Hit the road Positive leadership for troubled times - ICAEW

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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
FINANCIAL STRATEGY substantial reputational damage. The potential financial implications may be even more severe in the event that the respective country exits the eurozone and denominates its currency; and explore the impact of austerity measures on the risk of credit default by key customers. To this end, strengthen the management and monitoring of credit – for example, revisit credit checks and searches on established customers to ensure their circumstances haven’t changed. 3. CUSTOMER REACH The third key growth driver to consider is customer reach. You need to: determine how your stakeholders are likely to be affected by the various scenarios. Establish the extent of your dependency on joint ventures, alliances or other major relationships with third parties within the eurozone countries; update your previous analysis of acquisition targets. If you are in the process of planning or executing any mergers or acquisitions in Europe, ensure that risk considerations are factored into price decisions. The current economic situation may give rise to new acquisition opportunities. Be aware of them and ready to act; assess the positioning of your competitors. Study their sourcing, supply, demand and manufacturing profiles. Would they be able to strengthen their competitive positions under any of the possible scenarios? Establish how you can move quickly to capitalise if a situation arises that favours you over your competitors. Work to negate any exposure that you may face; and widen your scope to acquire, to grow, to consolidate or to take out competitors. Update your approach to identify and evaluate such opportunities. 4. STAKEHOLDER FAITH The CFO is increasingly seen as the public face of the organisation. Their unique overview of business fundamentals, their role as conscience of the organisation Martin Holyoake is partner, business advisory services, Ernst & Young. mholyoake@uk.ey.com The CFO is increasingly seen as the public face of the organisation and their fact-based training means that a diverse group of stakeholders is increasingly looking to them for the answers. The CFO is best placed to deal with the fourth key growthdriver: stakeholder confidence. Investors and analysts want broader communications than the annual or interim reports, and the opportunity to question the CFO directly about the strategy. And with finance now a big story, you have more opportunities to make an impact in the media. Getting your investor communications right will give you a distinctive competitive advantage. So: focus on extending reporting beyond financial, regulatory and compliance requirements, and increase the frequency of your corporate performance communication. With the uncertain outlook making competition for capital fierce, it is even more important to ensure you can tell a compelling growth story to investors; and think about how you will use media opportunities to reassure customers, clients, investors and suppliers that your organisation has identified and assessed the potential impacts of the various eurozone scenarios, and is prepared to address the risks and seize the opportunities. The more volatile the conditions, the greater the need for reassurance. However, a note of caution here. Remember that investors look to a CFO to present them with an honest, objective picture – not a sales pitch. Hence it is important to also: retain investors’ confidence by being open and transparent. This transparency can stretch to providing investors with direct access to local management. You can demonstrate to investors that you have the right team in place that understands the nuances and risks of a particular business environment. RIDING OUT THE STORM By scenario mapping and boosting your planning in the key areas of cost competitiveness, operational agility, customer reach and stakeholder management as outlined, you can face the unsettled eurozone outlook with confidence. (See box, left, for an eight-point action plan.) Performing a robust overhaul of your organisation’s business strategy should leave it better prepared to cope with the underlying conditions in Europe and withstand any storms ahead. Organisations which understand the implications of the eurozone issues will not only be better placed to avoid the pitfalls and risks ahead, but also be in the lead position for growth opportunities as they arise. FINANCE & MANAGEMENT MAY 2012 17
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