The programme of sanctions imposed by the US and eurozone members against Russia, in an attempt to cool tensions between the country and Ukraine impacted a number of businesses with operations in this territory. Similarly, while last September’s Scottish referendum ultimately resulted in a ‘no vote’ against separating from the UK, the tight run at the latter stages of the campaign forced many businesses to scramble in preparing for the potential impact on trade of an independent Scotland.
The new year will undoubtedly bring its fair share of challenges and chief financial officers (CFOs) will have to account for these in their 2015 plans. Renewed fears of another full-scale eurozone crisis towards the end of last year – fuelled by a number of factors including Germany’s struggling economy and the continued problems in Greece – have spilled over into this year. Meanwhile, companies will have to consider the impact of the upcoming UK general election in May.
Nonetheless, CFOs shouldn’t be downhearted about their prospects for 2015. The UK economy saw stable growth in 2014 and chancellor George Osborne recently announced plans to provide support to companies looking to expand overseas in his 2014 autumn statement. Robust planning for 2015 will be key to ensuring that the business is as well prepared as possible for any event.
What do CFOs need to consider in 2015?
1. Optimising accounts management:
It is vital that the 2014 budget is scrutinised carefully to give CFOs a clear understanding of what worked, what didn’t and highlight areas that could benefit from more investment this year. The review can also reveal the areas where unnecessary expenses can be cut out. When setting the budget for each department, a good tactic is to reward departments who managed to cut their costs last year, rather than simply slashing their budget, in order to encourage further cost-saving tactics in 2015.
Another area to consider in the new year is the effectiveness of the business’ payments schedules. If the company regularly incurred charges for late payment in 2014, this must be addressed as a priority. Late payments create a gridlock for cash flow and can also irritate business partners, thus diminishing the business’ reputation as a good company to work with.
2. Evaluating the risk strategy:
Uncertainty rocks the markets – the pound dropped to its lowest level in ten months last September during the tight election on Scottish independence. With the UK election bringing debates over a potential EU in/out referendum this year, similar currency volatility is to be expected in 2015.
Companies trading overseas can be significantly affected by such foreign exchange (FX) fluctuations. If the exchange rate is no longer what was anticipated when planning, businesses can see their bottom line hit as they convert profits made overseas back to their local currency when they have not prepared for such risks. It is therefore vital that the CFO, along with the whole senior management team, develops a scientific and mathematical strategy that considers the company’s FX risk exposure.
A certain amount of market volatility surrounding the UK general election outcome can be expected this year, but CFOs will also have to ensure that their companies can deal with the inevitable unexpected global events of 2015. If a contingency plan is already in place, this must be reviewed this year and regularly thereafter to ensure that the company can cope with the changing business landscape.
3. Embracing innovative treasury and finance technologies:
The function of the CFO has been revolutionised through technology and has brought tools onto the playing field that can aid accuracy, efficiency and utility. However, many CFOs still stick to what they know and rely on spreadsheets as the core treasury tool. According to a recent McKinsey Report, failure to embrace more advanced treasury systems can lead to a lack of central control, and limit the ability to make accurate reporting and error avoidance decisions.
By analysing treasury management options in 2015, CFOs can focus on more strategic operations, such as advising the chief executive (CEO) on growth opportunities for the new year.
4. Preparing for regulatory updates:
The past year saw regulators continue their increased focus on the banks, which has been high on the agenda ever since the global financial crisis. This has largely resulted in risk being displaced from the banking sector to the corporate sector, so CFOs would be wise to consider reducing their reliance on banks in 2015.
This might mean stockpiling capital where possible, so that sufficient liquidity and a steady cash flow is maintained. With innovative finance companies continuing to grow, it could also be time for the CFO to seek alternative means of financing.
Seven years on from the peak of global economic crisis, the global economy is still battling to return to stability. Nonetheless, this does not mean that CFOs should avoid overseas opportunities this year. Managing the finances of an international company is always going to be a challenge, but with the right planning in place, along with clear evaluation of the potential risks, CFOs can start the new year by moving in the right direction.
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