Leading Through Inflation: New Priorities For Finance And The CFO

More than anything else, the CFO has got to show everyone how the business model needs to change during inflation.

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Cash is king in an inflationary environment, and finance is the keeper of cash. The CFO must understand clearly where the cash is going, ride close herd on receivables and take a proactive role in setting terms for customers. Developing online dashboards to monitor key financial metrics, especially cash on a daily basis, is essential.

It is going to get increasingly difficult to collect receivables. In many companies, this function is delegated to small departments in finance, often staffed by low-level, low-paid employees. In an inflationary period, this is a ticking bomb because, as I said before, collection of receivables in a B2B business is critical—it is the major cash trap for the company. The time is now for the CFO to build a strong department to manage receivables and working capital, led by a talented manager who reports directly to the CFO.

For the CFO, it is also essential that they are communicating constantly, taking initiative to show, persuade and get everyone educated on inflation—including the board—especially how different rates of inflation in the sector may change the conditions of the company. This is the time when the CFO cannot communicate enough: What are the facts? What are the numbers? Where are we advancing, where are we stumbling? They should be measuring how well people throughout the organization—and the board—understand all of this.

They’ve got to lead the development of different scenarios, different remedies, what the options might be in different situations. Meanwhile, they also have to have a handle on daily cash inflow, report what’s happening, manage the balance sheet, not incur too much debt. During a period of rising inflation, debt is a killer.

People may tell you, “We have a low-priced debt, let’s keep it.” But ask yourself, “What is my cash generation capacity in the inflationary period?” If it’s very good, keep the debt. Watch the payment schedule. But if your generation capacities are weakened, then you’ve got a problem and you need to rethink what’s on your books.

Finally, the CFO has got to show how the business model needs to change. A few essentials:

  • The CFO must work closely with sales and marketing on pricing policy to understand how pricing will affect the entire value chain.
  • The CFO must drill down to evaluate customer balance sheets and financial conditions to determine which ones are most likely to falter.
  • The CFO should act as mediator between manufacturing and purchasing and sales and marketing. Help them guard the company against shortages or delays in delivery of supplies, while resisting the urge to build inventory, a sinkhole for cash.
  • The CFO should help ensure that the entire senior management understands the changing priorities when budgets are being set.
  • The CFO must keep the board and CEO informed on a real-time basis of any significant deviations from financial expectations, including such events as customer or supplier defaults.
  • It’s important to be clear that the CFO is not the CEO or the chief operating officer. They’re an advisor. They should not have operating people reporting to them.

How do you know if your CFO is the right CFO for this turn in the road? On the boards where I serve, we’re asking the CFO and the CEO to lay out various scenarios for how the business might operate at various levels of inflation. When they do, look deeply at their assumptions, how they see consumer behavior changing. How will the end-to-end value chain need to change based on these changes? What would they recommend that the company do?

Spend three or four hours with the CFO, asking them to take you through their thinking on these topics. After that, you’ll know if your CFO has the ability to lead in this time or if they don’t.

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