Hit the road Positive leadership for troubled times - ICAEW

FINANCE & MANAGEMENT
for certain goods and erosion
of margins. While the total
volume of goods sold is likely
to remain fairly stable for core
consumables, price pressure
would arise from reduced
disposable income coupled
with increased competition
from other suppliers. Unless
the company can alter its cost
base, there will be a negative
impact on profitability. The
impact of tighter austerity
measures on the demand for
discretionary products will be
even more severe as both volume
and price is likely to be affected;
determine how your future
funding model would be
affected by various economic
scenarios. How would your
company’s capital structure
withstand stress? Does it
include government bonds
from eurozone countries? If so,
is the value of these material
to your business? Consider the
extent to which you need to
restructure your balance sheet
and your access to short-term
funding flows;
assess your current currency
hedging strategy. Were the
eurozone to break up, how
would you hedge your currency
exposure if underlying assets
are denominated in a new
currency? Determine how
your hedging strategy for
non-currency risk will be
affected by continued economic
uncertainty; establish how the
valuations of your company’s
assets would be affected by the
various scenarios – for
example determining the
likely impact on goodwill;
think about how the value of
your company’s liabilities
would be affected. Make sure
you are clear about the
accounting and disclosure
implications for impacted
legal entities and transactions
in the event of a break-up of
the eurozone.
Establish a cogent
plan to disclose to
investors and
regulators; and
consider how the breakup
of the eurozone would
affect your transfer pricing.
Ensure that your approach is
robust enough to cope with
continued European currency
fluctuations. To do this you
Check if your
sales contracts
allow you to
adjust prices
if currencies
experience
large swings
will need to model likely
scenarios to test the sensitivity
of the current approach.
2. IMPROVE AGILITY
CFOs should also take
measures to improve
operational agility. So:
make it your business to
understand your suppliers’
financial status. As a result of
globalisation, supply chains
have become increasingly
complex across most industry
sectors. Identify where the
products that you sell in
eurozone countries are
sourced. Understanding the
end-to-end supply chain
implications resulting from
uncertainty and potential
denominations within the
eurozone is critical, as their
impacts may be profound.
Are any of your suppliers
vulnerable to default should
conditions worsen? Establish
whether you may need to
provide direct support to
shore-up your supply chain to
weather the storm;
model how your supply
chain would be affected under
the different scenarios. Explore
alternative sources of supply.
Remember, a supplier could
fail as a direct result of
economic conditions or credit
constraints due to currency
devaluation;
ensure you maximise
contractual flexibility – from
both supply and demand sides.
Can you change your supply
chain to rapidly de-risk your
exposure or seek out new
suppliers to capitalise on the
opportunity? Check the
currency in which contracts
are denominated. Check the
duration of the contracts and
the basis for price setting. Do
your purchase contracts make
provisions for a denomination
and, if not, can they be amended
to cover this? Establish
whether your purchase
contracts allow you or the
suppliers to adjust prices if
currencies experience large
swings. Again, find out if you
can amend to make provisions
for this. Similarly check the
extent to which your sales
contracts allow you to adjust
WHAT SHOULD YOU BE DOING NOW?
prices if currencies experience
large swings. Can these be
amended to make provisions
for such changes? Establish
what scope the terms in your
sales contracts give you to
recover revenue in the event
of customer payment default.
Think about whether you are
prepared to renegotiate
customer price terms, currency
terms or break contracts to
seize other revenuegenerating
opportunities in
more stable markets;
consider, also, questions
over ethical obligations, and
the reputational damage that
can be caused should you
choose not to fulfil them. For
example, if a company exports
medicine to a government
hospital located in a troubled
eurozone country, it may have
an ethical obligation to
continue to supply life-saving
medicines even when
payments are uncertain.
Whilst this may not represent
a risk from a legal standpoint,
discontinuing the supply due
to revenue erosion risk – often
in circumstances where
generic supply options are
unavailable – could cause
1. Create a team with the necessary skills and knowledge
of the business and issues.
2. Define the potential scenarios and analyse the potential
impact of these on the business.
3. On the basis of the above analysis, develop the appropriate
contingency plans.
4. Update the business strategy in the key areas as appropriate.
5. Document and communicate the contingency plans and
governance structure.
6. Prepare stakeholder communications.
7. Agree a process to adjust the plans as the market changes.
8. Overhaul planning and reporting processes to increase
transparency to trends and agility in understanding
new scenarios.
AMY CARTER
16
MAY 2012 FINANCE & MANAGEMENT