CFOs are more worried about 2020 risks than others in the C-Suite: study.

Corporate finance executives are leading the pack in terms of company executives most worried about the magnitude and severity of risks to their organizations in 2020, according to a study by the Enterprise Risk Management Initiative (ERMI) at North Carolina State University and Protiviti.

On a scale of 1-10, with 10 being most concerned, chief financial officers’ impression of risk faced by their companies in the year ahead jumped from last year’s survey, up to 6.5 vs. 6.0 last year, putting them far ahead of their fifth-place slot last year. This is out of seven categories of surveyed executives made up of board members and six types of C-Suite executives.

Dr. Mark Beasley, professor and director of the ERMI, noted that chief audit officers’ assessment of risk also increased noticeably from last year, and chief risk officers bumped up slightly as well to 6.0 from 5.9. Meanwhile, chief executive officers and boards of directors saw their concerns about risk decrease in this year’s study.

The research was co-authored by Dr. Beasley and Ken Thomas, a managing director in Protiviti’s Business Performance Improvement practice. The survey received responses from 825 C-Suite executives and directors in companies across the globe.

The top five concerns for CFOs were: 

• Economic conditions. CFOs saw economic conditions starting to restrict growth opportunities as their top concern, a big jump from last year’s survey when it was not even among the top 10 risks.
• Regulatory changes and scrutiny. CFOs worry that an emphasis on regulations may increase and noticeably affect the manner in which their companies’ products and services will be produced or delivered. Mr. Beasley noted that the regulations extend beyond financial requirements to areas such as privacy, with European privacy regulations already in effect and those in California arriving in 2020, and increased government scrutiny of business models such as the big technology firms.
• Resistance to change. As innovative technology is deployed at an ever more rapid pace, CFOs are concerned about their organizations’ ability to embrace that change and remain competitive.
• Top talent. Related to the previous concern, CFOs are concerned about their companies’ ability to attract and retain top talent in a tightening job market, and consequently their ability to achieve operational targets. “How does [corporate finance] move from more production-type activities to more machine learning and other artificial intelligence technologies, taking people away from the analytics they used to spend time on and using that talent in the most efficient way,” Mr. Thomas said.
• Cyber, of course. Pervasive across companies, cyber-risk concerns keep CFOs awake at night worrying about whether their organizations are sufficiently prepared to manage cyberthreats that could significantly disrupt core operations and/or damage the company’s brand. Mr. Thomas noted that finance departments’ increasing use of technology-driven analytics ingests pulls data from multiple sources, heightening the risk. “Companies are moving to more tech-driven activities and operations that rely ever more on sources of data that can be impacted,” he said.

How one company survived the Great Recession, and advice on how to prepare for the next downturn.

With an economic slowdown looming—even if no one knows exactly when it will occur or how severe it will be—companies must prepare for the worst. It doesn’t get much worse than the slump Caterpillar Inc. experienced in 2009, when sales and revenue plummeted. But the company remained profitable and maintained its dividend. How did Caterpillar achieve its remarkable performance?

Recession planning was the focus of a recent NeuGroup meeting, where Ed Scott, senior executive advisor at NeuGroup and retired treasurer at Caterpillar, discussed the global company’s recovery methodology. He also noted some questions for treasury executives to ponder before the storm hits:

• What approach is your company taking to prepare for a possible recession?
• What are your company’s critical success factors that must be protected?
• What levers/workstreams are necessary to protect those factors?
• What is treasury’s role in the company in planning for and fighting a recession?

During the Great Recession, Caterpillar’s sales fell 37% and its profit dropped to $895 million from $3.6 billion. The company took a $3.4 billion charge to equity, and debt as a percentage of debt and equity soared to 59.7%, well above the company’s preferred maximum of 45%.

Caterpillar’s single-A rating, necessary to fund its captive finance company, was in jeopardy. So the company pursued the MAST methodology, which Mr. Scott said can be applied to virtually any significant project or initiative:

• Meaning. Why take action? For Caterpillar, it was to remain profitable, avoid cutting its dividend, and protect its rating.
• Action. Establish workstreams, which in Caterpillar’s case numbered 10 and included reducing inventory, closely monitoring the financial health of critical dealers and suppliers, aggressively pursuing collections and increasing liquidity as needed. Mr. Scott noted that each workstream had a designated owner.
• Structure. The cadence to make sure the plan is carried. Caterpillar’s CFO, treasurer and controller met every Friday at 6:30 a.m. with all the workstream leaders to review and document progress over the last week and discuss the week ahead. “Why so early? Because nobody has a meeting at that time, so everybody had to show up,” Mr. Scott said.
• Truth. Metrics for each workstream were key to tracking progress and eventual success. “It’s very important to define the critical success factors and the metrics to achieve that,” Mr. Scott said. 

