While we were still recovering from the COVID pandemic, inflation has risen to historic highs and the political situation and its consequences on energy and raw material prices remain volatile. Even more so than before, companies need to be able to adapt quickly. To remain competitive in a fast-changing world, they need to have a clear view on their financial drivers. How to act as a controller in a changing reality?
Information uncertainty is probably the biggest risk for any company. Yet, the future has become much more difficult to predict.
The clients I worked for, major players in their own sector, endured totally different impacts on their businesses during the COVID pandemic. At a client in the security sector, some existing sales dropped to zero (events) while new sales opportunities arose (f.e. COVID test centers). Another client in the travel sector had harsh times.
Instead of creating an annual plan and sticking to it, managers must understand their business well and respond adequately to vivid changes. Traditional models prove themselves inadequate in facing threats. We need to accept that existing assumptions are wrong and need to be rethought. We should celebrate learning from our mistakes, or better: experiences.
Information uncertainty is probably the biggest risk for any company. Yet, the future has become much more difficult to predict.
Why do existing operating models fail?
Operating an annual budget is common practice. Managers act in line with the decided strategies, goals, and costs. The assumptions determine how managers and departments communicate with each other.
In spring 2020, the assumptions that were made in the budget 2020 suddenly made no sense anymore. Since then we have been faced with the fact that any comparison with last year has become obsolete. Organizations were obliged to adopt more agile techniques to become more flexible and responsive. Flexibility is the answer to old rigid information. Focus should extend the finance view, and a dashboard to score the assumptions is probably desirable to follow up the most critical KPI’s.
Managers in a new situation tend to think too positively and will end up building a scenario that might be too optimistic. Moreover, the assumptions that are used are no longer sufficient. What was thought to be logical now has become uncertain. The planning needs to be agile, providing an answer to changing situations by the ability to adjust important parameters. Also, don’t underestimate people getting tired under constant change.
Flexibility is the answer to old rigid information.
How to act in this changing reality? 3 behavior tips for controllers
- Get involved
A controller typically supports management in making decisions. They anticipate and ‘act before the fact’, which is commonly referred to as business partnering.
In times of constant change, a controller should definitely get a seat at the table. The more uncertain a situation becomes, the more important it becomes to continue to communicate with management. A controller should always remain calm and trustworthy. A good controller also knows just how to get the company in motion. - Understand your business (drivers)
What is success, really? It is crucial to identify your business’ key drivers. Only if you understand perfectly what drives your business will you be able to respond to a changed reality.
Maybe you want to consider one price change instead of several, or you might want to say goodbye to a long-term contract that has become loss-making.
To support your decisions, insights into contribution margin (sales minus variable costs) become essential. Your operating leverage determines which part of your business contributes most to cover your fixed costs. Do you need to cut those fixed costs, or do you need to manage them to stay armed? Make sure you understand your cash flows and how your working capital behaves in a changing and volatile environment. - Adapt to the new world
“Understanding how your business is affected and what reporting you will need to inform timely decisions is key.” Think the unthinkable. Suffering high energy and raw material prices, inflation rates, supply chain disruptions and personnel issues, adjusting your reporting is key to keeping the head above water.
Modeling all those changes and their impact on revenue, costs and cash flow will help you to reduce unwanted surprises. Even do some stress testing by building scenarios you don’t expect to gain insights on your business.
Photo by Lukas Blazek on Unsplash
