Purse strings attached: Managing expenditure in tough times

Editorial note: This article is a derivative of the Raconteur data-driven finance insights

As companies throughout the UK continue to face tough trading conditions, their finance chiefs are having to keep a much closer eye on expenditure to maintain profitability and avoid a cash crunch.

Yet keeping a tighter leash on costs, from capital expenditure to employees’ expenses, can have a negative impact on an organisation. Cutting investment could stifle its growth in the longer term, while cutting back on perks could harm employee morale and cause discontent.

It means that CFOs must strike a careful balance where they manage costs responsibly but don’t dial down spending to such an extent that the business will suffer.

“You need to ensure that you’re spending well and that you have a real return on that investment, as well as having a proper business case to justify the expenditure and understanding what benefits it will bring,” says Marco Torrente, global CFO at travel services company WebBeds.

He reports that the intense experience of the Covid crisis means that his team has been scrutinising expenditure far more than it ever did before the pandemic.

“What we learnt from that period is that, when you have a cost structure that’s flexible, you can survive and come out of it much stronger,” Torrente says. “Having a more discretionary cost structure means that you can more easily adjust your spending to the period you’re in. If it’s a growth phase, say, you can act differently from the way you’d behave during a downturn.”

Understanding costs better

The pandemic has prompted some firms to scrutinise not only corporate spending but also the viability of their underlying business lines. For instance, Equiniti has conducted a review to work out how much it costs to serve each client and how much revenue that expenditure generates.

“That forces us to look much more closely at how we’re allocating resources – and whether it’s worth continuing certain activities,” reveals Rob Bloor, Equiniti’s Chief Financial Controller.

Since the company’s acquisition by private equity firm Siris Capital at the end of 2021, its employees have had a direct equity stake in the business, which helps to focus minds on cost management.

“Everyone is reminded routinely that their contribution comes back around to their benefit because of their equity position,” Bloor notes.

While the continuing economic uncertainty means that firms will inevitably be more vigilant about their outgoings, the close scrutiny of costs should be part of the finance chief’s agenda regardless of the situation, argues Matthias Heiden, CFO at Industrial and Financial Systems (IFS).

“It’s the responsibility of the finance function and ultimately the CFO to manage spending sensibly,” he says. “It’s not that I lean back and tell people: ‘OK, let’s go on a spending spree now that the Sun is shining.’ You must manage this all of the time. It’s the CFO’s role to bring that discipline to the organisation.”

Maintaining such discipline can help companies better manage liquidity and avoid potential cash shortfalls or undue strains on the business.

“If you spend less, it’s not only your profit going up. At the same time, you hold on to your cash balance,” Heiden says. “We need to treat these topics holistically and view spending not only as a P&L item, but also as a liquidity expense that affects the bank account.”

Cost management must also extend to employee expenses, ensuring that people aren’t overspending in this area. This means establishing a comprehensive policy so that all staff understand what they can claim reimbursement for and what they can’t.

“You don’t want to operate a police state”, Torrente stresses, “but you do need to be clear that everyone benefits if you’re controlling costs in the right way.”

Cross-border spending challenges

Organisations operating in several territories present a bigger challenge for finance chiefs when managing expenditures.

Torrente says that a key objective for his team at WebBeds has been to “put a foundation in place where we have one enterprise resource planning system that everyone uses. This ensures that we can track, control, and report all expenses the same way in any part of the world.”

By adopting the right technology, CFOs can obtain a consolidated view of cross-border spending that isn’t distorted by currency fluctuations.

Heiden notes that an effective enterprise resource planning system will enable any finance chief to make “an apples-with-apples comparison when you look at your reports”.

CFOs must also ensure that spending behaviour is consistent in every country of operation, agreeing on common rules and clamping down on any profligacy they detect.

“There used to be differences in how people spent in different countries, but that is starting to change as people learn what’s right and what isn’t,” Heiden says.

By establishing and maintaining good spending practice across the organisation and ensuring that any substantial outlay offers a clear return, finance chiefs should be able to manage costs without creating excessive friction among the workforce or missing potential long-term growth opportunities. While this is not a straightforward task, it’s something that many CFOs have had to become increasingly adept at in recent years.

A note from us

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