For years, alternative financing models have been changing the way companies access cash. Now, fintech is offering innovations, from subscription and fee-based online lending marketplaces to blockchain, that are changing the alternative financing landscape itself. That, in turn, is altering the competitive balance as traditional banks go head-to-head with financiers to provide CFOs with better terms and greater flexibility for managing working capital.

 “Businesses rely on access to growth capital, yet due to their risk appetite and stringent regulation, banks are constrained,” Deloitte explained in a 2021 paper. Direct lenders can offer attractive rates with little or no equity dilution of the business, enabling companies to “make acquisitions, refinance bank lenders, consolidate [their] shareholder base, and invest in growth.”

Varieties of alternative financing already range from venture capital, crowdfunding and equipment financing to peer-to-peer lending, angel investing, factoring and revenue-based financing. The factoring market alone reveals the thirst for alternative means of raising cash. The most recent estimate by Researchandmarkets.com placed the global factoring market at $3.8 trillion in 2024 and forecast that it will reach $5.3 trillion in 2028 at a CAGR of 7.8%. 

The latest, fintech-fueled innovations promise to expand alternative financing even further, pairing lenders and loan seekers through algorithms generated by artificial intelligence. 

Marketplace financing means the company submits a loan application online, where it is assessed, graded and assigned an interest rate using the provider’s proprietary credit scoring tool. For a flat fee or subscription, direct marketplace lenders facilitate all elements of the transaction, including collecting borrower applications, assigning credit ratings, advertising the loan request, pairing borrowers with interested investors, originating the loan and servicing any collected loan payments.

A leading provider is Leverest FinTech, which launched its financing platform in 2021. With offices in Frankfurt, Berlin, London, and more recently in the US, it connects private equity investors, debt and M&A advisors, and corporates with lending partners, including banks and debt funds, anywhere in the world.   

Leverest has thus far completed over 100 transactions with 600 lenders in Europe, amounting to more than $1 billion managed via the platform. But in addition to being a lending marketplace, it is also a specialized customer relationship management tool.

Instead of tracking your relationship bank’s offerings on an Excel file, “you always have up-to-date data to see who fits your project,” says Leverest COO Janik Bold. “You always get the answer from the tool because we have so much data and so many financing parties on the platform.”

The platform is also geared toward making the financing process more efficient, he adds: an especially valuable characteristic for CFOS of small to midsize enterprises who want to free up time and resources.

“We see a lot of parties that might have a marketplace,” Bold notes, “but then at the same time they have internal consultants that need to help the parties finalize the financing. We took a different approach, using digital tools to enable a do-it-yourself solution. You really need both to put that power back into the hands of the CFO.”

Many CFOs have limited time to manage a competitive process, which is why they tend to rely on just two or three relationship lenders. Bold argues. “The process management software we offer, be it a data room or a deal cockpit, helps to send out invites and share and receive information. With just a marketplace alone, they still would have to manage that process manually.”

Other than corporates, some of Leverest’s marketplace clients are bigger investment banks that manage financing processes for private equity.

“Why they’re also using the platform is because it’s also making them much more efficient,” Bold says. “The whole investment banking space is still not digitized. They’re still using Excel and Outlook. They love our platform because they can save hundreds of hours of time.”  

CFOs can expect further financing innovations to roll out this year.

Blockchain is set to revolutionize loan transaction efficiency, say consultants at Lexington Capital Holdings in a recent report, and as the technology gains traction, it will redefine the way transactions occur.

“The decentralized and transparent nature of blockchain can streamline the loan approval process, enhance security and reduce fraud,” Lexington concludes. “Smart contracts, enabled by blockchain, have the potential to automate and expedite various aspects of lending, making the entire process more efficient.”

Artificial intelligence-driven credit scoring, the technology behind platforms like Leverest, will continue to streamline the risk assessment project. “AI is poised to revolutionize credit scoring, allowing lenders to assess risk with unprecedented precision,” Lexington foresees. This shift toward more accurate risk assessment will be particularly relevant for businesses with nontraditional credit profiles. 

New and innovative marketplace models not only allow CFOs to navigate the complex financing market more effectively, but also provide value-added process management technology to their clients. The provider universe is likely to undergo its own transformation as well; Lexington anticipates this year will see increased collaboration between traditional banks and alternative lenders, creating hybrid financing solutions that cater to a broader spectrum of businesses.

These factors are squeezing the bottom line at many global companies this year, forcing CFOs to redouble their supply chain management efforts.

Why the CFO?

“It’s one of those things that happens in one area but cascades through the rest of the business,” says Sean Fitzgerald, senior research director of the Finance Executive Advisory Practice at The Hackett Group. “Physical supply chain volatility clearly has an operational implication, which has a financial set of implications, including cost profile implications around where the business is staffed, where you spend money and where you’re looking to save money. You have this real-world set of dynamics that permeate all these other dimensions.” 

So, what are companies and their finance chiefs doing to manage the impact of yet another round of supply chain disruptions?

For Ali Sarfaraz, global controller at Qikiqtaaluk Corporation, a Canadian exporter of lobster, shrimp and other fishery products, anything affecting cost structure gets pushed forward.

“We sell all our product through a marketing company in Europe, which then distributes it mainly in China and the EU,” he explains. “For us, our catch and processing costs are fixed through binding agreements, but the variable marketing and distribution costs have gone up by anywhere from 10% to 15%. Given the nature of our industry, there’s not much we can do about it, other than push prices forward.” 

To reduce the impact, QC has implemented a natural hedge. “We pay our fixed costs and any other costs in our local currency, but we sell our product in US dollars,” Sarfaraz says. “This always gives us a nice cushion for circumstances beyond our control.”

Other companies are bringing to bear lessons they learned during the Covid-19 pandemic. In the wake of the pandemic-induced economic slowdown, Estee Lauder worked to eliminate the traditional long distribution haul between the US, Europe and Asia, says Julie Teh, the company’s senior vice president of Finance Digital Transformation. 

“We’ve restructured our manufacturing footprint, opening several locations in China, India and Japan and moving our product closer to our growth markets,” she says. “That in part is how we’ve protected ourselves from these black swan events.”

These kinds of organizationwide shifts are where the CFO comes in.

