Hit the road Positive leadership for troubled times - ICAEW

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FINANCE & MANAGEMENT 14 MAY 2012 FINANCE & MANAGEMENT
FINANCIAL STRATEGY Weathering the eurozone storms The UK is far from reaching the sunlit uplands, economically speaking. But for its biggest trading partner – the eurozone – the outlook remains particularly unsettled. What can FDs do to adjust their strategy and minimise risk exposure in the region? Martin Holyoake has some advice… U ncertainty continues to produce heavy economic weather in Europe. Markets are volatile and even seemingly minor events can cause a storm. Nobody can be sure if the risk of one or more countries leaving the eurozone will materialise, but in any scenario, growth in Europe is likely to be lower than was the norm in the pre-crisis decade. Across Europe, governments are working to reduce their budget deficits. Public expenditure is being cut. At the same time credit availability is reduced as the banking sector strives to meet new regulatory targets. As a result there will be lower demand for goods and services and restricted liquidity for the corporate sector. NOT BUSINESS AS USUAL There are a range of scenarios for the future development of the eurozone economy. These scenarios will be characterised, among other factors, by: different rates of economic growth; varying levels of intervention by fiscal and monetary bodies; disparate views on exits from the currency zone; and contrasting levels of liquidity in the capital markets. As governments, businesses, financial institutions and consumers adapt, there’s a risk of severe disruptions to normal patterns of economic activity. Business as usual is not an option. IMPACT ON THE CFO How does this changed eurozone environment affect the CFO? Shareholders, boards, analysts and banks are asking increasingly detailed questions about executives’ preparations for operating in this new environment. They want to know the contingency plans that are in place and whether firms have thought through the longer term consequences for their business model. And they will look to the CFO to provide guidance on the impact for cash, cost management and working capital and modelling for managing the potential scenarios. So how should you approach the task of revising business strategy, so your company is ready to deal with the realities of the eurozone and the effects of unexpected shocks, while making the most of the new opportunities that emerge? Research for Ernst & Young shows that high-performing organisations are taking distinctive action around four drivers of competitive success: cost competitiveness; operational agility; customer reach; and stakeholder management. When preparing their business for the eurozone scenarios, the CFO can take a series of actions in these areas. 1. COST COMPETITIVENESS First, consider cost competitiveness. You need to: assess cashflow projections and consider how various economic scenarios would affect your company’s cashflow. Determine whether liquidity will be sufficient to withstand a sustained period of below-trend economic growth. If you have significant interests in a country on the periphery of the eurozone, consider how cashflow would be affected if that country were to exit the currency; develop rigorous plans that help you to forecast with confidence, while remaining agile. Prepare for fluctuations in demand. Consider, for example, how a fast moving consumer goods (FMCG) company would be exposed to the effects of uncertainty. If such a company exports to the eurozone, sales are likely to be sensitive to economic policy decisions in the respective countries. Tighter austerity measures would bring increasing pricing pressure, slackening customer demand FINANCE & MANAGEMENT MAY 2012 15
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Hit the road Positive leadership for troubled times - ICAEW

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