Axiom EPM Whitepaper: Fit for the Now: Part 1: Adapting to Challenging Times & Economic Uncertainty

Axiom EPM:

Fit for the Now: Part 1: Adapting to challenging times and economic uncertainty

Applied Financial Intelligence

Managing your organisation through uncertainty From redundancies to new tariffs, lockdowns to loss of revenue, there are few - if any - industry sectors currently escaping the immediate and growing pressures and challenges presented by Covid-19, Brexit and the economic downturn.

New economic realities have dramatically shifted the landscape in which all businesses must make decisions.

While industries might be united by lockdowns and growing unpredictability, each sector also presents its own unique set of challenges and opportunities; from mapping and managing cash cycles in Insurance to effective inventory management within Manufacturing. From cash flow planning in Retail, to workforce planning and management in Hospitality, to disrupted supply chains in Brewing and Beverages.

In this whitepaper we will be looking at the current financial challenges that businesses are facing in the short-term and the financial management solutions that can help mitigate the many arising issues.

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In this whitepaper we will explore: • The immediate challenges for different sectors • The importance of cash management • Developing effective supply chain management • Workforce planning and management • Financial management data at a detailed level

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New economic realities have dramatically shifted the landscape in which all businesses must make decisions. While industries might be united by lockdowns and growing unpredictability, each sector also presents its own unique set of challenges and opportunities.

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Forecasts for the year ahead The vast and dramatic impacts of Covid-19 continue to be felt differently across a wide range of industries. In 2020, the gross domestic product (GDP) is expected to shrink by 11.3%1. However, the economy was expected to enter recovery in 2021 with GDP expected to grow by 5.5%. Since the announcement of tougher restrictions and a renewed surge Coronavirus cases, the Resolution Foundation2 thinktank has now reduced the forecast of growth to 4.3%.

Winners and losers As often is the way in business, there are some winners and there are some losers. While some businesses have reported increased profits from Covid-19, others – even organisations in the same sector – have suffered, with Manufacturing, Travel and Transportation, Hospitality and Retail currently reported to have experienced the worst overall impacts3.

Through lockdown, quarantines and regional restrictions, there have been some industries which have naturally witnessed a rise in demand, such as frontline Healthcare and Retail operations deemed ‘essential’. However, a significant number of industries have been directly hit by a reduction in demand, footfall and orders.

Unemployment is predicted to spiral with the end of the furlough scheme in April 2021.

https://www.statista.com/statistics/375195/gdp-growth-forecast-uk/

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https://www.resolutionfoundation.org/app/uploads/2020/12/Macro-Outlook.pdf

2

https://www.statista.com/statistics/1106302/coronavirus-impact-index-by-industry-2020/

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While there are many challenges that are sector-specific, businesses across the board are facing a range of issues that include: • The impossibility of forecasting future demand and revenue based on historical data • Predicting changing government policy and legislative changes as the situation changes • Modelling revenue and profitability quickly to maximise benefits of schemes such as ‘Eat out to Help out’ • Making environments safe for staff and customers and the additional cost of equipping people to work from home Retail The retail sector is a prime example of the lows and highs witnessed by the current pandemic. While retail as a whole is up by 30%, retail stores have seen a huge drop in demand.

Conversely, essential retailers such as supermarkets, food retailers and pharmacies have shown a rise in demand, and online shopping has also spiked significantly. Retailers have had to change their business models quickly.

Brewing and Beverages Overnight, the market within Brewing and Beverages witnessed substantial changes with a significant and dramatic reduction in revenue and the immediate loss of the on-trade market with the closure of pubs and restaurants. The main issue here is cash: you can still trade if you have revenue whilst making a loss or reduced profit, but if your cash disappears this is a major problem.

Hospitality One of the sectors that has been most directly impacted by the current challenges and where robust, yet flexible, financial management and planning solutions are more critical than ever.

The industry faces a range of issues, from a total reduction in visitors from abroad to large location and seasonal variations affecting trade.

Higher Education Multiple changes are having a massive impact on the Higher Education sector, with long-lasting effects. The immediate impact of the pandemic includes reduced income from student numbers and tuition fees and losses on long-term investments, as well as access to financial resources and grants. A recent study from the Institute for Fiscal Studies suggested that thirteen universities might very soon face insolvency without a government bailout.5

Manufacturing 50% of Manufacturing businesses believe their operations will not stabilise before the next planning process4. 26% feel their operations will not stabilise until 2021 or beyond. Demand volatility and uncertainty has left the sector with increasing operating costs, disrupted supply chains and a reduction in productivity due to health and safety requirements.

https://www.westmonroepartners.com/perspectives/in-brief/manufacturingbusiness-planning-and-budgeting-in-a-post-covid-economy

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“Will universities need a bailout to survive the COVID-19 crisis?” Institute for Fiscal Studies, 6 July 2020

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Cash is king, particularly during tough economic times Some companies faced an immediate challenge, switching from operating with surplus cash to managing cash in a constrained environment.

Cost management and forecasting is crucial and yet it can be difficult to balance with the unpredictability of consumer confidence: how to price goods or services to encourage demand, while also covering increased running costs associated with the pandemic.