“The CFO has 360-degree vision into the potential financial and strategic impacts across the enterprise,” says Courtney Rickert McCaffrey, global insights leader at EY Geostrategic Business Group, “and can be instrumental in building scenarios around these types of risk and the potential impacts on their companies.”

The CFO’s job expands into coordinating internally between different teams.

“What we often find is there are pockets of geostrategic activity going on within companies, but that the different teams might not necessarily be collaborating,” McCaffrey notes. “CFOs can help ensure that everyone is working together, rowing in the same direction in the same boat.”

This includes forging tighter ties with supply chain managers, says Fitzerald.

“It’s really important that the CFO and the entire executive suite are clearly aligned on what incentives people should have that are consistent with these supply chain challenges,” he says.  “You need to make sure that you don’t have different parts of the organization working against one another because they have misaligned objectives in relation to inventory optimization.”

CFOs should also be looking carefully at their currency hedging strategies, says Josh Nelson, principal of Strategy & Operations at the Hackett Group.

“You can use treasury as one of the cost-management levers to pull,” he suggests. “If you’ve got local currency issues related to either the procurement of raw materials, or even the costs around packaging and transporting those materials, that’s purely a finance lever to mitigate cost variability.”

CFOs should also consider factoring receivables to smooth this year’s cash flow, Nelson adds. “If companies have to hold more inventory in order to ensure stability or relative stability of supply, or if they have liquidity concerns due to increased costs, then factoring is certainly something that the CFO is going to look at.”

The impact of shipping delays on the bottom line is forcing companies to focus more on working capital.

“Companies should be reining in days sales outstanding (DSO), getting collections in place,” Nelson advises. “On the flip side, we should see companies trying to push out days payable outstanding (DPO) to help improve their cash positions in the face of rising costs. 

Also, when it comes to inventory,  he adds, “it’s like a pendulum this year.” “During the early days of the pandemic, there was no inventory in the system. Then the pendulum swung the other way where companies bloated up their warehouses. They wanted to make sure they had coverage with the goal of hedging against supply risk and maintaining supply continuity. But in doing so, they lost focus on optimizing inventories, in other words placing inventories at the right location to drive appropriate service levels without bloating the balance sheet.” This year, inventory optimization should be a key priority for CFOs, he advises. “They may not directly control it, but they can partner with their operations and supply chain counterparts and really drive down inventory, reduce working capital costs and overall operating costs.”

“At the end of the day, it’s all about intelligent cost management,” says Fitzerald. “Figuring that out is not about just cutting costs wholesale; it’s about focusing on near-term benefits without putting long-term capability at risk.”

The world must achieve zero carbon dioxide emissions by 2050 to stave off further climate disaster, according to the 2015 Paris Agreement. Buildings are the largest source of emissions of any sector, accounting for 40% of energy-related global carbon emissions. Yet, only 3% of investment in new construction is currently green and efficient. 

Big as the challenge is, climate change is typically classified as a regulatory issue: the domain of compliance and sustainability officers, engineers, and designers.

For building owners, developers, and REITs, “it’s the responsibility of CFOs and their team to maintain financial viability and to steer a company’s portfolio decisions,” says Julie Emmrich, sustainable finance lead at the World Green Building Council (WorldGBC). “There needs to be close communication between finance and other stakeholders to understand the economics of future-proofing a building.” 

When it comes down to the financial management of building companies, the WorldGBC identifies several reasons why CFOs should care about building green, including the potential for greater access to investment, improved corporate reputation, higher asset value and desirability, resilient investment and lower risk of stranded assets, increased ROI, and preferential insurance premiums.

Green buildings can also amass substantial cost savings. In North America, Leadership in Energy and Environmental Design (LEED)-certified buildings reported $1.2 billion in energy savings, $715.3 million in maintenance savings, $149.5 million in water savings, and $54.2 million in waste savings from 2015 to 2018. Other savings come from lower remediation or refit costs and potential federal, state and local government tax benefits. 

Ignoring Net Zero Risky

Beyond the benefits of building green, CFOs need to be aware that the financial risks of ignoring a net zero carbon agenda can be significant now that more governments are cracking down. In France, landlords can no longer increase rent on properties with poor energy efficiency ratings, and as of January 1, it is illegal to rent out the least energy efficient properties: those consuming more than 450 kilowatt hours per square meter per year.  In the UK, by 2025, buildings will require Energy Performance Certificates or they cannot be rented out; it’s expected that energy upgrades will apply to 15 million homes in England and Wales, according to Lloyds Banking Group.

Local governments are also weighing in on reducing building CO2. Vancouver, Canada declared a climate emergency in 2019 and set a goal to reduce embodied carbon (carbon from construction materials) 40% by 2030. The city has since established an aggressive building carbon reduction strategy, including new zoning requirements, by-laws, and guidelines for new builds.

In the US, New York City Local Law 97 sets limits on buildings’ greenhouse gas emissions, starting in 2024. As part of the Climate Mobilization Act of 2019, the law aims to help the city reach the goal of a 40% reduction in greenhouse gas emissions from buildings by 2030, and an 80% reduction in citywide emissions by 2050. Some 3,700 properties could reportedly be out of compliance with the new law next year and collectively face more than $200 million per year in penalties. By 2030, this number is forecast to grow to over 13,500 properties that cumulatively could face penalties as high as $900 million each year according to a January 2023 report from the Real Estate Board of New York.

What this demonstrates, says Emmrich, is that policy risk is always on the horizon: “CFOs need to understand that the ROI they calculate today may change very quickly if they don’t consider net zero or ESG considerations.”

Market Forces

Public-company CFOs are also at the mercy of shareholder expectations—and the repercussions that negative perceptions can have on share price.

Consider the value of REITs. Finance teams need to consider how their buildings’ compliance with net zero standards will likely impact future market share, Emmrich cautions, and whether the company is keeping up with its competitors in the transition to net zero.

“Future proofing the business must include an understanding of the demands of investors,” says adds, “and it’s the job of the CFO to ensure that investments or projects are in alignment with market demands.”

Net zero carbon initiatives are also forcing CFOs into new territory with regard to reporting. Evolving reporting regulations place the responsibility for disclosure on environmental, safety, and governance matters in their hands.

In the EU, sustainability issues fall either on the chief sustainability officer or the strategy department, says Lydia Neuhuber, sustainability consulting lead at Deloitte Germany. Over the past two years, however, “this has changed dramatically, and the big driver of that first and foremost is regulation.”  

