How tighter financial management enables manufacturing CFOs to mitigate risks better

Opinions expressed in this article are those of the author.

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Image credit: Jeson/stock.adobe.com
Article by Johan Conradie, Global Chief Financial Officer, SYSPRO

In today’s volatile economic climate, marked by rapid technological advancements and unpredictable macroeconomic headwinds, the role of the Chief Financial Officer (CFO) in the manufacturing sector has never been more critical. 

The current economic challenges have not just shifted the CFO from traditional financial management to a broader operational and strategic role in the manufacturing sector, but have also necessitated this evolution for building resilience and managing risk in a turbulent global market.

According to our recent Global CFO Manufacturing Survey, 67 per cent of manufacturing companies across the Asia Pacific region have been buffeted by economic uncertainty and the same percentage cited supply chain disruptions. 86 per cent in Australasia said they had been severely impacted by a shortage of skilled personnel. This puts Australasia at odds with the rest of the APAC region, where only 50 per cent of respondents flagged labour shortages as a cause of instability.

How manufacturing CFOs are responding to financial pressures

The ‘Hybrid CFO’ is a new breed of financial leaders in the manufacturing and distribution sectors. They are not just adapting to change but embracing it. They leverage comprehensive visibility into their operations to manage risk effectively. The Hybrid CFO’s toolkit is no longer limited to ledgers and financial statements; it now includes advanced technology systems that provide real-time data across all business units. Such tools are essential for responding to economic pressures and market dynamics with the agility to build better resilience.

Manufacturing is particularly susceptible to macroeconomic shifts, including fluctuations in commodity prices, changes in trade policies and varying demand cycles. These elements can unpredictably impact costs, operational efficiency and profitability. Tighter financial management, or fiscal conservatism, is an essential strategy.

Fiscal conservatism as a strategic lever

Fiscal conservatism, characterised by stringent financial controls, cautious investment strategies and robust budgeting processes, has become the backbone of effective risk management strategies for today’s manufacturing CFOs. This conservative approach ensures that enterprises are not over-leveraged and can maintain adequate liquidity to withstand economic downturns and market disruptions. It provides a solid foundation for your risk management strategies, instilling confidence in financial decisions.

In embracing fiscal conservatism, CFOs prepare their enterprises for downturns and position them to thrive in favourable conditions. This approach involves maintaining a solid balance sheet, optimising inventory levels to reduce holding costs and avoiding large debts, which could cripple the company during economic contractions.

Likewise, fiscal conservatism helps build stakeholder confidence. Investors, lenders, and partners are more confident in a manufacturer that demonstrates prudent financial management and a clear strategy for sustainable growth underpinned by essential technology investments.

Technology investments required to support fiscal conservatism

Most respondents are being impacted by higher inflation and the corresponding rise in interest rates used by central banks to curb inflationary pressures. This was seen as a trigger for embracing a more conservative fiscal approach, with 63 per cent of all respondents taking this route. 

The research also identified that 30 per cent globally have already implemented CRM systems (Customer Relationship Management), indicating that managing customer relationships is necessary for successful margin boosting and growing revenue. Australasian respondents specifically cited CRM and Enterprise Resource Planning (ERP) technology investments as their top five business priorities for this year.

How ERP helps to build resilience to macroeconomic headwinds

ERP is crucial in managing core business processes from inventory to manufacturing operations, scheduling and planning, and back office functions. ERP shines because it can enable tighter financial management and boost resilience against economic shocks. 

By providing a comprehensive, real-time view of financial metrics in their ERP system, manufacturing CFOs can quickly adjust their strategies to mitigate risks associated with global supply chain disruptions, currency volatility and changing market demands. For instance, during supply chain disruption, a CFO can quickly assess the financial implications of shifting suppliers and make data-driven decisions that align with long-term economic health and operational continuity. 

An integrated ERP system provides a holistic view of a manufacturer’s financial health to:

  • Monitor cash flows

ERP systems enhance visibility into cash flows, enabling CFOs to manage working capital more effectively. This is crucial for maintaining liquidity and funding operations without incurring unnecessary debt.

  • Control costs

Detailed insights into cost structures help identify inefficiencies and areas where costs can be controlled without compromising quality or output.

  • Enhance compliance and reporting

With stricter regulatory environments, especially in manufacturing, ERP systems help to ensure that all financial practices comply with legal standards, thereby mitigating risks related to compliance.

  1. Drive strategic decisions

By integrating data from various departments, CFOs can perform predictive analytics to forecast trends, prepare for potential challenges, and capitalise on emerging opportunities.

Conclusion

The challenge of achieving tighter financial management within the manufacturing sector is evolving. The emergence of the Hybrid CFO highlights a shift towards a more integrated, strategic role where financial acumen meets operational insights. Through a specialist manufacturing ERP system, CFOs will be equipped to manage tighter financial controls and navigate the complexities of a disruptive market more effectively.

In the current economic climate, integrating financial management and operational intelligence will continue to define a manufacturer’s success, putting the Hybrid CFO in the ideal position to mitigate risks better.