In terms of preparing for a recession, Mr. Scott said, analyzing how much sales will likely drop, or trough planning, is key, and pressure testing is also important. “Think about what the company could do if it had a 20% or 30% drop in sales,” he said.

How metrics help treasury teams market their successes in good times.

Treasury teams get plenty of attention in financially volatile times, but in the good times their more mundane if still critical activities—reducing bank accounts, hedging foreign exchange, etc.—tend to go unnoticed.

• “If we don’t convey the value treasury provides in good times and in bad, no one else will,” said Ed Scott, senior executive advisor at NeuGroup and former treasurer at Caterpillar, who co-led a recent NeuGroup meeting of assistant treasurers. He added, “The losers are your people who are not getting the credit.”  

Develop metrics. One peer group member said his treasury department recently completed a treasury transformation, implementing a treasury management system (TMS), rationalizing banks and creating pooling structures. A year ago it began developing metrics to measure progress and determine what had been done correctly or not.

• It’s all about the data. Pursuing metrics, he said, can’t be successful without “good, solid information.” Define, measure, analyze, improve and control, or DMAIC, is the Six Sigma methodology his team uses. “It’s all about quality and continuous improvement. That’s where the metrics help us go,” he said.

He displayed 14 metrics his team applies today under the categories of cash, currency, credit cards, bank fees and insurance, and he noted several others under consideration in areas such as treasury-staff productivity and financial metrics including hedging performance, FX spreads and cash-flow forecasting accuracy. 

Trends, not points in time. The member said viewing a metric at a point in time provides little value. Instead, analyzing the trend is “where you really start to learn what you’re doing, and it generates lots of questions about the process,” he said. He noted activity-based metrics, such as how many banks the company has or its cash balances, provide important information. The most critical metrics to drive improvement are performance-based ones, such as how many banks and bank accounts have been eliminated, or how much interest was earned.

CFO stories. Mr. Scott noted that reducing the number of bank accounts also cuts fraud, bank fees and labor costs. “So how do you translate those things into the story your CFO wants to hear? What’s the value of doing that?” he asked the group.

The presenting member said treasury must create and monitor meaningful metrics that make a difference in the business and are actually read by the C-Suite:

• Focus. Report what’s most important.
• Display. Use effective graphics to deliver the message.
• Be concise. Deliver a clear, easy-to-understand message.

Founder’s Edition, by Joseph Neu

What direct reports can do to help a CFO—and themselves—climb the strategic stairs.

We recently facilitated an event for growth-company CFOs where a lot of discussion centered on how the CFO should help get things done by being a strategic partner of the founder or CEO. Playing this role has also become a priority at more mature companies.

• Bottom line:  If you report to the CFO, you’ll want help make that person a true strategic partner—as you simultaneously become one yourself.

For starters, focus on these five areas:

1. Excellence inside and outside the box. The key takeaway is that CFOs have to be good at operating outside of the core finance function, or box, to be successful. That means they must have people they can rely on to handle what’s inside that box. So make sure the finance box functions phenomenally so that you, too, can support the CFO’s work outside it.
    
2. Hire well and develop talent fast. To increase their span of control and become a strategic partner, CFOs need to hire the right people at the right time for key finance areas. That may always be true, but CFOs tend to struggle when they don’t recruit the right people at the right time for what’s needed next. Smarter hiring will let you take that next step.
   • The need to develop talent fast is in part generational, as millennials expect to progress faster. There’s also a supply-and-demand curve issue skewing finance talent younger. “Senior roles are filled by professionals, on average, six years younger than a decade ago,” a West Coast-based executive recruiter who specializes in finance executives said. A lack of supply for finance professionals with the right experience means that they have the ability to move up quickly. If you don’t promote them, they will leave. Your head of FP&A is someone else’s CFO. Don’t let that happen.
     