That results from two key moves by EU regulators. “First, sustainability issues are now closely integrated with financial issues,” Neuhuber says. “Take revenues, for example. Suddenly, the sustainability department must report a specific percentage of green revenues overall. That’s resulted in the fact that somebody needs to understand the overall revenues—and that’s the finance function. So, there is this kind of incorporation of the two topics by establishing new KPIs that are regulatorily binding.”

Second, the 2021 Corporate Sustainability Reporting Directive (CSRD) expanded and standardized the sustainability topics that need to be reported on—all of which needs to be audit-assured.

“This is a total shift, because previously, sustainability reports were not standardized and there was no warranty assurance of information,” says Neuhaber. Now, “both the CEO and the CFO are responsible for the ESG information that is communicated to external stakeholders.”

Of course, the finance team isn’t going to solve the challenge of going to carbon net zero by itself, she adds. But it will be up to the CFO, increasingly, to make clear what’s at stake financially and to marshal the troops to take action.

“That’s the core message for CFOs when it comes to sustainability,” says Neuhaber. “What really matters is that the topic is anchored within the entire organization and that net zero is driven forward in a cross-functional way.”

Currency risk has always been part of doing business globally, but most CFOs who are now at the financial helm of their companies haven’t managed this type of FX volatility—ever. The last time we saw major currency fluctuations of this sort was in the 1980s.

Recall in 1987, when the euro ranged between $1.06 and $1.29. Fast-forward three decades, and the euro was swinging again between $0.95 and $1.14, or up over 20%, in 2022.

For international companies, the negative impact of FX fluctuations can be significant. Foreign exchange exposure can affect virtually every level of financial statements. It generally comes in the form of translation impacts when consolidating international revenue to local dollars, or in the form of expenses in foreign currency-denominated payables.

“FX has a broad impact across the income statement,” notes Andy Gage, senior vice president of FX Solutions and Advisory Services at Kyriba, a cloud treasury and financial solutions provider. “It affects operating decisions, debt considerations and other strategic considerations central to how business is conducted.”

If not properly hedged, FX exposure can not only eat into profits but also change the competitive landscape for companies caught off-guard, according to Donald Lessard, MIT Sloan professor of International Management.

“In addition to the impact on the financials, companies also need to understand the potential impacts of a change in currency values on the competitive landscape and other aspects of business risk,” Lessard says. “My sense is that the financial management of foreign exchange is still myopic,” he adds, “and tends to focus mostly on contractual and translation exposures. This doesn’t really address the impact of changes in effective exchange rates on costs, prices, margins and cash flows.”

Despite these impacts, Chatham Financial estimates that only half of US multinationals are hedging their FX exposure. While it’s difficult to determine the opportunity cost of that, estimates show that FX volatility can impose a considerable financial burden.

According to Kyriba’s January 2023 Currency Impact Report (CIR), the combined pool of North American and European corporations reported more than $17 billion in tailwinds and about $47.2 billion in headwinds (i.e., a negative impact on corporate earnings) in the third quarter of 2022 due to FX fluctuations. 

North American companies reported a 26.6% increase in FX headwinds compared with the previous quarter, Kyriba says, whereas European companies reported a 68% increase in FX-related headwinds. The fall in the value of the euro against the US dollar was to blame.

In the EU, the electronic-equipment instruments and components sector felt the greatest pain when it came to the negative impact of currency volatility. In the US, healthcare equipment and supplies were hardest hit, as of the third quarter of 2022.

For companies that chose not to hedge, year-over-year volatility could have eliminated margins entirely, explains Chatham Financial managing director Chris Towner.

“For example, if you were a UK business importing from the US and started the year at $1.35 GBP/USD, and you gave yourself a $1.30 budget rate, that would be a major concern when the pound went to $1.05,” Towner says. “That would’ve impacted profitability—or even, for some businesses, completely wiped out profitability because they would be required to pay 20% more in [pounds] sterling.”

These kinds of extremes have led to a lot more hedging requirements and a lot more hedging inquiries from corporates, says Towner. “While companies still tend to use plain-vanilla FX forward hedges, we’re starting to see companies combine more optionality and much more usage of participating forwards,” he adds. When the environment becomes more volatile, options provide more flexibility than straightforward contracts. The downside is that options are more expensive than regular contracts.

For some companies, FX hedging is the least feasible choice for managing currency risk. As Taswer Ahmad Khan, Middle East CFO of Güntner, explains, it can all depend on where your customers are.  

Güntner, a manufacturer of refrigeration and heat-exchange products, is headquartered in Germany and Austria, with customers in the Middle East, Africa and India—and working with hedging instruments in countries across the Middle East and Africa is quite risky, says Khan, citing political volatility in those regions.

“One country improves, another goes down and then improves again, and the result is payment delays from our customers,” he says. “That’s one reason we don’t want to bind ourselves into an FX commitment when we’re not certain about the timing of that revenue.” As a result, Güntner Middle East has a wide, sweeping policy of selling only in euros, he adds: “We have kept it pretty straightforward, which is more secure for us.”

Other companies, like Qikiqtaaluk Corporation (QC), a diversified Canada-based resource company located in Nunavut, Northwest Territories, have a natural hedge. Ali Sarfaraz, QC’s corporate controller, says the company maintains all revenue inflows in USD and any multicurrency inputs are paid through their US dollar account—only converting to the weaker Canadian dollar when necessary, and at a gain. 

It’s no secret that the strength of the US dollar has heightened currency volatility in many countries around the world. In 2023, most observers and analysts alike expect it to remain strong.  

What To Keep In Mind

For international companies with exposure not only to USD, but to other world currencies, there are two things that they should keep top of mind when it comes to managing FX exposure, says Chatham’s Towner.

“First, it’s important for companies to have an FX policy or strategy that’s signed off by the board, that everyone bought into. Adhere to the strategy and take a disciplined approach—don’t be deterred by market moves,” he says.

“Second, whenever companies have an FX exposure, they should look at ways to offset that risk organically. What can they do internally or strategically to reduce their exposures? For example, can they do foreign currency debt swaps, before making any decisions to go to external FX markets?”  

Kyriba’s Gage tends to agree.

