What CFOs can do to plan for the unknown 2012
The Eurozone crisis has decisively changed business conditions. While nobody can be sure how the crisis will turn out, there is a consensus that, under any scenario, growth in Europe will be lower than was the norm in the pre-crisis decade.
As governments, businesses, financial institutions and consumers adapt, there is a risk of severe disruption to normal patterns of economic activity. Business as usual is not an option.
Shareholders, boards, analysts and banks are starting to ask CFOs increasingly detailed questions about their preparations for operating in this new environment. They want to know the extent of the contingency plans that are in place, and whether the longer-term consequences have been thought through.
What is this paper about?
This short guide provides an overview of actions the CFO should consider as they prepare for conditions in the Eurozone. The actions relate to four main growth drivers. Research for Ernst & Young1 shows that high-performing organizations are sustaining growth through the right balance of four drivers of competitive success: customer reach, cost competitiveness, stakeholder confidence and operational agility.
Remaining viable by reviewing pricing, reducing costs, passing on cost pressure and optimizing capital.
- Assess cash flow projections under each scenario
- Determine whether liquidity is sufficient to withstand a sustained period of below-trend growth
- Understand how your cash flow would be affected if a country in which you have significant interests were to exit the Eurozone
- Prepare for fluctuations in consumer demand based on changing economic policy decisions and consequent pricing pressure
- Explore how your future funding model would be affected by the various scenarios
- Ensure that your capital structure can withstand shocks in the Eurozone
- Reassess your currency hedging strategy
- Establish how the value of your assets and liabilities would be affected under each scenario
- Understand the accounting and disclosure implications of a Eurozone break up
- Ensure that your approach is robust enough to cope with continued European currency fluctuations
Improving delivery by accelerating response speed, creating flexible work platforms, concentrating on innovation and collaborating.
- Ensure you fully understand your supply chain and identify where the products that you sell in Eurozone countries are sourced
- Model how your supply chain would be affected under the different scenarios and establish whether any of your suppliers are vulnerable to default
- Determine whether you might need to provide direct support to “shore up” your supply chain
- Maximize contractual flexibility on both supply and demand sides, so you can rapidly de-risk your exposure and seek out new suppliers if necessary
- Establish whether your contracts allow you, or the suppliers, to adjust prices if currencies experience large swings
- Determine whether your sales contracts give you scope to recover revenue in the event of customer payment default
- Decide whether you are prepared to renegotiate customer price terms, currency terms or break contracts to seize other opportunities in more stable markets
- Explore the impact of austerity measures on the risk of credit default by key customers
- Strengthen the management and monitoring of credit
Maximizing market opportunity by focusing on key segments, broadening the product or service offering, prioritizing markets and reinforcing the brand.
- Determine how your stakeholders are likely to be affected by the various scenarios and evaluate your dependency on joint ventures, alliances or other relationships with third parties within the Eurozone
- Update your analysis of acquisition targets and, if you are in the process of planning or executing any mergers or acquisitions, ensure that risk considerations are factored into price decisions
- As the economic situation gives rise to new acquisition opportunities, ensure you are ready to act
- Assess the positioning of your competitors by studying their sourcing, supply and demand
- Move quickly to capitalize on a situation that favors you over them and negate any exposure you may be subject to
Building stronger relationships by identifying and explaining risks, enhancing reporting, anticipating regulatory compliance and re-engaging with internal talent.
- Get your investor communications right by focusing on extending reporting beyond financial, regulatory and compliance requirements
- Use media opportunities to tell customers, investors and suppliers that you are prepared for the Eurozone scenarios
- Increase your communication and reassurance as conditions become more volatile
- Provide investors with clear information about changes to your risk profile as a result of changes within the Eurozone
What should you be doing now?
Eight key steps for CFOs
- Create a team with the necessary skills and knowledge of the business and the issues as they relate to changes within the Eurozone
- Define the potential scenarios and analyze the impact of these on the business
- On the basis of the above analysis, develop the appropriate contingency plans
- Update the business strategy in the key areas as appropriate
- Document and communicate the contingency plans and governance structure
- Prepare stakeholder communications
- Agree a process to adjust the plans as the market changes
- Overhaul planning and reporting processes to increase transparency to trends and agility in understanding new scenarios