Hit the road Positive leadership for troubled times - ICAEW

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
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