Building a Flexible Finance Function in an Age of Disruption

If there’s one thing that the past year has taught us, it’s that our organizations need to be able to react to crises and disruptions at a moment’s notice. What does this mean for CFOs and for finance departments more broadly? It means they must be nimble, agile and responsive to sudden change, in addition to being conscious of long-term preparedness.

I recently spoke with Steve McNally, CFO of the Plastic Technology Inc. (PTI) Group of Companies, and former finance executive for Campbell Soup’s largest supply chain operations, based in northwest Ohio, to discuss how recent events and trends have highlighted the need for a forward-thinking and flexible finance function.

Jeff Thomson: The Covid-19 pandemic magnified the risks of supply chain disruption and highlighted the need for robust enterprise risk management and internal controls. As a former supply chain finance director for Campbell Soup and a contributor to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission’s enterprise risk management and internal controls frameworks, do you see any difference in scaling risk management and internal controls for large vs. small- and mid-sized companies? How can frameworks like COSO’s help CFOs manage the next major crisis or disruption?

Steve McNally : Like so many management accountants, my first exposure to COSO was in conjunction with internal control over external financial reporting, in my case while leading Campbell Soup’s original global Sarbanes Oxley compliance team. Only later, while representing IMA on the COSO Advisory Council charged with updating COSO’s 1992 Internal Control – Integrated Framework, did the lightbulb go off that effective internal control increases the odds of achieving your operational objectives as well.

And it took me longer still to realize that creating and maintaining effective internal control is not the point, nor is identifying and managing risk. Rather, we must focus on setting our organization’s strategies and then doing whatever it takes to achieve them. Leveraging risk management and internal control (RM/IC) plays a role, of course, but it’s simply what we do; it’s a means to an end vs. the end itself.

You specifically ask if I see a difference in scaling RM/IC for large vs. small- and mid-sized companies. From a theoretical perspective, I would say no. Regardless of the nature or size of an organization, whether large like a Campbell Soup or smaller like PTI, you have goals and objectives and therefore you want to identify and address the potential obstacles that could prevent you from achieving them.

From a practical perspective, though, of course there will be differences. Every organization, regardless of size, is unique in terms of its mission, strategies and goals, its organizational structure and management team, its products, services and supply chain, etc. As such, every organization will face a unique set of challenges. The beauty of COSO’s ICIF and ERM and other such tools is that they are adaptable and customizable to meet any organization’s unique requirements.

The value proposition of ERM has changed over time, even over the last 5-10 years. Traditionally, risk management was a defensive tool. It was all about risk mitigation, risk elimination and value preservation. And Covid, not surprisingly, put many CFOs and their organizations on the defensive. But the ERM value proposition has changed and continues to evolve.

Now, ERM is on the offensive. Now it’s about creating and optimizing value. Now it’s about leveraging risk to create differentiation. For example, at PTI, after the initial Covid shock, we went on the offensive. Specifically, we saw a significant increase in demand for our packaging for hand sanitizer products. As such, we confidently upped the timing of our investment in new injection molding and blow molding machines consistent with the strategies we had already defined.

Thomson: Covid-19 was especially hard on smaller businesses, who had to receive government loans in the U.S. and elsewhere to continue paying their employees and to stay afloat through the crisis. Even after the pandemic winds down, finances will remain strained for many such businesses. How can CFOs in the small- and mid-sized sectors successfully lead their organizations out of this difficult period?

McNally: CFOs for small- and mid-sized companies must, first and foremost, up their game in terms of basic blocking and tackling. I know of a smaller, private company where, pre-Covid, closing the books and reporting financial and operational performance was not the priority. It could take them 2-3 months to close the books. And even then, the quality of the numbers was questionable because accurate classification and timely cut-off was not a concern. Cash was always a mystery, too. Strangely, as sales increased, cash dwindled. Not preparing monthly bank reconciliations was the icing on the cake.

How can you run a business that way? How can you make good decisions? Needless to say, once management realized its major product line was underpriced after bringing in support to carefully analyze its cost structure, complete, timely and accurate financial reporting became a priority. And the CEO and her team actively engaged in performance reviews and risk assessments going forward. The value became clear!

Assuming the basics are covered, CFOs at small- and mid-sized companies must build effective business partnerships with their CEOs and cross-functional peers. They need to ensure the executive team is focused on planning for the future while keeping the doors open until getting there.

Leveraging our inquisitive nature, CFOs should be asking a number of questions. What trends are likely to impact your industry? Have customer needs and wants evolved or outright changed? Are your suppliers going to make it? Have larger competitors with greater resources been able to more effectively weather the Covid storm, meaning they will come out of this stronger than you? Small- to mid-sized companies, like it or not, will need to fight harder just to stay in business, let alone grow and prosper.