3. Cultivate a direct line to the board. CFOs need to have a direct relationship with the board, usually with the chair of the audit committee, who can act as a sounding board, coach and networking advisor. Give them what they need to make the most of their board interaction and, as a key direct report, cultivate your own board relationships so that you are in the running as a successor.
   • Hint: The first step might be with a specialty sub-committee or advisory board. Start building your own network of advisors to make you a better and more valuable part of the CFO’s finance team.
      
4. Set up solutions. A strategic CFO shows that he or she can offer more than information by proposing potential solutions and advancing the team to the 5-yard line, making it easier for the CEO to score the touchdown. Make it easier for the CFO to do this. Don’t be a passive data collector, but instead drive to solutions and, where appropriate, proactively take action.
    
5. Be proactive about data as an asset. At more companies, data is becoming one of the most valuable assets; or it’s at the top of the list. Even if it’s not yet on the balance sheet, help the CFO to manage data well, leverage it for better decisions, and monetize it both to generate new revenue for the business but also as an asset with which to secure new capital.

Focus on these five things and you’ll likely see the strategic importance of the CFO’s role rise, and with it the strategic value of your role as controller, head of FP&A, vice president of corporate finance/treasurer, or chief audit executive.

Founder’s Edition, by Joseph Neu

When venture capital isn’t enough, you need a treasurer.

Growth companies looking to disrupt industries outside software and pure internet plays (which are already mostly disrupted) can have significant capital needs. This is why traditional venture capital needs to be supplemented with new types of investors and innovative ways to access capital markets. Given the cost of equity, pre-IPO, non-investment grade, un-rated companies needing capital have to be creative about debt financing.

This puts a new spin on the need for a treasurer with solid capital markets experience to serve as head of corporate finance for a growth-company CFO wearing multiple strategic hats. Growth companies that can’t afford to bring one in-house should have access to one on an on-demand basis.

That capital markets experience should include:

• Wide-spectrum asset-linked securitization. Disruptive companies often have unique assets and monetization strategies to spin off cash flows that require a visionary mind that can bundle them into financial securities. They need finance talent with experience working on such problems, identifying opportunities and packaging them properly. These asset-linked financings may start with AR factoring, but quickly move to contracted revenue securitization, for example, and even rights to cash-flow streams from future data monetizations.
• Relationships with debt financing innovators. Treasury’s role as chief bank relationship officer can also be useful, to the extent it includes meaningful connections with incumbent banks and bankers who go against trend to be innovative. Yet it also must include relationships with creative finance minds who’ve left the incumbents to join fintechs, capital advisory firms and investor groups. These relationships often are critical to getting needed funding or funding with a sub-10% cost of capital versus a 40%+ dilutive equity round.
•  A contingency/opportunistic financing mindset. While most treasury professionals understand that the best time to arrange for financing is when you don’t need it, growth companies need to take this thinking to the extreme. They continually need to look to expand the number of current and contingency funding sources for the capital plan to keep growing as well as funding and liquidity options to tap to survive in a stress scenario or crisis event. 

But the treasurer also needs to be capable of executing the basics:

• Expand the funding toolkit. “From the earliest stages of a startup, the finance team needs to think about expanding their financing toolkit so that the number of funding sources keeps growing, from 2-3, to 5-6, 6-10, to 16 or more,” says Kurt Zumwalt, former treasurer of Amazon.com and NeuGroup member who’s more recently been advising growth companies.
• Build a bank group. Start early to build what will become long-term relationships. “As soon as you can build a traditional bank group, so much the better, as bank credit opens avenues to more sources of funding,” notes Neil Schloss, former treasurer of The Ford Motor Company and CFO of Ford Mobility (and NeuGroup member). Plus, more banks are thinking creatively about lending opportunities; so why not target those banks for your facility?
• Instill a cash culture. Finally, a professional with treasury experience, especially in a high-leverage environment will appreciate the importance of free cash flow and instilling a cash culture throughout the business and finance operations.

NeuGroup can help connect you with one if needed.

Perennial value of free cash flow. Any form of debt financing requires cash flow generation to service it—and it helps if it is cash available after capex and other critical outlays. Equally important, as mindsets shift from revenue and user growth to profitability as drivers of enterprise value, the ability to generate free cash flow does more than improve firm borrowing capacity, it creates a better overall valuation, too.

This renewed focus on cash flow for funding a firm to reach its private value potential with debt and realize its full initial public market value should put treasury finance expertise in demand earlier at growth companies.