has its own perils, but increased concerns over currency exchange rates is posing threats to almost every finance executive at a time when prioritising capital investments is the focus.

Though these issues sound commonplace, many finance organisations struggle with how to effectively identify, fund, implement and measure the results of investments that lead to improved shareholder value. But these fall within the usual work profile of a CFO, who is currently facing challenges from completely new sources.

* Fluctuating exchange rates: The peril of a globalised business model is the increase in currency risk. CFOs identify exchange rate risk as the highest risk to their companies’ balance sheets.

* Regulatory changes: New and fast changing regulations pose a lack of legal clarity, which CFOs grapple with to understand their significance, implementation costs and compliance.

* Volatility in the capital markets: Volatility in the global markets is increasing and is of great concern. In contrast, the valuation of assets is perceived as less of a risk to company balance sheets.

* Restricted financing and credit: Raising finance continues to be a key challenge with the cost of new credit being high, despite availability of credit.

* Varying interest rates: Altering short-and-long-term interest rates play havoc on the planned and unplanned borrowing with many companies working towards restructuring debt owing to interest rate fluctuations.

The CFOs in the study said what’s troubling about the state of the economy is the inability to see a fast emerging silver lining. Yet they are positive about the future of the economy and expect buoyancy to return to business soon. The mood of the CFO signals the changing times and with most of them looking at hiring, expansion and growth the rub down should automatically have a positive impact on the overall economy and business sentiments.

As companies prepare for renewed growth, having an enterprise-wide perspective on process effectiveness may contribute substantially to the overall company performance. Coordinating the many processes that support different business units in different locations can become a daunting challenge. The focus at the moment as per the survey seems to be towards local business opportunities than looking out globally. CFOs are well positioned to contribute to a company’s efforts to improve process effectiveness.

Managing expenses
For most companies the three largest controlled expenses are salaries and benefits (S&B), travel and related entertainment expenses (T&E) and maintenance, repair and operating expenses (MRO). CFOs at many companies have aggressively cut costs by trimming direct expenses and capital expenditures. This leaves with managing indirect expenses, which they are focusing on now. In the wake of the increase in travel and entertainment envisaged by CFOs, the role of expense will be crucial.

There is savings opportunity with direct sourcing. For instance, companies can leverage consolidated T&E spend data during price negotiations with key suppliers. If companies know how their T&E budget is spent, they can optimise spends through preferred suppliers, ensuring they gain access to the most competitive rates possible. Globally and in India, companies have saved over 8-10 per cent of their annual T&E budget through direct sourcing, which is reflected in the bottom line. To maximise savings, Indian companies should develop a strategic travel and entertainment policy based on global best practice recommendations.

* Consolidating and tracking T&E spend: Consolidation of T&E spends through a single payment vehicle provides the with robust supplier-level data that brings full visibility to all business-related expenditure.

* Devising an effective supplier strategy: Consolidated spend data can be used to negotiate discounts or rebates with key suppliers, which can be optimised by reducing the number of suppliers and sourcing through the most competitive supplier.

* Implementing the preferred supplier strategy: Negotiating discounts will result in savings only when the T&E spend is channeled through preferred suppliers. For significant results, a holistic travel policy detailing preferred suppliers, booking and approval processes and enforcement methods should be endorsed and communicated by senior to employees. This should be mandated across the organisation.

* Monitoring and compliance: No strategy can achieve the desired results unless monitored and complied with. Using reporting tools like enhanced MIS, companies can closely monitor adherence to T&E policy.

Though controlling these expenses seem easy, CFOs face severe challenges in achieving savings on indirect expenses, especially in mid-size organisations that are on a fast track growth trajectory. However, enforcing spending policies effectively is essential for efficient expense management, which is a collaborative process between the CFO, the senior and the expense partner. When senior managers lead by example, compliance goes up; this can be communicated within the organisation, which in effect results in better expense

Shifting goalposts
Managing finances in a tough economy has taught new lessons to organisations, which has also resulted in several innovative outcomes and solutions. The complex financial and organisational needs require some hand-holding, resources and infrastructure to live up to their promise. To do so, many companies are closely looking at their effective expense models with external partners and business processes in an effort to provide better access to information for internal decision-making, cost optimisation, financial reporting and regulatory compliance and battling new or emerging risks.

All these measures should see organisations in a good stead to face the new realities of business. As finance executives step up to an expanded and strategic role in their organisations, it is important that they recognise the benefits of analysing spends and not settle for cost savings alone. Savings, on their part, need to be better utilised to fuel growth, with optimum risk and returns.

In this environment, process effectiveness will be the focus, as finance executives begin to consider it as the game changer. How well a company executes its processes-cut wasted effort, streamline data flows and increase communication-can mean the difference between incremental cost improvements in isolated processes and best-in- class process and enterprise-wide financial performance.


The author is vice-president and country head, global corporate payments, India

First Published: Mon, May 21 2012. 00:34 IST
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