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3. Misalignment of Expectations

Business strategies often clash with shareholder and market expectations, leading to challenges in preserving margins while facing rising costs of goods sold (COGS). Striking a balance between maintaining margins and expanding market share becomes a delicate act.

4. Legacy Technology and Slow Adoption

The reliance on outdated technologies impedes the agility needed to navigate today’s complex financial landscape. Slow integration of new technologies hinders effective decision-making and adaptation to changing circumstances.

5. Oscillation in ESG Integration

The fluctuating approach towards Environmental, Social, and Governance (ESG) principles poses challenges—whether ESG remains core to business strategies or is merely given lip service during favourable times.
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Focus Areas for 2024

Profitability

2024 budgets have now been completed (or will be shortly). For many, this exercise seems somewhat futile. Excel and Google Sheets documents created from August onwards are already outdated, riddled with errors, and layered with the misconceptions and predictions of individuals within a business lacking the rare ability to accurately predict the future. It is fair to say that if someone could correctly predict the central bank’s reaction to events in Q3 2024, they would be unlikely to be responsible for creating a business unit’s annual budgets. They would instead be correctly predicting lottery results, the Grand National, and picking the winner of the Premier League.

However futile, creating the budget allows a business to plan for performance. Ultimately, success for many businesses in the current conditions will be deemed if margins are maintained. This is objectively positive and shows strong stewardship of a business. But what value does planning a margin for a product, business unit, or overall business hold if so much remains in flux and unknowable?

Instead, shouldn’t businesses plan for revenue and accept a fluctuating margin as a cost of doing business in such an era, knowing that improving future conditions will allow for margin improvements? Growth can be reflected in market share or expansion into new areas. While this approach requires caution – cash flow is king – for businesses with a long-term view, improving market share should take priority. Thus, less time should be spent preparing budgets and more on understanding the operational drivers of performance and scenarios in which their interactions change. The focus should be on determining in what scenario certain drivers within our business are more critical than others.

Understanding how likely future scenarios could alter your plan is more critical than the plan itself. Your planned profitability becomes useless in the face of uncertain circumstances.

Balance Sheet Improvement

For many, a business’s balance sheet strength is the true measure of its health. While a Profit and Loss statement might be embarrassing, a robust balance sheet ensures resilience for future challenges. However, this duality can sometimes prompt decision-makers to rely on a strong balance sheet rather than swiftly addressing real-world issues.

Consider real estate as a prime example. Often, pundits lament the “new normal” of the hybrid workplace, urging a return to the office to boost productivity. Yet, this narrative merely glosses over the actual drivers—real estate costs. Leaders, seeing vacant expensive city offices, opt for simplistic solutions instead of taking the more challenging path of renegotiating leases or reassessing real estate assets. This often results in memos mandating office returns, reflecting poor decision-making and leadership.

Instead, organizations should challenge themselves to reshape their balance sheets for future success. Shedding the burden of excessive real estate is one aspect, but planning for the generated cash’s utilization to enhance the business’s position is crucial. Crafting scenarios and responsive plans becomes imperative.

Boosting your cash position in the short term isn’t detrimental; however, deploying it at the opportune moment holds significance. Balance sheet strength, by itself, should not be the ultimate goal.

Inflation

Failure to have mitigation plans for inflation in your business spells trouble. Every facet of your business should have strategies to navigate this challenge successfully.

Consider staff salaries as a simple example. Employees often represent the key to enhancing business performance. If you intend to weather the challenges posed by the aforementioned issues, are you, at the very least, offering adequate pay increases aligned with inflation? Or are you inadvertently diminishing their purchasing power by adhering to pre-existing policies that might no longer suit current economic conditions?

Where are you accommodating inflation, and where are you working to mitigate its effects? Are you crafting strategic combinations (as mentioned earlier regarding scenarios and their implications) to address this issue? Are you contemplating price hikes irrespective of the inflationary impact, merely because it seems more straightforward than challenging the business to adapt to the evolving market landscape?

Summary

There’s little novelty in the mentioned challenges. Many of you who have reached this point are likely familiar with these recurring issues. What needs to change now is how you approach preparation. If you find yourself reliant on Excel, Google Sheets, PowerPoint, or Power BI to handle the range of scenarios you’re encountering, you’re inadequately equipped. Your teams, organizations, and outcomes shouldn’t depend on technology that has seen minimal evolution since its inception. Frankly, it’s akin to using an enhanced abacus while your competitors embrace technologies that streamline, simplify, and significantly enhance decision-making capabilities.

These arguments hinge on having a platform capable of running scenarios for various situations, something Excel lacks. Remaining tethered to it necessitates extensive manual work, tolerates substantial errors, and signifies an inability to adapt swiftly to the changing environment.

Instead, a single individual should seamlessly analyze vast business areas quickly. Implementing uniform pay increases in line with inflation across the board should be achievable, with subsequent reviews of its impact on Profit and Loss, balance sheets, and cash flow projections. If you struggle to achieve this promptly, it might be prudent to consider upgrading from traditional tools before contemplating AI integration into your finance team.

