By FCPA Dr. Jim McFie.
On 31st May 2022 the International Federation of Accountants (IFAC) published a report on the “Global Priorities for Professional Accountants in Business and the Public Sector”
The report was the outcome of a virtual meeting in March 2022 of IFAC’s Professional Accountants in Business (PAIB) Advisory Group, called to consider the key global trends impacting the accountancy profession. Sanjay Rughani, the Chair of the Group pointed out that we live in a chaotic world which challenges businesses and governments: the adverse effects of the Covid pandemic have been compounded by the consequences of the Ukraine war.
The report summarizes the key insights and learnings from the discussions amongst this global group of business and finance leaders, drawing from their diverse experiences and expertise. “We need to think differently to drive sustainability and create value during this time of deep uncertainty and unprecedented trading and economic conditions” Rughani. “By sharing our learnings as a global profession, we can support professional accountants to engage in higher value actions and inform more strategic decisions.”
Increasing energy and commodity prices are affecting economies and consumers across the globe at a time
when there is a worldwide push to get to the net-zero climate and sustainability agenda. Inflation rates and inflationary pressures in most major economies are certainly affecting people outside Russia, and possibly hurting people outside Russia more than people living in Russia. It is clear that many countries face energy insecurity, a lack of energy independence, compounded by the costly transition to low-carbon alternatives. These trends and issues are greatly impacting market dynamics on the demand and supply side and are likely to be sustained for the short to medium-term at least.
Chief Finance Officers (CFOs) and finance teams are at the center of addressing these challenges that are
impacting profitability, supply chain resilience, product or service quality, interest rates, the cost of borrowing, and financing and investment. For CFOs and finance teams responding to inflation and the current market challenges is a priority that requires connecting different parts of the organization in which they work: they have to provide insights that enable a business to continue to create and protect value. Their co-pilot and value partner role can be captured in four key areas.
Firstly they have to understand and keep track of market dynamics. They need to be aware that external data is needed for planning and forecasting to provide predictive insights that support strategic and operational decisions. They have to hunt for any market research that is available: they need to seek external advice from a host of persons in their sector of the economy but also from any sector that is affected in any way by the business in which they work; they need to examine facts and figures from key functions in their organization and from key relationships with financiers, customers and suppliers.
They have to use relevant third-party and external data to enhance their understanding of demand and supply-side fundamentals and calculating what things cost today and what they may cost in the future.
If prices are increasing, by how much and how permanent will the increases be?If they purchase goods from abroad, is there a supplier of similar goods in Kenya? Have they done a search? What will be the knock-on effects on consumer demand such as the substitution effects from higher prices?
“Increasing energy and commodity prices are affecting economies and consumers across the globe at a time when there is a worldwide push to get to the net-zero climate and sustainability agenda. Inflation rates and inflationary pressures in most major economies have reached levels not seen in forty years or more. Once in a generation challenges present new market realities with risks and opportunities. Legacy supply chain and capacity issues from the pandemic and systematic lack of investment in many commodities and supply chains have caused tremendous backlogs of supplies.”
Some well-off customers may not change their consumption habits at all but some customers will seek substitute products or use less of the organization’s output leading to lower demand for some products. International transport costs have shot through the roof: CFOs must gain insights on supply-side market dynamics including supplier risks and economics and actively engage in dialogue with suppliers, and with procurement colleagues. Secondly, the CFO and the finance team must pay particular attention to relationship management and collaboration. The CFO must be seen as a trusted value partner which involves building relationships with relevant teams and external stakeholders.
It requires relevant actionable information and tools in supporting the selling function in the organization
to identify additional revenue opportunities and offer the right incentives to customers. The CFO must assist the procurement department to deal with supply-side challenges and break down siloes between the pricing and the procurement functions to ensure clarity on pricing opportunities, and where to pass on cost increases to protect margins.
The CFO has to be an adviser to the human resources department to plan responses to wage inflation and put in place strategies to attract and retain the talent and expertise needed for the organization to compete. It is surprising that staff turnover is quite high in Kenya at the moment, at a time when many businesses are recovering only slowly from the negative effects of the Covid pandemic, and one would expect that there would be few employment opportunities in the economy. The CFO has to craft explanations of the value of the overall employment offering including flexibility and other benefits that can be important aspects of retention and recruitment.
The CFO needs to be able to explain to external stakeholders so that they understand the context of economic, industry and company-specific factors that impact pricing and supply issues, for example making customers aware of the drivers of increasing prices. The CFO is the person who has to have a dialogue with banks and credit rating agencies to find innovative ways to maintain a reasonable cost of funding.
Thirdly, the CFO and finance team have to do all they can to assist in managing the impact of volatility. The US dollar Kenya shilling exchange rate reflects a gradual drop in the value of the Kenya shilling at the moment but if the organization is either an exporter or an importer, that exchange rate has to be closely chain challenges and reconfigurations, if this is necessary.
They need to be aware that external data is needed for planning an forecasting to provide predictive insights that support strategic and operational decisions.
The finance team must work closely with their procurement and supply chain teams on targeted changes, reviewing existing contracts, and ensuring involvement in opex and capex decisions early in the process. The role of CFOs and finance teams in procurement is becoming more strategic: they have to evaluate strategic priorities for supplies and the value chain to meet business and customer needs; they have to address strategic priorities for supply chain management and consider alternative sources of supply, as stated above, and lifecycle strategies including circular monitored to take advantage of any movements, which may occur over the course of a single day, to gain a financial advantage for the organization.
CFO needs to be able to explain to external stakeholders so that they understand the context of economic, industry and company-specific factors that impact pricing and supply issues, for example making customers aware of the drivers of increasing prices. The CFO is the person who has to have a dialogue with banks and credit rating agencies to find innovative ways to maintain a reasonable cost of funding.
The team needs to understand the requirement to provide information and predictive insights to allow flexibility and agility. The team must focus on improving forecasting and using predictive modeling analysis. It needs to provide insights on the interconnections between key financial performance drivers and critical value drivers in relation to consumer demand and supply of materials and other resources as a basis for making good decisions and driving the right discussions with customers and suppliers.
It should consider whether there would be any advantage in increasing the frequency of forecasting to boards and management to provide timely visibility and insights. The speed at which cost changes and price adjustments can be made is critical to making the best decisions and responding to market changes. The team must be aware that it is important to provide accurate and timely insights into profitability and margins as input and sales prices change, and to be cognizant of potential macroeconomic changes to interest rates and commodity prices.
The team must have an understanding of costs from a product, channel and customer perspective to target actions to increase value and reduce cost-to-serve. In a cutting-edge organization, the team needs to deploy artificial intelligence and digital tools to enhance the tracking of underlying transaction data and translate the insights into proposed actions on pricing and procurement.
Fourthly, the CFO and finance team must assist the procurement department in dealing with procurement and supply business model options to increase resource efficiency. Finally they have to ensure that procurement teams receive the right information such as through value chain mapping and analytics for key materials, markets, and suppliers.
Are you a professional accountant are you merely a bookkeeper? If your answer is that you are a professional accountant, step up to the task of being an extraordinarily valuable asset in the organization which you serve by being a truly resourceful person to assist all the other functions of the organization.
FCPA Jim McFie is a Fellow of ICPAK