As operating processes become more challenging, CFOs are exploring beyond traditional metrics to determine and highlight the key strengths of their businesses to current and potential investors.

Finance leaders are facing a range of new challenges this year. Inflation is rising rapidly, interest rates have increased faster than anticipated, and several major economies face a period of deep recession. The Office for Budget Responsibility has suggested we may experience the biggest decline in living standards in the UK for nearly sixty years.

With rising economic pressures, many CFOs have prioritised ways to grow their business over the next few years. According to research by Gartner, most CFOs are preparing for a decline in revenue and increased costs over the short term. A study by Deloitte indicates that a little over 90% of UK finance chiefs expect a drop in their operating margins over the next year. Taking this into account, many finance leaders are exploring specific metrics that can determine the health of their company, even if the top-line growth is struggling.

According to Edmund Reese, the CFO of fintech company Broadrisge, there are three specific areas to focus on during a downturn. The first is client retention, which could involve adapting payment terms to alleviate economic difficulties. The second is capital strength, which focuses on liquidity maintenance, especially if cash flow is a long-term concern. The third factor focuses on the accounting ratio, typically referred to as operating leverage, which concerns the cost structure of a business. If the revenues of a company with a high operating leverage, i.e. large fixed outgoings relative to variable costs, increase, that typically has more benefit on profit margins. But, if the revenue declines, the same high leverage can be challenging because the company has limited ability to reduce its cost base.

Reese explains that you need to create a plan with scenarios and determine what triggers to use at the right time. Reacting to situations as they appear may result in an inappropriate response.

Focusing on productivity and growth

Some businesses will continue focusing on the same targets despite the broader economic conditions. Scott Bogard, CFO of Exacta Land Surveyors, explains that his company is very focused on productivity, ensuring its workforce is carefully managed and continues to provide as many opportunities as possible to enhance productivity.

In a period of recession, businesses must recognise that the processes they did yesterday won’t necessarily be the right choice for today. Economic downturns often provide opportunities for more established companies to increase market share if smaller competitors lose business. This is another metric that displays business strength, even if revenues are staying relatively flat. Bogard believes that with strong liquidity, their company can capitalise on the market share, on winning new clients to replace existing clients that may be doing less business in the future.

CFOs face increased pressure to provide guidance on business performance, which can be challenging with the uncertainties surrounding the existing economic conditions. Matt Benaron, the Co-Founder of VantagePoint Consulting, explains that many CFOs struggle to forecast for the next year with so many likely changes predicted for the near future. Finance leaders who will prosper during this period will be those that have invested in technologies to enable them to predict scenarios and outcomes. Having solutions to allow leaders to understand their options will likely create better financial results.

Reese also believes it’s important for CFOs to manage people’s expectations across the entire business with how to manage the downturn. Every recession is different, so we must recognise that some solutions from the past won’t necessarily work today. We must adapt and be willing to apply new metrics if the business has had to change plans due to unforeseen market changes.

Businesses may begin exploring non-traditional metrics to monitor success, particularly those within the environmental, social and governance fields (ESG). Many investors are closely following these types of metrics. As more investors adopt ESG frameworks for risk and opportunity assessment, this will drive new metrics of business success and profitability.

Technology can create other non-traditional metrics, allowing companies to gain new information, such as data on the efficiency of a supply chain. It is really about utilising the data finance leaders have access to. By exploring more granular data, CFOs can identify trends that influence decision-making and create insights that may help with performance in a way that traditional reporting cannot do.