With the S&P 500 down more than twenty-three percent through the end of September 2022, inflation up 8.2 percent during the same period, and the threat of recession looming more ominously by the day, it’s safe to say that corporate tax and finance professionals are feeling a little skittish about the future. And what do tax departments do when they sense a macroeconomic storm on the horizon? They start looking for ways to preserve their companies’ working capital.
In the current environment, however, that seemingly simple concept of removing leverage from the balance sheet and shoring up all available cash can be anything but a straightforward process.
Managing Increased Complexity
First, there is the issue of complexity on the balance sheets of most multinational corporations. The last several years of disruption, record levels of mergers and acquisition activity, and a long bull market that saw corporations investing in everything from emerging markets to cryptocurrency has resulted in an extremely complicated set of financials. On top of that, many companies that have grown rapidly through acquisition are juggling multiple different enterprise resource management (ERP) platforms and tax software platforms, a scenario that can limit complete visibility across different business segments.
Then there is the highly uncertain tax and regulatory outlook. According to recent research from Thomson Reuters, seventy-three percent of corporate tax professionals expect to see changes in government tax requirements in the jurisdictions in which they operate over the next two years. Among tax pros working in the tech sector, ninety-two percent say they expect regulatory changes that will affect their businesses over the next year. It is also worth noting that over half of tax pros surveyed (fifty-seven percent) said they feel they do not currently have the resources they need to meet these challenges.
That leaves many tax and finance departments staring down a recession, hunting for cash, and trying to prepare for an uncertain future with limited resources and an incomplete view of their total balance sheet.
Data-Driven Approach to Cash Management
Thankfully, this struggle is not unique, and many pioneering tax teams are forging a path of best practices to managing this complexity by taking a data-driven approach to cash management. These leaders leverage new technologies to break down data silos, look across the entire organization, and become much more adept at anticipating changes that will affect their bottom lines.
The critical common bond in these successful strategies is a strong data strategy. Tax and finance departments that want to stay one step ahead of the volatility that has come to define the current economy need to have a single source of truth they can trust to see their entire economic picture. That means having a real-time view on receivables, payables, and inventory along with developing insights into macroeconomic activities and constantly changing legislative compliance requirements that could impact any one of those inputs. Only when these key data points can be tracked accurately, across the entire enterprise in real time and at scale, is it possible to test different scenarios and forecast potential problems before they occur.
Increasingly, thanks to new low-code application programming interface (API) integration technologies and advanced data analytics capabilities, it is possible to access this level of granular siloed data, even in organizations that run multiple technology platforms and operate in multiple different jurisdictions. The key is making that real-time visibility a priority, which can be hard to do heading into an economic crisis.
New Leadership Challenge
Going back to the results of our survey of corporate tax professionals, just five percent of those surveyed said their departments were fully optimized with technology that allows them to perform analytics-driven decision-making, and seven percent said they were using predictive analytics to proactively manage risks and advise key decision makers using that information. Instead, most respondents (sixty-four percent) described their department’s approach to technology as either “reactive” or “chaotic.”
Therein lies the real challenge for tax and finance departments as they look to preserve cash and anticipate change in a challenging economic environment. The resources exist to support a more proactive, data-driven approach, but too many tax and finance pros are still taking a fire drill approach to cash management. However, by spending all of their time scrambling whenever new alarm bells ring, they are missing the opportunity to adopt a more predictive approach to avoiding crises in the first place.
Satnam Singh is chief product officer for corporate tax and trade at Thomson Reuters.