Today's global economy can't seem to snap out of its downward spiral, driven by one uncertainty after another across a rotating cast of market factors. We are living in a prolonged era of economic and regulatory volatility, where the next Brexit or market rumor in China could immediately affect commodity and currency prices and depress markets across the globe.
To effectively steer their companies through global uncertainty, business leaders are increasing their reliance on ad-hoc decision support and analysis from corporate finance. Companies need to be nimble when it comes to processes and systems -- they can't wait for the end of the month to see results or routine budget cycles to make strategic investments. CFOs can adjust to this environment by sharpening their assessment of economic risk and even simulate mitigation, and then implementing the right processes and tools to keep them agile. And one thing is for sure in all this uncertainty: active risk management has to be an integral part of all financial and operational business processes!
Evaluate Market Factors and Assess Risk
With unforeseen market risks arising daily from political, economic and societal uncertainty across the world, there is no common agreed-upon measure to assess risk. However, by evaluating both the likelihood of an event and the potential impact, CFOs can prepare themselves to better navigate global volatility.
In order to best assess risk, corporate finance departments need to determine the likelihood of an occurrence, looking at the probability of a potential political, economic or social event as well as considering the potential speed of onset. Some countries have a stable political environment either because it appropriately represents the opinion of the population or because the government secures its re-elections by different means. Nevertheless, this does not mean that societal conditions can't evolve rapidly, as precisely illustrated during the Arab Spring and more recent election cycles in the West.
Beyond assessing the likelihood of an occurrence, CFOs and corporate finance professionals also need to think about the impact, and look for ways to minimize exposure. There are certain markers that CFOs can evaluate that might point to global volatility, including evaluating commodity prices, exchange rates and demand, and looking for vulnerabilities. Financial planning, forecasting and treasury/financial risk management are most commonly impacted by economic volatility. A great case study lies within Brexit, where it is almost certain that labor and tax laws will change, tariff agreements will be renegotiated and corporate structures will be reassessed -- driving significant, new complexity. As a result, a number of CFOs and corporate treasurers made moves to protect against foreign exchange risk, by increasing currency hedges, raising cash holdings and carefully evaluating the credit quality of trade partners to minimize the impact wherever possible.
Best Practices for Overcoming Economic Uncertainty
Shedding antiquated legacy technologies and embracing the new digital economy can help CFOs sharpen their risk assessment, drive revenue and identify new areas of focus, depending on market conditions. The right tools can be an effective hedge for business performance, regardless of economic circumstances. A good rule of thumb is to implement processes that are well suited for the following capabilities:
- Agility: All teams within the finance organization will be impacted by market volatility. In a changing business environment, it's important to build flexible platforms that support new revenue and expense models, rapid internal reorganization and greater process automation. With the rise of the digital CFO, there are many new technologies such as cloud computing that make real-time insights a reality. By leveraging the right tools, agile companies will be able to have the live insights to make smarter, in-the-moment decisions.
- Risk management: Most companies recognize the importance of strategically balancing risk and opportunity in order to create significant competitive advantage and profitability. However, global research commissioned by SAP, revealed that only one in ten organizations are fully satisfied with their GRC tools. Employing the right technology provides transparency into internal activities and brings visibility to supplier and credit risk in the broader ecosystem. Furthermore, real-time management of currency and country risk allows for optimization of exposures and hedging. By adopting the latest technology, companies can minimize risk management administrative tasks and spend more time on strategic planning.
- Continuous monitoring of operations: To keep pace with real-time transaction processing, finance organizations are embedding compliance monitoring directly into their transactional systems, allowing 24×7 monitoring to keep their organizations safe. With core compliance centralized and automated, focus turns to collaborating effectively with the risk-management function, with a shared goal of protecting the brand. By opening lines of communication between departments (that might not otherwise interact) enterprise risk topics become focus while business networks provide visibility into supplier and credit risk.
Global market moves can be unsettling for any business. While corporate finance departments hold the key to deep business insights required to navigate economic uncertainty, it can only be unlocked with the right tools. To turn uncertainty into opportunities CFOs should invest in a next generation finance solution as well as globalization services that provide peace of mind. CFOs have the opportunity to become among the most tech savvy, competitive and agile in the boardroom. By embracing the digitization of finance, organizations will be better equipped than ever to face the headwinds of global economic volatility.
An earlier version of this article appeared in Finance Monthly.