As CFO, you need to proactively drive your organization’s strategic thinking, planning and, ultimately, execution. That said, take advantage of being smaller by leveraging and embracing the inherent advantage of being more nimble and agile.

Thomson: Large companies like Campbell have a lot more resources at their disposal for employee training and upskilling than a small- or mid-sized firm like PTI. How do you make up for that lack of resources in a world where finance professionals must constantly upskill to continue to keep pace with the evolution of their jobs? How does a business of your size approach lifelong learning and training?

McNally : Historically, large companies like Campbell Soup certainly had the advantage vs. small- and mid-sized companies when it came to offering management accounting and finance professionals training and development opportunities. Such large companies could afford to send staff to large conferences and expensive programs, and/or to get their MBA. Likewise, they had the scale to sponsor internal leadership programs and develop company-specific courses.

But I would argue the playing field has become more level, especially with a little creativity. In a smaller company, you tend to have closer relationships with your CPA, banking, liability insurance, employee benefits, legal and other partners and they are often very willing to provide informal training. We are currently renegotiating our utility contracts and are “being educated” all about electric supplier auctions and “signing day” accordingly.

Due to Covid, the trend towards online webinars has skyrocketed. More importantly, the quality of this training has significantly improved and much of it is now free. I know we have participated in numerous sessions regarding the CARES Act, PPP loans and Employee Retention Credits (ERC).

Professional organizations like IMA (the Institute of Management Accountants) or state-level associations like the California Society of CPAs (CalCPA) offer another great source of lifelong learning and training, as they typically have programs and courses you can take to improve specific skills.

Thomson: We hear a lot about the technological skills that finance professionals need these days, from data analytics to cybersecurity. But what about the “soft skills” – leadership or communication, for example? Are finance professionals entering the workforce with enough of these skills? In your opinion, what’s the best way for finance professionals to acquire these skills?

McNally : I often talk about the need for CFOs and their teams to earn their seats at the table as business partners and strategic advisors. As companies continue struggling in response to the ongoing pandemic, rejiggering budgets and strategies to exist, it has never been more important to take that seat. But you need to earn it!

Of course finance professionals need to get the basics right, owning the financials and protecting the bottom line. To be successful, though, they must go way beyond “the basics.” The CFO, for example, must inspire and empower their team and organization, effectively tell the story behind and beyond the numbers, steer strategy, embrace change and mitigate risk.

The CFO must also develop a strong CFO-CEO relationship, becoming the CEO’s right hand and developing a shared vision for the company’s future. And finance professionals must always remember to be transparent and objective, delivering the “hard truths” and engaging in “fierce debate” when needed. By doing so, you’ll earn your seat at the table!

And this is where the “soft skills” come into play, such as leadership, teamwork, political savvy, communication and emotional intelligence. Certainly college programs can bring awareness to the need for such skills and can support students in developing these skills via group projects, internships, etc. And certainly CFOs can support their staff, especially young professionals, with coaching and mentoring. And certainly leadership development programs and courses can spark new insight. But, ultimately, development of soft skills will only be fully realized via experience.

Thomson: PTI is a leader in sustainable packaging, but even companies that specialize broadly in environmentally friendly products and markets can still have challenges with ESG performance. With ESG becoming an increasingly central issue in finance, how do small- and mid-sized CFOs ensure that they’re doing what’s right on issues involving the environment, diversity and employee health and safety, among others? How do they balance these demands with more limited resources than big corporations have, and with the need to turn a profit?

McNally: Whether you are leading a big corporation or a small-to-mid-sized company, increasing economic value and staying in business is mission critical. Likewise, ESG issues are relevant to all CFOs.

I would suggest it starts with knowing what you want to achieve, your organization’s strategic goals and objectives, and then investing in those ESG initiatives that are aligned with your desired future, especially those with a positive ROI. You need to prioritize and focus your limited resources, including financial and human capital, as you need to do with all things.

For example, we recently made significant investments in new injection molding and blow molding machines as well as smaller investments in new chillers, compressors, hot water tanks and other equipment. By doing so, we have significantly enhanced the reliability of our equipment, adding needed capacity to meet increased customer demand, while simultaneously benefiting the environment as the new equipment is so much more efficient.

We also recently entered our U.S. locations into a demand response program whereby we are expected to quickly reduce electric usage at our sites upon short notice if there is a potential grid emergency. We may receive a small payment for participating. More importantly, we’ll receive advance notice of a potential blackout, allowing us to insulate our equipment and product from damage or loss by proactively shutting down in a controlled manner.

Leveraging our core competencies as management accounting and finance professionals, we can support our CEO and cross-functional partners in making informed decisions regarding strategic goals, achieving these goals while complying with legal, regulatory and societal expectations, and appropriately responding to changes, disruptions and surprises that will happen along the way just the same.

This article was written by Jeff Thomson from Forbes and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.