During the previous 12 months businesses with low cash reserves or unstable cash flows were particularly vulnerable.

As the virus has spread, there’s been a ripple effect that impacted on multiple sectors, for instance, Tourism affecting Hospitality affecting Entertainment and Brewing.

“ Careful balance between defensive cash preservation and generation tactics are of paramount importance but need to be effectively managed.”6 KPMG, ‘Guide to Maintaining Enterprise Resilience’’

Going forward there are some key areas of cash management that require urgent consideration in order to mitigate risks and plan effective cash management: • Debtors can be a significant asset on the balance sheet and a hidden source of capital. Customer bases need analysing to assess the financial risk of key trading partners, customers and suppliers. This means getting control over debtors and establishing longer payment terms, plus, a re-assessment of financing options, as not all options will continue to be available. Additionally, by selling or financing for your debtor book or improving your supplier management, you can positively affect your cash position.

• Cash-to-cash conversion cycle. Due to the current conditions, it can be preferential to move attention from P&L to Balance Sheet in order to look at payables, receivables and inventory.

Considering variable costs in order to immediately reduce cash outflows, from hiring freezes to discretionary spend, such as training.

6 https://home.kpmg/uk/en/home/insights/2020/04/responding-to-covid-19/covid-19guide-to-maintaining-enterprise-resilience/covid-19-financial-resilience.html

Manufacturing The Manufacturing industry has historically been a high-volume business with relatively low profit margins. To face the current challenges, manufacturers must effectively manage inventory and control cash balances and flows, in accordance with plans and changing circumstances and to account for long lead and shipment times for parts and products.

Retail Processes need to be a priority for buying stock to mitigate cash flow problems. For instance, monitoring on-line sales channels and returns’ implications for revenue recognition with regard to the lapse of the period in which the customer can return the goods.

Professional Services As time is the inventory of a service-led business, a more agile and reliable system is necessary for logging billable hours in remote working situations to protect revenue. Rolling forecasts and real-time forecasting will also be crucial in order to uncover a deeper understanding of all aspects of business activities, projects, resource allocation and profitability, to facilitate performance improvements and stronger financial results.

Hospitality A hotel’s income statement is a critical tool, with major business decisions based on the results. Timely financial reporting processes need to be in place in order for hotel operations’ teams to make the adjustments to improve results for the given time period, so the same potential costs or inefficiencies will continue.

Management planning

“ Given the importance of cash flow in times like this, companies should immediately develop a treasury plan for cash management as part of their overall business risk and continuity plans… the approaches you take to manage cash will have implications for not only your business but also for your customers.”

Deloitte: ‘Managing cash flow during a period of crisis’7

7 https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/ gx-COVID-19-managing-cash-flow-in-crisis.pdf

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Supply chain management Brexit and Covid-19 continue to pose disruption with interruptions of supply, or shortages and increased cost of raw materials or components. Countrywide lockdowns have prevented employees from working. Plus, the UK’s exit from the EU is bringing its own particular challenges with regards the cost of imported goods, future trade deals, tariffs and movement of goods across borders.

Disrupted supply chains

Managing the impact

This complex environment requires careful management across lead times, costs, administrative burden of importing and exporting, and future tariffs on goods.

There are changes afoot to supply and demand that every sector cannot ignore. From overtrading and exponential growth in Manufacturing placing a strain on cash flow, to Retail’s disruption to supply chains with unpredictable future tariffs and movement of goods across borders.

Good supply chain management equals good cash management.

It is essential that all businesses monitor key suppliers and customers, work with them, and address weaknesses in their value chains to be ready for the uncertainty ahead while tackling any immediate issues from the pandemic. In addition, it is imperative to avoid using stock as a buffer against potential further disruption as this will impact cash flow.

A focus on the immediate changes to the supply chain is vital if businesses are to ride out the current challenges, manage cost and profitability effectively and make rolling forecasts on supply chain management for the future. Recovery strategies can include: • Keeping tight control over inventory and other important data, especially as increased competition can create price wars.

• From a cash flow perspective, reducing inventory, especially perishable items, to reduce wastage, while ensuring there is no impact on customer service.

• Pricing and distribution decisions – working out differences in demand fluctuations from any future lockdowns and pandemic-related restrictions.

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Workforce planning & management Sectors everywhere are having to look for new ways to support their people to work effectively.

This naturally means additional costs equipping people to work from home, as well as making certain office space redundant without any saving on leases and rates.

Human capital management For many businesses, especially in Finance and Professional Services, people are the most important, as well as the most expensive, asset. It is therefore critical for finance in these sectors to assess workforce management and link people to scenario planning and diversification, in the same way as other sectors consider products and services.

Consider the different types of workers, from full- or part-time employees to associates or freelancers; from zero-hour contracts to regular contractors. In addition, there needs to be flexibility for scaling up a workforce quickly and accessing the right talent and skill mix according to the demand of the business and the need to keep operations running.

Devolving budgeting By democratising and devolving budgeting and operational finance responsibilities, finance teams can maintain control by allowing data to be easily and quickly collected and collated, giving finance professionals the agility to inform decisions. Equally, by encouraging ownership and responsibility, individuals are more empowered to act on information that will drive performance at a local level.

