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NeuGroup’s Top Five 2021 Insights

By January 4, 2022March 18th, 2022No Comments

Reassessing finance organizations under new leadership tops the list of 2021 insights.

By Joseph Neu

Before we plunge full throttle into the new year, I wanted to distill what struck me as the key takeaways from 2021, our second year of accelerated change and pandemic-fueled challenges.

1. Questioning the way things have been done. The pandemic encouraged transformational thinking as many legacy business processes and delivery models did not perform well during lockdowns nor in a work-from-home environment. Covid-19 also sparked a new way of thinking about work, leading to what’s been called the Great Resignation and a further disruption to the status quo. But disruption inevitably creates room for positive change: As many exited the workforce, they opened the door for new finance and treasury leaders with fresh ideas, who naturally took the opportunity to question why things are being done the way they are.

By looking beyond validated best practices, leading finance and treasury organizations have gained significant efficiencies and enhanced the value they add to the enterprise. One of our member companies has centralized the financial support model to eliminate redundancy and standardize processes for funding and cash management, as well as financial planning, analysis and reporting. As a result, staff was freed to focus on more value-creating work and engage more effectively with its stakeholders.

2. You don’t really need as much extra cash as you think, an idea that’s hard to accept. Treasurers have been going around in circles trying to determine the appropriate amount of cash to hold on their balance sheets and are torn between two extremes: Hoard cash or trust external liquidity sources (which are often boosted by post-crisis central bank intervention). In the aftermath of the eruption of the pandemic, banks and capital markets were highly receptive to corporate borrowing. Indeed, prevailing rates and spreads even made it a desirable option. Accordingly, the need to hold strategic cash has felt a bit hollow. That is especially true because the carrying cost of cash does not get better in an inflationary environment than in a zero-to-negative rate one.

  • Yet, others, or even the devil on the other shoulder, may counter that holding on to cash is paramount. According to one of our members, “Cash is a weapon. Unless you have activist shareholders, you wait, go countercyclical and buy cheap assets when others cannot. You should also invest in operations when others are not able to. Plus, if you are in expansion mode, then ‘hoarding’ is critical.” This senior finance executive added, “You can supplement cash with debt if the market is open. But having a good cash pile puts you in the driver’s seat.” Ultimately, most investors in tech or industrial corporates care more about avoiding losses than companies earning low returns on cash.
  • Furthermore, governments continue to threaten to tax distributions to shareholders via buybacks. This may persuade more CFOs to maintain cash reserves for rainy days.

3. Investing in technology to scale the finance function and support the business. Digitalization in support of remote work and new delivery models is critical. Most immediately, many CFOs signed big checks for new technology investments because of the difficulty of finding and retaining talent, and to enable transaction processing in a virtual environment. Staffing has been a particular challenge at the medium and lower ranks (e.g., senior treasury analyst).

  • The Great Resignation has therefore convinced CFOs to approve automation initiatives to plug capacity gaps (and scale up) created by staff departures. The proliferation of API-enabled and cloud-native fintech solutions has boosted levels of automation, sophistication of reporting and right-time analytics and shortened ROI generated by tech spend, reducing head count requirements. At the same time, automation is also redefining finance professionals’ roles and responsibilities, away from “grunt” work into more strategic activities.

4. Institutionalization of crypto means it’s something treasury needs to know. 2021 was the year corporate finance leaders had to start learning about crypto. Many are still taking their first steps up the learning curve, but it’s imperative that they come up to speed—and fast—because crypto is here to stay. The most mainstream use cases today are: (1) accepting “coins” as payment for NFTs being created by business experimentation with new ways of monetizing IP; and (2) sourcing cryptocurrency for ransomware payouts. In both cases, companies are not holding cryptocurrency on the balance sheet. However, inevitably, every corporate will need to decide when to move beyond such arm’s length arrangements.

  • Therefore, finance leaders should evolve their understanding beyond current practices. Crypto is either the biggest, fastest-growing Ponzi scheme ever, or a game-changer bringing on a new future of business-governance structure, finance and how the internet works. Time is running out to determine which you believe is true.

5. ESG is inescapable. ESG is now an integral part of every corporate decision, be it the still-dominant E (now gravitating toward CO2 emission targets), the increasingly relevant S (supporting diversity, equity and inclusion goals, especially), and the timeless G (which will be “governed” more and more by how intentional corporates are in managing themselves in support of E and S).

  • To remain aligned with the company’s vision, finance executives must factor ESG into every funding and investment decision. For many, the light bulb has gone off that the emphasis on ESG is not the result of a proliferation of external attention from raters and rankers. What matters is the internal stakeholders’ view of why, when, what and how ESG factors impact the value of the firm. That’s good “G”. Outsiders just need fair and measurable standards to judge performance against current and future targets.

All of these takeaways fit well into the topics we will look to distill new insight from in the year ahead. For more on what we expect in 2022, please read this outlook by Nilly Essaides.

Justin Jones

Author Justin Jones

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