“I’m a huge advocate of looking inside before you look outside to manage your FX risk,” Gage says. But you’ve got to have good analytics to understand where your exposures are coming from. “If you see that [data], then you should be compelled to ask questions like, ‘How can I work with the business to reduce those risks?  What can be done differently?  Can we rethink our supply chain?’ That’s the best practice even in periods of light volatility.”  

Companies also need to be looking at how they’re accounting for transactions. “Make sure your business is really clean and precise in terms of accounting for foreign exchange transactions,” he says. “Make sure you’re netting your hedges so that you don’t have one business unit hedging Euros in one direction and another business unit hedging Euros in the opposite direction.”

To combat the host of supply chain issues created by the Covid-19 pandemic, as well as the new ones that have emerged in March as a result of the war in Ukraine and subsequent sanctions, CFOs are focusing on risk mitigation strategies and optimizing working capital. They’re building budgets around business drivers as opposed to historical costs and are smoothing cash flows by joining digital ecosystems that connect the entire financial supply chain through automated payments.

As Craig Bailey, associate principal at The Hackett Group global consultancy, explains, supply chain backlogs have caused many companies to double up on inventory orders.

“Companies are spending more than usual trying to replenish inventories. Some are even using costly air freight options for emergency inventory orders, knowing they also have goods stuck at sea,” he says.

Generally, whenever organizations react that quickly to supply chain shortages, it leads to a buildup of inventories, Bailey adds. “Most companies are still trying to catch up from 2021.”

Restarting the production that was shut down by the Covid-19 pandemic in 2020—especially in China—led to a shipping bottleneck throughout 2021 when shipping rates soared, as did the number of ships waiting to offload their cargo. In mid-December 2021, as many as 101 containerships were waiting to berth at the Port of Los Angeles and the Port of Long Beach.

Meanwhile, Brexit’s aftermath complicated the UK’s and EU’s business environments by introducing new red tape and increased border checks for imports and exports.

This was in play before Russia invaded neighboring Ukraine on February 24. The subsequent sanctions and trade restrictions placed on Russia by much of the rest of the world have furthered trade complexity.

Interos, a company providing supply chain risk management solutions, estimates that more than 2,100 US-based firms and 1,200 European firms have at least one direct (tier-1) supplier in Russia, while more than 450 firms in the US and 200 in Europe have tier-1 suppliers in Ukraine. Adding tier-2 suppliers—those who purchase from companies with suppliers in the affected countries—of course enlarges the number of affected companies. More than 15,100 firms in the US and 8,200 European firms have tier-2 suppliers based in Ukraine, and Interos research found more than 190,000 firms in the US and 109,000 firms in Europe have Russian or Ukrainian suppliers at tier-3.

Whether alternative sources of supply can be found for Russian and Ukrainian goods like wheat, corn, minerals and oil, above all, remains to be seen. Grain importers in Africa and the Middle East are in trouble should Russian wheat supplies cease to reach their shores. At the same time, interference with Black Sea shipping will have broad consequences for global supply chains. As of the beginning of March, approximately 200 cargo ships were reportedly stranded in Ukrainian ports while more are stranded around the globe without access to the Black Sea route to market, increasing already soaring shipping costs.

According to January data from shipping rate provider Xeneta, Asia-US contract rates had gone up 122% from early 2020. The Shanghai Containerized Freight Index, which reflects the Shanghai export container transport market’s spot rates, also reached a new high in late December 2021, up 76% year on year, breaching the 5,000-point level for the first time. As of mid-March of this year, the index had reached 4,625 points.

Managing The Risks

Reduced supplier access and increased shipping costs have hit the bottom line for many companies hard and have CFOs turning increasingly to factoring their receivables, or selling their accounts receivable, to smooth out their cash flow and reduce risk.

The recent crises in Ukraine fueled the demand for factoring, with companies looking for working capital financing facilities in those sectors with the highest exposure to commodity prices, according to Johannes Wehrmann, managing director for corporate sales at London-based supply chain finance platform provider Demica.

“Companies are looking to more effectively manage cash, paying off higher debt by selling receivables at more favorable terms,” he says. “In Europe, for example, companies are taking advantage of the fact that various large, reputable finance providers are aggressively trying to grow their factoring business by providing very competitive terms. They’re quite a low risk compared to other debt products and enable sellers to repay older incumbent debt facilities.”

For CFOs to know whether factoring is a good option to manage their corporate cash flows, they must have a deep understanding of their receivables portfolio, Wehrmann adds. “They need to know the value drivers behind their portfolios, how they’ve performed historically and how the contracts are structured. Then they need to think about the impact on their balance sheet, liquidity and profitability.”

Deep insights into the factors driving profitability are critical when costs are rising, according to Tom Seegmiller, vice president of Financial Planning and Analysis at financial management software provider Vena Solutions.

Finance executives, as well as financial planning and analysis professionals, are increasingly using driver-based budgeting to link resource usage, activities and costs to the bottom line.

“Driver-based budgeting, from my perspective, really acknowledges that the budget is your financial output, the articulation of a series of operational items or activities that happen within the business,” Seegmiller says.

Such an approach shifts the focus from the budget item to the activities the company will undertake in the future, he adds. “That’s how you drive the budget. It moves the ownership of the budget from finance, one of the criticisms of traditional budgeting, to ownership that very clearly resides within the business.”

In an environment of rising costs, traditional budgeting falls short. “In the current environment of uncertainty over input prices, growing wage bills and the impact of the Ukraine crises on the global supply chain, it’s even more important for finance executives to dive deep into the operations side of the business to manage costs,” says Seegmiller.

Going Digital

To create more-stable supplier relationships while reducing risks, companies are rapidly joining “digital payments ecosystems,” according to Gavin Cicchinelli, COO at working capital and business-to-business payment platform provider PrimeRevenue.

No matter where companies are located today, supply chain issues remain prevalent. One of the biggest challenges for companies is ensuring they have adequate cash flow to produce the products, ship the products and then track everything.

“Roughly 40% to 50% of businesses still rely on manual vendor management and payment processes across their supply chains,” says Cicchinelli. “Last year, PrimeRevenue focused on delivering enhanced platform solutions that solve these problems for our clients by automating accounts payable and working capital solutions. As a result, companies can pay their suppliers early or on time at invoice maturity and reduce the friction in their entire supply chain, whether they have 100 suppliers or 15,000 suppliers.”

