Managing a Sudden Cash Flow Increase? Here Are 4 Areas Where Smart CFOs Invest

As businesses recover from the pandemic, CFOs are prioritizing innovative investments like digital transformation to manage their cash flow.

If your business is experiencing surplus cash flow, as the CFO you most likely have a say in how that working capital is used. Modern CFOs have grown beyond traditional finance positions into roles that drive business decisions throughout the organization. For many CFOs, this means spearheading enterprise digitalization and other initiatives that streamline business operations and increase return on investment (ROI).

Given the current financial market — which is seeing supply chain disruptions, inflation, interest rate hikes and labor shortages — CFOs must make smart investments to optimize cash flow and support business growth. According to Gartner data, CFOs who make timely, effective investment decisions can increase their business’s economic value by up to 2.5 percentage points.

Using a cash flow increase to invest in practical business functions, such as marketing or opening new locations, might seem like the obvious choice when it comes to business growth. However, if your goal is to differentiate your product or service, you might want to pursue more innovative investments. Here are four creative ways that smart CFOs are making use of surplus cash.

1. Digital transformation and new technologies

In 2022, Gartner surveys found that 82% of CFOs prioritized digital investments over other business investments, such as talent, supply chains or business services. There are good reasons why. Investments in digital transformation — the integration of digital technologies across an organization — can not only optimize business processes but also drive more informed decisions for business growth.

For example, cloud computing solutions can unburden your IT resources, support an efficient hybrid workforce and help you avoid costly cyber breaches by strengthening security. Forward-thinking enterprises are also investing in advanced data analytics and artificial intelligence (AI), which use algorithms to detect patterns within large data sets. This has a range of business use cases, such as:

• Process mining, which identifies gaps and inefficiencies in various business processes, such as supply chains, and suggests fixes.
• Financial tool upgrades, such as more accurate forecasting and predictive models that anticipate risk based on your business’s financial data and external market factors.
• Business process automation, which often supports administrative and financial tasks in areas where many businesses are understaffed.

Customer service improvements, which can help you automatically detect customer buying patterns, create targeted advertisements and offer 24/7 customer support, for example.

2. Workforce development

Workforce training is part and parcel of digital investments. As businesses integrate solutions such as cloud computing or data analytics, employees need the skills to use new software effectively. You should consider digital upskilling solutions alongside any new technologies to make the most of your investment.

Additionally, the Great Resignation has necessitated workforce development investments that include strategies to attract talent and minimize churn. PwC’s 2022 Pulse Survey says that over half of CFOs consider talent acquisition and retention a serious business risk.

More attractive wages and incentives, innovative projects and technologies, skills development programs and tools to support hybrid work environments are all investments to consider for workforce development. Excess cash flow can also be used to upgrade recruitment initiatives, such as establishing an employee referral program, leveraging recruitment automation or improving a social recruiting strategy.

Many businesses are already seeing results from redirecting working capital to these strategies. Inspire, a full-service event technology provider, found success in restaffing its talent pool this year by investing more in onboarding, training, upskilling and reskilling — as well as offering sign-on bonuses and innovative project incentives.

For many job seekers, workplace culture, inclusiveness and transparency are also major factors. You could invest in HR and communications resources, either in-house or outsourced, to define and implement workplace culture, communication strategies, diversity and inclusion training, and even philanthropy.

3. Environmental, social and governance (ESG) initiatives

Customers are consuming products and services more mindfully, opting to do business with companies that demonstrate sustainable practices. For businesses, this means that ESG can improve sales, and help them attract and retain employees. Data has also shown that sustainable investments often outperform traditional funds in the stock market.

As a long-term strategy, you could invest surplus cash flow into ESG integration. This process will look different for every organization but typically starts with:

• Defining your ESG goals and metrics within your overall business strategy.
• Procuring tools that will gather and interpret data in support of your ESG objectives.
• Investing in sustainable technologies, practices and partners that align with your ESG plan.
• Developing a communication strategy that informs customers and stakeholders about your ESG initiatives.

4. Product or service innovation

In 2022, Costco acquired Innovel Solutions, a logistics firm that offers last-mile delivery services. The goal? Facilitate the sale of larger products, such as appliances, furniture and fitness equipment, that have seen a rise in demand since the start of the pandemic. Funneling free cash flow into such smart business acquisitions can provide added value for an existing product or service, and differentiate your offering from competitors.

A business doesn’t need to go as far as acquiring another company to upgrade its products, however. Investing in new technologies, such as a mobile app or in-store experience, can provide a better customer experience and a valuable cash optimization project for your business.

Soliciting research from firms and think tanks knowledgeable in your industry can help you foster business innovation and develop a strategy for how to best spend working capital. Plus, data and analytics tools can help you decide which ventures or product enhancements will benefit your business by enabling you to forecast risks and ROI.

Managing cash flow going forward

In 2022, your company may be reevaluating capital investments as it moves past the pandemic recovery and starts seeing an influx of cash flow. Many businesses will use this as an opportunity to invest in marketing initiatives and equipment upgrades, but more innovative investments such as process mining tools or an ESG strategy can set your company apart from competitors and realize better long-term returns.

However, innovative investments require a different approach than investments such as marketing strategies. Experts suggest that CFOs plan to invest in a portfolio of smaller projects when pursuing more innovative capital expenditures and be ready to abort those that fail. And even if your cash flow is abundant now, it’s always a good idea to evaluate your cash flow management strategy, especially if your investments are less fruitful than expected.