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Financial and management data at a detail level In order to forward plan for different types of potential futures, having accurate and real time financial data readily available and easily accessible is critical.

A single source of truth

Manufacturing

In financial performance management businesses need a system that is a single source of data. A single, unified truth means accurate input and accurate data. In turn, this gives decision-makers the confidence in a robust view that informs better decisions.

Businesses in this sector can improve their insights to understand the cost and profitability impact of each component in the production lifecycle, by integrating data from across an organisation and wider supply chain.

By unifying budgeting and forecasting, cost management, and reporting and analytics into a single, accessible platform, businesses can empower their scenario planning and make more informed decisions across cash flow management, budgeting and forecasting, right down to department or local level.

Retail

Integrating data and improving insights

Hospitality

Integrating financial and operating data from virtually any source across all areas of a business, including CRM, HR and ERP can bring spending under control, providing managers or partners with complete visibility of the cost pipeline. This can include:

Here, KPIs can be measured including room rates, occupancy and Food & Beverage sales to track specific drivers of income and offset this across lots of different expenditure including staff and other costs.

• Using the tools to outperform, including reports, analysis, statistics, dashboards, what-if analysis, plans, budgets and more.

Healthcare

• Validating every purchase request and commitment against budget at any level, such as department, office or project.

• Deploying sophisticated approval-routing to guarantee improved governance within a clear, structured, controlled spending policy.

For product marketing, Retail businesses can use integrated data to understand the profitability of promotions, the costs of acquisition and the profitability at an individual SKU level. It can also support awareness of loss leaders to acquire new customers.

High levels of staff turnover is a widespread problem for the Care sector with levels in the UK at around 30% in 20198. A solution can include using integrated data and insight to create more robust retention strategies.

• Leveraging and interpreting the insights behind an enormous amount of data to gain useful information, predict trends and, therefore, improve operations, with assessments at both a micro and macro level.

Source: Skills for Care Workforce Estimates 2018/2019

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Financial agility.

How Axiom helps address these challenges Agility in financial management and planning is all about making decisions with greater confidence.

By being financially agile, businesses can make it easier and speedier to respond to the changing landscape and to understand how to replan when further challenges come their way.

Modern financial planning practices and tools have become central to decision making. Financial data offers greater insight into how the business is performing within current market conditions, linking operational drivers to financial results. Axiom’s Budget and Payroll Planning solution enables businesses to combine financial data to forecast staffing decisions and factor in various drivers that impact on staffing. Consequently, businesses can make accurate, agile decisions and maintain total control over finances by modelling different financial plans and initiatives.

By making informed decisions with accurate forecast and budget data, both financial and nonfinancial, businesses will be able to align strategies with immediate and long-term objectives. Axiom’s Reporting and Analytics module helps companies transform financial data into insights by analysing and visualising financial and operational data to identify and highlight trends, variances, and improvement opportunities.

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Applied Financial Intelligence

Fit for the Now: Managing your organisation through uncertainty The unprecedented scale and speed of the current crisis, and with further challenges on the horizon, means businesses across all sectors need to adapt quickly with robust recovery plans and growth strategies for the future.

As expectations for business conditions vary sector to sector, it is vital to immediately identify financial management performance tools that will assist with the specific range of issues and challenges facing individual industries. The key is to match solutions to specific sector challenges with robust, agile financial planning and management that will prepare businesses for the range of immediate uncertainties we’ve discussed in this paper, equipping offices of finance with the solutions to help meet challenges, manage change, and increase resilience.

As we’ve seen, careful cash management is crucial, along with an analysis of capital expenditure and running multiple scenarios to prepare for all kinds of change. By gaining a better understanding of impacts and changes that will affect each industry, businesses can better re-imagine and re-align how to plan operations and growth going forward, developing new forecasts and strategies. This is why Axiom financial performance management solutions are targeted to improve financial management efficiencies and forecasting within individual sectors, while also developing new opportunities to stay ahead of the competition.

At the crux of being fit for now is having access to accurate and real-time financial data. Maximise opportunities by capturing reporting and analysis to develop new business models and provide a stable revenue stream during intense disruptions.

By efficiently gathering financial information from across the organisation, businesses can predict the impact of a wide range of operational and market drivers. Consequently, they can put in place insight, agility and continuous innovation matched with robust financial planning and management, for fast, effective decision making.

With such processes in place, companies across all sectors will be able to rethink their overall financial planning approach, to consider key drivers of source data, revenue guidance, and realistic budget planning. Ultimately, with the over-arching aim to empower critical decision-making and leadership that will successfully grow every business through the immediate crisis and beyond.

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Why not get in touch and see how Axiom can help your finance teams face the challenges of today and tomorrow.

Contact us by emailing hello@axiomepm.co.uk or call us on +44 1932 548 465 to talk to one of our higher education specialists.

Applied Financial Intelligence

Dixcart House, Addlestone Road, Addlestone, Surrey, KT15 2LE T +44 1932 548 465 E hello@axiomepm.co.uk

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Applied Financial Intelligence