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The four main business impacts a Finance organization should focus on in these troubled times – an Asia Pacific Perspective

Apr. 30 2020 by Michael Chung, General Manager - CCH Tagetik Greater China

Performance Management Budgeting & Planning Strategic Planning

According to the Standard & Poor’s latest forecast, the permanent income loss for the Asia-Pacific region reeling under the strain of the pandemic could be as high as $620 billion. With China being the first epicentre of the disease, naturally, the APAC region was the first to experience the business impact of the pandemic, starting with highly disrupted supply chains due to the lockdown in China. In numbers, China's economic growth reduced by -0.91 percent, while both Indonesia and Singapore experienced an economic growth reduction of -0.26 percent in 2020, owing to the outbreak of COVID-19.

The global pandemic has impacted almost every country in the world, leading to partial or full lockdowns in many regions, impairing several economies, with not much relief in sight at the moment.

However, tougher times call for tougher actions; and companies across the world are making major changes across their business processes to mitigate the impact of the pandemic. There’s an urgent need for the office of finance to recognize these challenges and take immediate action – by letting go of ineffective budgets and switching to monthly, weekly or even daily forecasting to keep the wheels turning.

Below, I have identified the four most apparent impacts of the pandemic on enterprises:

-Disrupted Supply Chains

According to a paper by Oxford Economics, “Cross-Asia supply chains were a key channel for COVID-19 economic impact through the first quarter of 2020, with economies across ASEAN feeling the impact of factory shutdowns in China.”

It must also be noted that the pandemic has not only impaired the supply of raw material from China and other affected economies, but the demand for products (as well as the ability to meet existing demand) has also taken a hit due to lockdowns in many parts of the world – disrupting the cash flow significantly.

For example, businesses that are impacted by lower Chinese demand may experience overstocking, which may persist until demand picks up or production is reduced. Besides, with an economic slowdown in China, customers in the country are likely to delay payments to preserve cash, leading to a significant reduction in the working capital of many suppliers.

-Delayed Sales

Flowing from the previous point, in addition to lower demand, many organizations have put sales cycles on hold, which leads to extended closing on sales and a consequent increase in the cost of sale for vendors. This is especially true for the enterprise sector with comparatively longer sales cycles that may get further extended owing to the pandemic.

-Changing Revenue Patterns

Budgets follow historical data. In fact, most organizational decisions are made on the shoulders of past data. However, it is no longer business as usual, and both buying and revenue patterns are changing dynamically across geographies, on an almost day-to-day basis – calling for continuous reforecasting by CFOs to ensure their business plans remain relevant.

For example, the International Air Transport Association (IATA) assessed that the outbreak could lead to a 13% full-year loss of passenger demand for carriers in the Asia-Pacific region. This is a sharp contrast to the forecasted growth rate of 4.8% for the region’s airlines. In monetary terms, this scenario could translate into a $27.8 billion revenue loss in 2020 for carriers in the Asia-Pacific region, with carriers registered in China expected to bear the maximum loss.

-Disruptions Due to Remote Working and Social Distancing

Collaborative meetings and joint decisions driven by key stakeholders over cups of coffee and presentations are no longer practical. Social distancing is necessary to control the present situation, which has led to a large part of any company’s workforce to be telecommuting or working from home. In some industries, like manufacturing, tourism and the services sector, where work from home may not be feasible or 100 per cent possible, workers are no longer available to carry out day-to-day operations. CFOs must be the captain to fronts that change and now more than ever flexibility and adaptability are among the most important goals an organization should focus on to deal with this unusual way to work.

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How Is The Office of Finance Responding to the Global Pandemic?

The current situation is not something anybody had predicted or anticipated. Yet, all these questions are valid and need to be introspected by the office of finance and used for scenario modelling to be better prepared for mitigating the economic impact of the pandemic.

For example, most of us would concur that the 2020 budget, made at the end of the past fiscal year, is no longer relevant. Besides, in the present situation, businesses cannot rely on previous numbers but require a new budgeting methodology based on the performance of their critical business drivers. The office of finance can handle this novel situation by switching to scenario planning as opposed to the traditional holy grail of finance – fixed annual budgets.

Tiding Over Troubled Times

According to S&P Global, GDP growth for Asia-Pacific will fall to 0.3% in 2020 before a gradual recovery, implying a two-year income loss of over US$2 trillion. Corporates can expect to see 10% to 15% less revenue and banks may incur over US$400 billion in extra credit costs because of the outbreak.

Yes, the situation isn’t bright and it’s time to act! Survival of the fittest – the Darwinian theory of evolution – can also be applied to businesses in the present times, as only the most agile, forward-looking and adaptive organizations would be able to mitigate the impact of these turbulent times and come out stronger when things return to normal.
Of course, CFOs are, and will continue to play a significant role in these troubled times – deviating from their usual concerns to ensure the success of work from home models without IT intervention and forecasting performance on daily (or even hourly) basis to make quick business decisions.

Be Prepared. Stay Safe

True that the COVID-19 outbreak began in Asia—but McKinsey also reports early indications of containment, new protocols, and the resumption of economic activity in the area. In China, urban activities are almost back to pre-outbreak levels. McKinsey has also pointed out that the curve has almost flattened in many Asian countries, owing to the agile public health measures implemented in the area. Based on these factors, the region is still expected to show a strong long-term growth trajectory, despite the present slump. However, organizations in the Asia Pacific need to remain agile and reimagine their business processes by bringing in more technology if they wish to overcome the financial impact of the pandemic and resume their growth curve sooner.

In our opinion, when faced with a watershed event, organizations must analyse their day-to-day performance to get a fair estimate of the future – which is essential for budgeting and business planning. Using an intuitive and agile forecasting engine can help the office of finance not only keep a tab on actuals but also develop multiple scenario-based business models to efficiently combat difficult situations if and when they arise.

To learn more about how CCH Tagetik can assist you during times of disruption, check out the Must Have Tools for Planning in Today’s Turbulent Times page in our website.

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