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Back to basics

The second step is to go back to basics. While “back to basics” for some of us is associated with John Major’s Conservative government, for finance teams looking forward to 2024, it should be associated with ensuring that the core functions of the organization are covered efficiently. Over the past 20 years, “mission creep” has been an almost universal side effect of the internal politics of large organizations. A simple example of this would be that for many businesses, multiple plans for the business are owned by multiple parts of the business: a sales/revenue plan owned by Sales, a budget owned by finance, a headcount plan owned by HR/People, a marketing spend plan owned by Marketing, etc. Duplicate information, managed by duplicate resources, for reasons lost in the murkiness of internal politics and power wrestling among teams. Retrenchment is often viewed negatively but offers the opportunity to remove the buildup of non-core activities supported by finance and gently remove activities already covered within finance from other departments. Doing less but doing it right should be seen as a greater contribution to the organization’s strength, as opposed to stretching out into areas owned by others. Again, do you have your processes mapped? Do you know where your resources are spread and what your technology supports? If not, then there is work to be done before moving onto step 3.

The lies of ROI

This leads to the third step, a ruthless and pragmatic approach to “Return on Investment.” The internal investment equivalent of externally adjusted (fudged) EBITDA, for years now, ROI calculations have been lifted from the sales materials of consultancies and software vendors. They should be treated with the utmost skepticism, for rarely are they thoroughly audited for accuracy. Even those that are accurate are likely assembled from multiple implementations and projects, the vast majority in situations quite removed from your business’s own. If nothing else, the exercise to establish an internal technology ROI calculation to use in weighing investments allows you to use a consistent measure across all the possible investments to be considered. However, if used correctly, creating your own ROI calculation will help standardize the prioritization process emerging from steps 2 & 3. A level playing field, geared around your business. Undoubtedly, this is missing from your finance organization; creating it should be a priority before moving to step 4.

Dynamic, achievable, and immediate

The final step needed is to set clear short-, medium-, and long-term objectives for finance projects. Far too much time and effort are wasted by organizations worrying about the latter, and far too little energy is invested in the former. Take a leaf from the book of private equity: what would the 100-day plan look like for finance projects? Can you articulate the value that will be driven by them in that period, and crucially, is this understood by other senior stakeholders in the business? In recent years, “OKR” has arisen as a fashionable term in this space. By all means, embrace this, but remember that creating a dynamic organization necessitates a focus on change and embedding change as a fundamental operating principle of the business. As a result, your long-term OKR descriptions should reflect the fact that your short- and medium-term plans to get there will be subject to change. This is the final step, but one that needs the greatest external communication and alignment with the remainder of the business—i.e., return to Step 1 and cross-check!

Ideally, the above steps are consolidated into a moderately simple framework within which you operate your decision-making process. Creating this for finance, by finance, is important; outside entities within your own business and beyond may offer this service, but the reality is that nobody understands your needs better than you. Giving up control of the decision-making framework isolates you from being able to weigh the steps in the process according to your understanding of the need.

The bottom line

Why does this protect your case for investment in finance? Quite simply, this is the process that all areas of the business should follow but likely don’t. Traditionally in challenging times, businesses have focused on spending in revenue-generating areas, taking the approach that functions missing out on spend can be prioritized once headwinds turn to tailwinds. This is undoubtedly never achieved, for when the good times roll, the clamour to further prioritize direct revenue generation increases to allow the business to cash in. Therefore, you should be more prepared than the rest of the business, covering the above and demonstrating the value the investment of resources will bring.

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Additionally, Forbes highlights an alarming aspect within the industry. PwC’s 2022 Next in Private Equity Survey indicated that 54% of PEs use email attachments to collect data from portfolio companies, while 36% write responses within the email body. This reliance on an antiquated method in a sophisticated data-driven industry underlines the need for urgent improvement and modernization in data collection strategies.

The urgency for a data-centric approach is underscored by statistics revealing PE firms’ reliance on error-prone data collection methods, emphasizing the need for modernization in data collection strategies.

The urgency surrounding data lies in its ability to drive speed, precision, and informed decision-making. Timely access to pertinent data empowers firms to adapt swiftly to strategic shifts and identify new opportunities for value creation. However, despite this, private equity firms often grapple with scattered data or a lack of talent and digital expertise to effectively harness and integrate information.

This shift in approach involves exploring advanced analytics, artificial intelligence, and machine learning capabilities to extract deeper insights from available data sets. It’s crucial to foster a culture that values data interpretation skills and upskill talent to leverage data effectively.

Initiating a data transformation strategy within portfolio companies necessitates a holistic assessment of existing capabilities and subsequent enhancements. Revamping data collection methods, refining data analysis processes, and empowering the workforce in effective data utilization are crucial steps. This transformation encompasses technological upgrades, cultural shifts, and strategic planning, aiming to establish unified data repositories shared by all stakeholders to ensure consistency and facilitate seamless interactions.

Thriving in this landscape demands embracing a data-centric future, rethinking strategies, and transforming approaches to data and analytics. Forward-thinking private equity firms are embedding data-driven decision-making processes into their DNA, utilizing data not only to drive value creation but also to adapt swiftly to changing market conditions and foster a competitive edge in the industry.

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