He adds that automating the process saves time and money from an accounts payable perspective and smooths and accelerates cash flow from suppliers.

Despite being given three full years to prepare for new lease-accounting standards from the International Accounting Standards Board (IASB), even after two years operating under the new rules, many CFOs around the world find they are still feeling the impact and making adjustments to their lease and accounting practices.

US private company CFOs, only now forced to face a similar standard from the Financial Accounting Standards Board (FASB), could learn much from the experience of their international peers.

The IASB standard, IFRS 16, effective as of Jan 1, 2019, requires a lessee to recognize assets and liabilities arising from leases on its balance sheet. “It’s a completely different way of looking at leases,” says Kim Vinkler, finance director for Partnership Countries and former head of Group Accounting and Cost Controlling at ISS, a publicly listed workplace experience and facility management company based in Copenhagen with leases in 50 countries. “In the past, you expensed them. Now you need to capitalize them as an interest-bearing debt.”

The FASB granted private companies a reprieve until fiscal 2021 to align with the parallel US standard, ASC 842, so CFOs in the US are only now confronting the impacts. The new standards demand a much higher level of reporting than in the past, with details on every change to leases throughout the year. “You have to make sure that you have all of your leases registered, that you have them all in the system, you have the terms and conditions correct, and that you’ve got the accounting right,” says Vinkler, “and you have you do this monthly, as opposed to quarterly.”

Aside from the actual accounting, the lease standard caused sweeping changes in how leases are managed and controlled. As Vinkler explains, ISS has more than 23,000 leases spread across 50 countries—and they were basically hidden from corporate view.

“As leases were simply an expense, we originally had a very limited understanding of, first, where they were, and second, how effectively they were being managed,” he says. Lease data was stored in a variety of formats, he adds: “Excel spreadsheets, paper in a folder, or somewhere under the couch … we had no idea.” 

IFRS 16 demanded that the company apply much greater discipline to the lease management processes. “We have definitely learned along the way and are much wiser now,” says Vinkler.

Today, he notes, ISS units in each country take responsibility for compliance based on consistent policies across the company. “Once we addressed the nuances of lease accounting, set some parameters and developed a centralized depository for leases, our local finance departments were able to take over,” he says. “Now, Group only handles difficult or complicated leases, or if we find something in our technology that we don’t expect.”

Ultimately, the exercise of complying with IFRS 16 delivered unexpected, sometimes long-term benefits. Vinkler says ISS identified opportunities to renegotiate some contracts for better terms, and implemented strict companywide policies on entering into new property leases. 

Now that leases are figuring on the balance sheets as assets and liabilities, finance executives are also taking a much greater interest in leasing’s impact on day-to-day operations. “CFOs are rethinking how finance works with real estate,” explains Gavin Maze, head of Account Management & Strategic Bids, Occupier Solutions at MRI Software, a global provider of real estate software applications and hosted solutions.“CFOs are trying to eliminate siloed work, moving away from having a property team on one side of the business and accounting on the other side of the business.”

Where lease management technology can support a more collaborative agenda, he adds, is to allow stakeholders to work on the same platform at the same time. “For example, as the real estate teams are completing rent reviews and negotiations with landlords and tenants, the data is captured at source in real time, and then informs the accounting team for their IFRS 16 reports.”

Meanwhile, most companies have adopted radically new and improved control practices in lease accounting, covering a wide range of potential accounting risks around leases. “These typically will include controls around the identification of a lease contract, classification (either financial or operating), accurately abstracting data, around the ultimate recognition of lease payments and the amortization of the liability, and controls around presentation and disclosure in the financial statements,” explains Aditya Mehta, managing director at Riveron, a US-based business advisory firm.

The complexity seems suited to technological solutions. Lease management software mitigates the need to test and double-check complex calculations, Mehta says, but it’s still necessary to periodically test the technology itself to make sure it’s capturing and reporting what it needs to. Furthermore, “some leases will be too complicated for software and have to be handled manually,” he notes. “But the controls still apply.” 

While devising and implementing lease accounting controls has been a big project related to IFRS compliance, the biggest challenge for companies is keeping up with changes to their leases, Mehta concludes. “The biggest lift post-implementation has been changing business processes to successfully account for leases in the future,” he says. “How do I make sure that my population remains complete? How do I account for modifications, reassessments and terminations of my contracts?  How do I make sure that when a lease is impaired that I’m accounting for it correctly? How do I know if someone in the field has dropped a lease or added a new one?  Those are the operational challenges people are dealing with now, and instituting business processes to capture all of that continues to be the biggest challenge, post-implementation.”

While much of the heavy lifting has been done with respect to lease accounting under IFRS 16 and ASC 842 for US public companies, the verdict is still out on whether the intended benefits have been achieved. It provided some clarity in liability obligations for analysts and rating agencies, says Mehta, but for the individual investor, not so much.  “The analysts and ratings agencies typically estimate companies’ lease obligations by looking at their yearly expenses around that, and what IFRS 16 did is confirm whether their estimates were in the ballpark,” he says. “When it comes to private investors, they don’t typically look at those details, so I’m not sure it’s added a lot of insights for them.”   

However, according to Gavin Maze, where we do see real ROI of IFRS 16,and ASC 842 are in the efficiencies gained in managing leases. First, by being forced to centralize leases and to implement internal procedures and controls as part of the process, companies were able to right-size their lease holdings. “Advanced leasing technology naturally facilitated all that, discouraged incomplete information and provided a single source of truth across the entire organization,” Maze explains. “So, there are lots of analytics that can be run on their portfolio, finding opportunities for streamlining, revisiting lease models and real estate strategies to minimize costs.”

For CFOs who are in the first throes of accounting for leases on the balance sheets—whether that’s because they only now require an auditor’s opinion on their financials or are only now required to comply with the new standards—several key insights can be drawn from the lessons of their peers. Data is king, so data architecture is critical. In giving their standard processes new scrutiny, companies will find ways to refine processes for handling leases and gain insights into their lease needs. Critical, too, is to keep in mind that change can be smooth if managed well, with open communication, a collaborative mindset and a culture of adapatability.

Increased uncertainty and a new world of risk have left many chief financial officers scratching their heads as to how to evaluate the Covid-19 fallout. Is goodwill impaired? How have employee benefits been affected? What is the impact on revenue cycle reporting?

