How To Execute A Future-Proof Financial Strategy In A Riskier And Transitory Environment
Omar Choucair, CFO, Trintech, has spent 20+ years leading financial and administrative organizations for public and private companies.
Initially, the pandemic caught many companies off guard and, for management teams, the past two years have focused on shifting priorities quickly and efficiently to keep up with rapidly evolving economic and industry changes. There is virtually no shortage of important lessons learned throughout this experience, but one of the most critical takeaways is the value of consistent risk preparation. More specifically, the importance of weaving a strategic risk program throughout corporate planning and strategy development.
In fact, while leaders have been focused on pandemic challenges, new risks have been taking shape. And while some of those risks you may not be able to predict—like another pandemic or evolving cybersecurity threats—there are many that you can plan for. In the current transitory business environment, it’s important for management teams to be as prepared as possible to address the risks that they can anticipate. We have identified three top areas of risk that CFOs should be paying attention to right now.
Addressing Growing Inflation And Rising Interest Rates
The rising cost of goods and services, partially driven by pandemic supply chain disruption, reached record highs in Q1 2022. Underscored by escalating geopolitical tensions, global inflation is expected to continue for the remainder of this year. In fact, in a survey conducted by McKinsey at the close of the first quarter, the number of “respondents citing the pandemic as a top risk fell from 57 to 12 percent” as much larger percentages now view energy prices and inflation as threats to the global economy.
As inflation continues and drives wages up with it, economists predict little relief for industrial supply chains to help cool things off. Policymakers had originally hoped that as the pandemic risks decreased, household spending patterns would shift. However, even as employers struggle to attract and retain talent during a national labor shortage, hikes in competitive wages may not be pacing with inflation rates.
But it doesn’t stop with inflation—you’re also seeing a steady hike in interest rates which impacts the cost of lending for both corporate and private companies. At the same time, CFOs are navigating the transition from LIBOR loans to SOFR, adjusting their financial operations to the new benchmark. These factors combined leave many businesses assessing whether to close open lines of credit and reduce debt, unsure how escalating interest rates may eventually affect the value and measurement of that debt.
With all this in mind, CFOs need to be realistic about the effects of inflation and higher interest rates on their budgets and strategic objectives for this year, especially as they build their short- and medium-term financial forecasts.
Integrating ESG Reporting And Regulatory Requirements
Climate change is not a new development. But the effects of climate change have become more widely felt in recent years and that has prompted more robust and direct responses from corporate America. In March 2022, the SEC proposed new rules for climate risk disclosures that public companies would need to start including in their registration statements and periodic reports. If approved, management teams will be required to include and attest to information about climate-related risks that could have a material impact on their business, the results of their operations or financial condition, as well as “climate-related financial statement metrics” in the consolidated footnotes to their audited financial statements.
These new and extremely complex proposed disclosures are just one example of a series of regulatory requirements that could be passed resulting in new workflows that must be integrated into the financial reporting process. While new sustainability measures create valuable insight into a company’s risks associated with climate change, the integration of these new reporting requirements will take time and thoughtful effort. CFOs will look to automate as many manual processes and search for streamlined workflows to integrate these additions to their existing financial reporting processes, while also looking for ways to optimize and automate the financial close process to support their F&A teams.
Protecting A Long-Term And Productive Hybrid Workforce
Throughout the pandemic, businesses needed to support a digital work environment so that employees could continue to work from home with as little interruption as possible. While many companies have proven business continuity with a virtual or hybrid workforce, more permanent digital transformation strategies and employee upskilling training are necessary. As a result, executive teams are investing heavily in new technologies to upgrade work processes on a permanent basis. In an early 2022 PwC survey, 60% of executives surveyed identified digital transformation as their most critical growth driver in 2022.
With a sustained digital work-from-home and distributed environment comes growing cybersecurity risks. When the pandemic began, data storage and access transitioned quickly to remote work settings, and IT teams moved equally fast to deploy new security measures that protect highly sensitive information. While some of these initial measures were built to last, many were temporary and preliminary stopgaps. In fact, according to a study released by McAfee Enterprise and FireEye, 81% of global organizations experienced increased cyber threats since the beginning of the pandemic. It is essential that CFOs plan for increased investments in cybersecurity technologies and teams to keep their data and systems secure.
As the global economy wrestles with growing inflation and economic uncertainties and management teams recover from the acute financial and operational challenges of the last couple of years, it’s more important than ever that CFOs be nimble and strategic in developing long-term financial plans. With emerging risk factors, including inflation, ESG reporting requirements and permanent hybrid work environments, finance leaders must plan ahead in anticipating these challenges—and in doing so, create human and digital bandwidth to tackle the unexpected challenges that will arise. The Office of Finance is perfectly positioned to be the strategic voice that leads with agility and fosters organizationwide collaboration.