Firefighting, Cash Flow Management, and Digitization – Short Term Solutions for CFOs
By Adam Livermore and Gary Shaben, Dezan Shira & Associates
In times of severe financial and operational strain, the chief financial officer (CFO) becomes the lead firefighter in the company’s bid to both survive and ultimately thrive. Long-term considerations take a back seat to short-term ones, such as getting hold of sufficient cash reserves and reducing expenditures to the bare minimum. Working tirelessly to ensure near to real-time transparency on finances and operations takes precedence.
Yet, beyond the crisis, many opportunities exist for well-managed firms in China. While some countries now face very challenging market situations in the months ahead, China already appears to be targeting a quick “V” shaped bounce back. Although many challenges for firms remain, production is tentatively ramping up in the country again, and companies are returning to normal operations.
The foreign-managed entity’s road to recovery depends on its ability to execute good decisions at this time and quickly. This naturally puts the spotlight on its in-house capabilities, including those of its in-country CFO, key organization leaders, and experts. Some foreign companies may be facing gaps in their in-house leadership capacity now – with key personnel stuck in other locations and without the processes in place to enable the firm to be financially managed in crisis mode from a remote location.
This article briefly discusses considerations for the remote managing of a China business’ financial operations during a crisis.
Managing a crisis
In a crisis, companies must ensure that their teams are safe, and operations continue; that cash, liquidity, and cost discipline is tightly managed, compliance is maintained, and various scenarios are accounted for. To achieve this, a company must increase its communication across teams. Information transparency and understanding of facts and implications across the organization is of crucial value at this time as it positions the company for optimal decisions.
Your internal finance team, outsourced teams, shareholders, and stakeholders depend greatly on the leadership and day-to-day management of the company’s China CFO to manage key elements such as to:
- Perform financial and liquidity stress tests and produce rolling forecasts
Take a crisis management approach, including the identification of possible scenarios by shape and severity of economic impact, and build views of potential impacts to your team, cash flow, balance sheet and P&L. They must also identify, track, and mitigate risk factors. For example, preparation should be made for potential changes to cash conversion cycles with key suppliers and customers.
- Implement effective cost controls
Reduce all uses of cash which are non-critical and implement tighter cash management and governance. Determine what levers can be pulled to put in place effective cost controls. For example, adjust inventory management and payment terms to ensure the delivery of high-priority products/services.
- Ensure expenditures are limited to what is necessary
Ensuring that expenditures are limited as much as possible often requires new policies and increased levels of oversight and internal controls within your organization. At a minimum, consider reducing discretionary spending, ceasing business-as-usual spending and implementing a procurement approval “control tower” methodology.
- Improve two-way communication with all key stakeholders
Transparent and effective communication with your company shareholders, suppliers, and your teams is essential for any crisis management plan to produce good outcomes. For example, communicating daily and weekly progress on critical points outlined in your crisis plan, reforming policy as required, which means taking critical decisions in real-time, and continuously updating key stakeholders. Sound processes and communication strategies are essential to determine what key options are available to the organization as well as to ensure that policies and decisions are in alignment and effectively implemented.
Are your ‘Key Managers’ on-the-ground in China?
Despite how critical these issues are, some companies now face a steeper challenge – at least for a time: As of midnight March 28, any non-Chinese passport holder, even if they have a valid residence permit and work permit, will not be allowed re-entry into China, without special approval. Even Chinese passport holders must be quarantined for 14 days after entry. These measures are suggested to be temporary but at this point, scenarios exist that might result in this becoming a long-term or recurring measure.
This means that, at the time when China seems to be on the road to recovery and a brightening spot in the global economy, foreign-managed firms may face a disadvantage. Companies now face additional breaks in their ability to communicate and oversee important information and processes.
Address interim gaps and manage finance and operations remotely
If a firm is unable to properly and adequately crisis-manage its finances and operations using on-the-ground resources, they are advised to seek supplementary or interim accounting, tax, audit, and finance expertise without delay. Operations face steep climbs and further disruptions, audit season is here, and the clock is ticking for all companies to steer their way forward.
Here are some of the additional challenges that a company may face when attempting to remotely manage its finances and operations:
- Remote managers and teams may be unable to perform in-person reviews of stock projections, cost and cash flow forecasts, and expense approvals using hard copy, Excel, and other traditional means. This can lead to failures arising from information gaps, process bottlenecks, and non-transparency leading to missed opportunities and incorrect decision making.
- Documentation processes that continue to rely upon hard copy remains effectively hidden from remotely based line managers and finance teams at HQ. This makes it challenging to understand the nature of the transactions undertaken in order to manage cash flow and control expenditures.
Remote management of accounting and financial processes
If your key management and personnel are in lock down, or stuck overseas, now is perhaps an ideal time to revisit existing and backbone management processes and the flow of information in your company. Critical improvements to established company processes will also supplement your team capacity.
Two projects that can give you more insight into your China operations and can be completed in a short period of time, are explained below.
- Digitizing your expenses and approvals process
An improvement that can be made in only a few short weeks is the digitization of your expenses and reimbursement approvals processes. Using ready solutions, digital expenses management can provide you higher transparency, timely visibility about your costs, and a more efficient back office process that can be run remotely with ease. We wrote about this solution in this article “China After COVID-19: How Foreign Companies Can Leverage Key IT Solutions”.
The benefits are many. Overseas and remote teams can actually obtain increased transparency about what payments and reimbursements they are expected to approve, compared with more traditional paper + Excel-based methods. Receipts become digitized and filed on appropriate servers and thus protected from unauthorized access.
Submitted applications and approval processes can be speeded up to enable coordination in real-time between applicants, managers, and your internal finance team. This can eliminate nasty surprises relating to expenses that are only identified shortly before payment deadlines. In this way, your organization should have time to study its cash flow plans and contact vendors, if necessary, to agree on delayed payment.
With such solutions, your staff could be trained and actually utilize the app and simple software in a few short weeks.
- Integrating your digitized expense related documents with your ERP to tighten internal controls and financial management
If you use an enterprise resource planning (ERP) system with a finance module, and your firm switches over to utilization of an expense management app, then the next short step is to synchronize this data with your ERP. Once expenses are processed, the expenses and approval data gathered can be “fed” into the financial management system.
Taken together with the logic necessary to perform accounting transactions automatically, this can bring your accounting books a step closer to real-time operations and reporting. This is a neat and inexpensive interim solution to increase the efficiency, transparency, and accuracy of your accounting process.
Making transitions such as these now, is both timely and simple. The push-back that companies may face from colleagues when proposing changes in “normal” times, seems significantly reduced these days. Companies in China have been successfully implementing a range of digital transformation steps in recent months.
Both of these solutions will deliver benefits in remotely managing your business through a crisis. Over the long-term, these can be built on further to increase the overall robustness and comprehensiveness of your financial reporting.
If you are relying on a third-party provider to do your accounting work, or if your internal team lacks the relevant knowledge to implement such solutions, the Dezan Shira & Associates team can help you out.
- China After COVID-19: How Foreign Companies Can Leverage Key IT Solutions
- China’s Support Policies for Businesses Under COVID-19: A Comprehensive List
- China’s Social Credit System: COVID-19 Triggers Some Exemptions, Obligations for Businesses
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, and Thailand in addition to our practices in India and Russia and our trade research facilities along the Belt & Road Initiative.