Companies are struggling to provide the answers, says Reinhard Dotzlaw, Global IFRS leader at KPMG. “The current environment is making the normal process of preparing financial statements very challenging. We’ve got increased uncertainty on the recovery outlook. We’ve got dramatic volatility in the stock markets and significant fluctuations in foreign exchange rates and commodity prices. This poses significant challenges for management for making estimates.”

While financial accounting might appear to be a highly structured, rules-based exercise, there’s a lot of room for judgement. “Estimates are pervasive throughout financial statements,” Dotzlaw says, “particularly when it comes to forecasting future cash flows and [assessing things such as] receivables, loans and nonfinancial assets like goodwill and intangibles.”

This means much more work for the finance department of companies reporting in this level of uncertainty, he adds. “Under IFRS, given the economic downturn, there’s the potential for a lot more impairment triggers, and companies will need to evaluate those triggers carefully to determine if they need to do recoverability tests. Companies will also need to revise, review and reassess the various assumptions underlying those tests, as well as model multiple scenarios and probability weight them to come up with a recoverability amount.”

According to Iarla Hughes, CFO of Manx Telecom, a UK-based telecommunications conglomerate, Covid creates unprecedented challenges when it comes to applying accounting standards that were designed for much less volatile times. “In terms of trying to estimate the economic impact of Covid-19, there is no playbook for us,” he says. “You couldn’t draw back in history to say this is how you deal with it.” Furthermore, he adds, “at the beginning, there wasn’t a huge amount of guidance in terms of what you do from a US GAAP or an IFRS perspective—how you validate the estimates required for your financial records in terms of provisions, potential revaluations of intangible assets, goodwill and bad-debt assessments.. In terms of the financial impact of Covid, all of those assessments were relatively new.”

As to how CFOs can provide a clearer picture of their companies’ overall economic position going forward, it’s easy for any organization to just present a set of numbers on a piece of paper in black and white, he adds, but what’s critical in these times is for shareholders to understand the context of how those numbers were achieved. “For me and for our organization, the most important thing is to make sure that there is a narrative, and it’s clearly explained how we’ve arrived at certain positions,” Hughes adds.

Dotzlaw says companies can expect their auditors and their audit committees to continue to go deep into the judgements made by their finance chiefs. “From an audit committee perspective,” he says, “what I’ve seen is that they’re focused on management’s response to this changing risk landscape and making sure they’re comfortable with the conclusions management has drawn.” At the same time, he adds, analysts and other financial statement users expect more clarity around key management judgements and estimates. “What we, as a profession, are encouraging companies to do is to go beyond the bare minimum in terms of the disclosure requirements,” says Dotzlaw. “So what we’re doing differently is, in those areas where there is a significant amount of judgement involved and a significant amount of estimation, we’re doing audit-level work to get to the bottom of things, and be comfortable with the judgements and assumptions that support for those estimates.”

More specifically, he says, auditors are more interested in how the company intends to survive in the coming months and what possible risks the future holds. “The key to this,” explains Dotzlaw, “is to explain how the strategy and the targets of the company may have been modified to address the effects of the pandemic, and the measures that they have taken to mitigate the impacts. As auditors, we’re focusing on the key assumptions that were made by management, where the uncertainty lies, and if there’s a range of reasonable possible outcomes, what are they?”

When it comes to comparing companies, things get even trickier, says Manx Telecom’s Hughes. “The biggest challenge I see, especially for the equity markets,” he says, “is ensuring that companies are taking a relatively consistent approach in what they’re doing; what provisions they’re putting in. I think it’s going to be very, very difficult to decipher what’s really happening from the outside looking in if you don’t have that consistency.”

Therefore, the main message to the accounting bodies when it comes to accounting during the pandemic, he says, is to make sure that they continue to strive toward consistency in how companies are allowed to apply the standards: “When it comes to accounting in the Covid-19 environment, there’s still a lot of room for interpretation.”

Over the past several weeks, the FASB and IASB have been working on ways to provide additional guidance and relief to preparers around certain standards that posed specific practical difficulties in the Covid environment. In early mid-March, the FASB ceased to deliberate on projects on their technical agenda. “Given the situation,” says Shayne Kuhanek, technical director at FASB, “obviously folks had other things to worry about. So we refocused all of our efforts on finishing a couple of projects that were very important to the capital markets and that were almost done, and then turned our attention to Covid-19.”

As he explains, the board is taking a three-pronged approach of deferring dates, providing practical interpretations of the guidance already released and helping develop reasonable applications of GAAP to account for Payment Protection Plan loans. “The Board understood that the economy had a shutdown, and businesses were really just trying to focus on survival at this point, so we deferred the effective dates for two standards [Revenue from Contracts with Customers (Topic 606) and Leases for Certain Entities (Topic 842)], which would shift the focus away from implementation to managing the company.”

“We also explained how to interpret certain standards,” he says. “As an example, in the case of hedging, we said, ‘Here’s when the pandemic happened in the cases of hedging, here’s what you can consider to be rare, here’s how you would account for your hedge under this situation in a pandemic,’ and laid it out in very plain English.” Furthermore, he adds, “working with our capital market partners and the AICPA, we developed guidance around the small-business loans provided by the government that companies didn’t necessarily have to pay back, which didn’t exist in our current GAAP literature.”

The world economy already looked a bit wobbly before the coronavirus hit. Now, according to Economist Intelligence Unit (EIU) forecasts, it looks as if the global economy will contract this year by 2.5%, marking the deepest recession in modern history. Brazil will be the hardest hit, with GDP expected to shrink by almost 8%, the EIU says. Individual businesses are grappling with how to get through the lockdown and prepare for what may be a significantly different future.

While many were hoping for a V-shaped return to normal economic activity once the virus comes under control, a quick recovery is not in the cards, says Cailin Birch, global economist for the EIU. “We’re expecting a lot of hesitance on the consumer demand side, particularly as it regards travel,” she explains. “Then on the output side we’re seeing supply chain disruptions across the range of consumer goods, including in high tech sectors, where China is a critical provider.”

At the same time, recovery will be staggered across the globe, as the virus manifests over time, she adds. “China and the rest of Asia have been the hardest hit in Q1, but the crisis is going to roll from region to region as the disease spreads.”

