This week's conversation explored how companies' risk strategies have evolved as a result of the pandemic.
CFOs and Finances directors discussed post Covid-19 risk strategy in this week’s CFO Community Conversation, which was sponsored by Workday.
The purpose of the weekly discussions is to create a supportive and safe space for finance leaders to share notes among peers and discuss challenges and concerns, whilst making new friends online.
CFO community manager John Deane set the tone for the discussion by first quoting a recent survey by credit insurance company Euler Hermes, in which 90 percent of CFOs and their direct reports said C-19 has impacted their organisation, with 61 percent reporting a year-over-year increase in customer payment defaults, and more than 2 in 5 experiencing major coronavirus-related cash flow disruptions.
“The research went on to say that nearly 45 percent of CFOs revealed plans to be more restrictive with extending credit terms going forward. 80 percent of respondents said they had experienced a loss of business from stricter payment terms,” said John.
In this context, the conversation explored how companies’ risk strategies had evolved as a result of the pandemic.
Marsh Africa CFO Michelle Pienaar said their risk hadn’t changed in terms of what they have on their risk register, however, cyber and regulatory risks in their environment have moved up the list. Cash flow has also become a key focus area.
“We also launched a Covid-19 product for employers to help cover colleagues in the event that they are hospitalised. Beyond that, there is a lot of work being done around modelling to take the pandemic into account because I’m pretty sure that was not something that organisations had taken into account in financial models said Marsh Africa.”
Most of the finance leaders said cash flow had become a massive focus and also how we keep managing it has become a big priority.
One CFO said that some of their external consultants had started to use Covid-19 as a reason to demand payment upfront.
“We normally pay our suppliers 30 days after receiving an invoice but I suspect they are trying to cushion their cash flow troubles by using the current pandemic as grounds for amending the agreement we have with them. I this pattern continues, this is likely to become a much bigger challenge because it will then require us to demand the same of our clients who are already facing difficulties paying as it is.”
Nokia CFO for Africa Michael Meiring agreed, saying that, in the telecom sector, they were seeing a lot of people trying to manage their working capital and at the same time also manage their CAPEX-to-revenue targets leading them to defer some capex Spending into the future.
“People want to have their bread buttered on both sides,” Michael says, adding that they shouldn’t try to be a banker if they’re not a banker. “Go to the bank and borrow to manage cash flow because that is what they specialise in, there are a lot of innovative supply chain financing options available in the market.”
He adds that, given the current interest rates, borrowing could be quite cheap. “It’s not as cheap as it would have been if we had not been downgraded to junk status. I have a friend who said to me the other day that borrowing for his business currently would work out cheaper for his business than using their own cash.”
Nonhlanhla Mona, CFO of the Education, Training and Development SETA said she learned of a new risk while watching the news on 21 April when the President announced, amongst other things, that employers would be given a four-month payment holiday for skills development levy contributions.
Said Nonhlanhla: “I was shocked because as a sector directly impacted by this had not been consulted prior to this announcement and, just like that, we had to start making adjustments to our budget and plans because the skills development levies account for more than 50 percent of our revenue for any given financial year. That had never been a risk for use before because we previously have always been able to bank on the income from skills levies. It means we will be struggling to fully deploy our mandate as our resources will be stretched quite extensively for the foreseeable future.”
The second risk was the legality of the Education, Training and Development SETA’s contracts as it saw a surge in the number of counterparties looking to utilise already concluded agreements to their advantage to alleviate financial pressures they may be facing.
In the end, finance leaders acknowledged that the approach to managing risk would have to be a lot more agile. Gone are the days when companies would compile a risk register that is reviewed once or twice a year. With loadshedding recently being added to the multitude of challenges, the need to be proactive regarding risk is paramount and the finance community is very much awake to that fact.