Which companies will come out ahead? Much comes down to the health of their balance sheets. That’s no problem for cash-rich global behemoths such as Apple, Google, China Mobile, Hon Hai Precision Industry and Samsung. Plus, there are plenty of cash-rich investors waiting for the right opportunity to buy.

“Just before the crisis hit, S&P 500 companies had upward of $2 trillion in cash on their books; and this may be the saving grace in all this,” says Howard Johnson, M&A managing director at Duff & Phelps. “Private equity firms are also flush with cash. So there’s roughly $1 trillion worth of dry powder sitting around.”

Companies with a strong balance sheet will come up even stronger, he believes, as weaker competitors fall by the wayside. “Those [cash-rich] companies will be ready to enter the M&A market with a lot of opportunistic buying,” he says. “Smart acquirers will have the advantage of seeing a very quick transition from what was a seller’s market in 2019 to what will be a buyer’s market by the end of 2020.”

Looking at sectors, certainly travel and live entertainment—including airlines, cruises, casinos, hotels and theaters—have been perhaps hardest hit. By mid-March, the Baird/Smith Travel Research Hotel Stock Index, tracking the market cap of the world’s largest hotels, had fallen by nearly 50%. Prospects for recovery in leisure travel are muted.

For companies producing consumer discretionary products like washing machines, automobiles, boats and household furniture, Refinitiv analysts expect earnings to drop by 18.1% in 2020. Others will be even harder hit. Industrial earnings will likely decline by almost 25%; and, as oil prices tumble, energy producers are bracing for earnings losses of a whopping 75%.

Companies like Midwest Industrial Supply have adjusted earnings expectations dramatically, anticipating the worst year on record. Midwest is a privately owned US-based company providing rail lubrication, dust control, soil-stabilization and related services to mining, construction, mass transit and other heavy industries. At the best of times, forecasting revenues beyond a three-month horizon is a challenge, explains CFO Mark Schoolcraft: “To a large degree, demand for our services depends on factors beyond our control, like commodity prices, raw-materials demand and anything else that impacts industrial production. Seventy percent of our revenue also happens May through September; so if sales soften then, we have little hope of saving the year.”

Midwest has begun doing more complex forecasting, combining historical data and linear regression models with predictive analytics. “The challenge this year, however, is that the impact of the virus is still an unknown,” says Schoolcraft. “It comes with effects that history won’t tell us.” Although mainly serving the North American market, Midwest recently saw one of its European projects—a large roadworks construction near Venice—indefinitely postponed due to the pandemic.

However, the coronavirus has fueled demand in some sectors, most notably health care, technology, consumer staples and utilities. For example, at Tente Casters North America, the US division of a global castor-manufacturing conglomerate headquartered in Germany, medical supply sales have skyrocketed. Tente makes, among other things, wheels for hospital carts, beds and other health care related equipment.

“Since the global pandemic took hold on our economy in early March, our order intake is up over 252% in just four weeks,” says CFO Pierce Kohls. March 2020 nearly beat the company’s prior record for sales, and the impact on operations has been significant too.

“We have rearranged production lines, changed shift schedules, and taken drastic measures to increase the cleanliness of our office and plant, so we can keep our employees safe while we keep up with demand,” Kohls explains. “Even so, our product availability is shortening daily while our lead times go further out. [The virus] has forced us to shift our resources to focus on medical projects and has us reaching out to other suppliers that can provide us component parts, even if it means at a higher cost.”

Some companies are laying off workers en masse. For example, Hertz announced April 20 it would lay off more than a third of its 29,000 employees in North America. Meanwhile, even deeper job cuts will hit the global airline sector. On March 16, Norwegian Air announced the temporary layoff of 90% of its workforce, amounting to 7,300 employees.

However, Tente is scrambling to hire. “We’re actually looking at adding an additional 15% full-time equivalent to our workforce right now—just because of the order intake that we’ve had this month,” Kohls comments.

One question separates those that are benefiting now from those that will benefit in the wake of recovery: Will impacts related to social distancing fade once restrictions are lifted? Many believe that this pandemic will be a catalyst, a tipping point, for lasting and widespread adoption of new behaviors.

“The patterns of demand are changing,” says Colin Keaney, CFO of Dell Financial Services (DFS), the leasing arm of Dell Technologies. “Organizations we serve, such as educational institutions, are changing their model to teaching online; and folks are setting up capability at home—laptops, desktops and peripherals. This sparked a great demand for our technology, as you can guess. Subsequently, we’ve also seen a change in demand for our financial services.”

In addition to increased demand for the company’s traditional longer-term lease products, DFS has seen a burst in demand for shorter-term, on-demand lease products. “Most of our financing is over a three- to four-year time frame. But at this time, customers don’t know exactly what their needs are at the moment. They’re interested in acquiring a technology for a six- or twelve-month period, until they really understand how this whole situation will play out. Similarly, Dell Tech on Demand, which is usage based, is expected to be well positioned for the foreseeable future,” Keaney comments. “There’s been a lot of industries where the whole profile of the business has changed substantially. So, by us having a full suite of products that are based on consumption, we’re well positioned to serve those customers.”

The GRI was responding to a chronic lack of “reliable and comparable, country-by-country information on the taxes that multinational corporations contribute,” says Alex Cobham, CEO of the Tax Justice Network. He argues that the existing standard practices, compliance requirements and legal processes are not doing the job. “Every year, the global economy we all live and work in loses an estimated $500 billion to multinational corporations not paying the tax they owe,” Cobham said in public comments on GRI 207. “That’s $500 billion less each year to fund public services and to invest in our communities.”  

The GRI says it developed the new, voluntary framework to provide clarity on how much companies contribute to the tax base of the countries in which they operate, thereby curbing tax avoidance and helping governments fund services and sustainable-development initiatives. The new standards suggest more disclosure in several areas, including some practices, like transfer pricing, that companies prefer to keep out of the public domain.

Supporters of GRI 207, such as Gary Kalman, executive director of the Financial Accountability and Corporate Transparency Coalition, are urging companies to adopt GRI 207 as soon as possible. “GRI’s tax standard is the clearest and most significant recognition to date of the global trend toward tax transparency for multinational companies,” he said in responding to the proposal. “The standard is both necessary and balanced.”

Others are not convinced that a straight line can be drawn between GRI 207 and greater funding for sustainable-development initiatives, however. “While we see benefits from improving transparency around tax,” PwC commented, “we question whether more detailed public tax reporting would necessarily lead to increased tax revenues.” 

Data security has emerged as the No. 1 risk concern for many companies today, and finance executives across the board are worried.

“Cyber-risk is the thing that keeps me up at night,” says Mark Mishler, veteran CFO, founder of CFO Resource Management and a professor of finance and accounting at Seton Hall and Rutgers universities. “When you think about public services being hijacked with ransomware, companies have the same problem,” he adds. “If that is allowed to continue, it will have a huge negative impact on commerce and the economy as a whole.”

These concerns are also having a significant impact on the role of the CFO, the board and auditors. “Cybersecurity represents one of the most significant economic, operational and national security threats of our time,” Kathleen Hamm, a then-member of the US Public Company Accounting Oversight Board (PCAOB), said in a speech to the 18th Annual Financial Reporting Conference in May. “The government, private institutions and individuals each share responsibility for protecting our individual and collective assets and each other from cyber threats. Public companies and their officers and directors have important roles as well. So do auditors.”

This may be remembered as the year data insecurity broke big. Newly published research by Risk Based Security, a cyberprotection consulting and research firm, concludes that more than 3,800 publicly disclosed breaches exposed 4.1billion personal records in the first half of 2019, up 54% over the same period last year.

In one of the largest bank hacks to date, over 100million Capital One accounts and credit card applications were accessed, revealing up to 140,000 Social Security numbers in the US and 1million Canadian Social Insurance numbers in Canada. First American Financial, a Fortune 500 company providing title insurance and settlement services to the real estate and mortgage industries, reportedly exposed customer financial records as far back as 2003. In June, the American Medical Collection Agency (AMCA), a healthcare-related debt collector, reported that more than 19million medical records were exposed. Consumer lawsuits were filed within days of the initial breach disclosure and AMCA was forced into bankruptcy within weeks.

Companies surviving the fallout of data hacks have faced significant penalties. The 2017 Equifax breach that exposed sensitive information of many millions of cardholders was settled this year with a fine of at least $575million that may reach up to $700million. Yahoo, consequent to the discovery of data breaches affecting roughly 3billion account holders worldwide between 2013 and 2016, has agreed to pay $117.5million in class-action suits; and Yahoo’s current owner, Verizon, plans to spend $306million between 2019 and 2022 to secure customer data.

International Efforts

Securities regulators, standard setters and accounting bodies around the world are redoubling their efforts to make sure companies in all sectors put cyber-risk mitigation and reporting high on their agendas. The EU, in particular, is moving fast, requiring that internal auditors and board members stay on top of a vast amount of regulation as well as anticipate how future regulatory developments will roll out. According to a 2018 report by Deloitte, bank executives with responsibilities for cyber-risk will be tasked with a number of “key actions” going forward. More specifically, these include early contact with supervisors to discuss emerging concerns, measuring changes in their exposure to cyber threats, understanding the evolving regulatory and risk environment and establishing a clear line of accountability for data security.

US companies also got a wake-up call in 2019 from the Securities and Exchange Commission (SEC) with the release of data showing that supply chain management is the weakest link in data security, as hackers have accessed vendors’ email accounts and inserted fraudulent requests for payments—and payment processing details—into electronic communications. Fraudsters have also corresponded with personnel responsible for procurement at US banks, requesting changes to vendors’ banking information and attaching doctored invoices. The SEC has called for increased scrutiny of manual processes and improved employee understanding of data security.

Global bodies responsible for training and certification of financial professionals are moving to ensure that the international financial-management community is not only aware of the risks, but prepared to take action. In a report published in May, the Association of Chartered Certified Accountants (ACCA), a global certification body, cautioned the financial-management community that much more work needs to be done on the cyber-risk front and that leaders at the corporate level must be accountable for their organization’s cyber-risk exposures. The group more specifically concludes that in the event of an attack, the CFO is accountable to shareholders and will be expected to provide accurate assessments of the potential damage as well as lead internal and external response.

The Way Forward

The ongoing war against cybercrime will have profound effects on the role of senior finance executives, corporate boards and their auditors, says Richard Swinyard, managing partner and CFO at Computer Integrated Services, an access management and security services company. The heavy focus on data security and compliance in the audit world will drive CFO behavior in particular, he says: “If companies can show they’re ahead of the curve, it’s a source of competitive advantage.”

This means the CFO must understand the changing cyber-risk environment as well as the evolving regulatory scene, he adds; the biggest challenge will be building knowledge and working out what’s acceptable financially.

For the senior finance executive, knowledge is the first line of defense, says Carolyn Zhang, division CFO at Tekni-Plex, a globally integrated packaging manufacturer. “As guardians of the company’s assets,” she says, “we need [to gain] a good understanding of the risks, then implement a strategic cyber-risk protection and mitigation agenda, make the CEO believe the program is necessary and then carry it out.”

While email can leave an open door to hackers, the security of advanced cloud-based technologies and data storage is also in question. When it comes to data security, says Zhang, “We’re really questioning the concept of what is the cloud. Our concern is, who can see into the cloud, and how equipped is it to protect our data?” The CFO’s job, she says, is to find answers to these questions before making an investment in cloud-based technologies.

Auditors, too, are being encouraged to step up their game when it comes to evaluating companies’ ability to detect and prevent cyberfraud. Going forward, the PCAOB’s Hamm says auditors will be expected to take a deeper dive into the cyber-risk exposure and the controls companies are putting in place to minimize attacks.

Her recommendations translate into more-rigorous corporate governance around cyber-risk. Auditors will be asking companies to document the methods they use to prevent and detect cyber incidents that could have a material effect on their financial statements. Auditors will also look at the processes companies use to identify and block unauthorized transactions and to address a material cyber incident once it’s detected, how they ensure the board is informed, when breaches are disclosed to investors, whether or not systems have been evaluated for vulnerability to cyberattacks, and what the expected impact would be on the company’s operations and financial outcomes.

As to what corporate boards need to do now, the ACCA strongly recommends they ensure that the responsibility and accountability for cybersecurity is properly placed; cyber-risk assessments are made regularly, and risk is quantified; appropriate resources are allocated to risk prevention, including talent; and breach-recovery programs are in place. Perhaps most importantly, the ACCA emphasizes that finance executives must “appreciate that it is not a question of ‘if’ you are attacked, but of ‘when’ and ‘how.’”