This series addresses various recession proofing strategies that can be implemented by your Chief Financial Officer or part-time CFO including:
· Risks and Mitigation Strategies
Implementing strategies around these elements shield your business during tough times and prepare you to take advantage of opportunities as they arise. Importantly, recession proof companies are prepared before the economic slowdown occurs – they do not wait until it is too late. All businesses are different, it is important to implement strategies best suited to your business.
Your CFO or part-time CFO should lead identifying and implementing the strategies most suited to your business.
Now is the time to act.
Economic Indicator:
Brexit creates substantial uncertainty to world growth and the risks of recession in 2020. In the short-term, the effects of Brexit will mainly be felt in the UK and the EU. Between April and June 2019, the UK GDP fell for the first time in six and a half years by 0.2%. A hard Brexit is anticipated to have a short-term impact on UK GDP by 3.5% and 0.5% impact on Europe. Trade agreements, visas and labour shortages, customs delays, finance markets, exchange rate impacts, the response by Ireland and Scotland all take time to work through with business investment being delayed until there is some certainty and confidence around where it might end and their return on investment.
For Australia, the direct impact is limited. Trade with the UK accounts for only 2.8% of Australia’s exports while trade with EU accounts for 4.6%. There are 1,500 Australian businesses that have an office in the UK, many of them use it as a base for Europe. Investment decisions need to be made by Australian companies on how they will operate within Europe and the people and customs implications of using the UK as a port of entry into Europe. Indirectly, the EU including the UK accounts for 15.6% of exports from China and 18.2% of exports from the USA. With already weak global growth and delayed business investment owing to the China-US Trade War, the effects of Brexit both directly and through our major trading partners could be the straw that breaks the camel’s back for Australia.
Risks and Mitigation Strategies:
Business Risk can be viewed in several ways. You can break it up simply as internal risks and external risk. At the other end of categorisation, you can break risk into the myriad of about 50 specific risk that may impact your business. For most organisations there are about five groups of risks that need to be assessed:
- Strategic Risk; are the business plans, strategies and tactics appropriate for the organisation and the times and how successfully are they being implemented.
- Financial Risk; how leveraged is the business? What is the capacity of the business to access funds should it require them for internal risk or external risk mitigation purposes? How will events impact on the cash flows of the business and for investors? How will these risks impact on investors returns? For example, a substantial lengthening in payment terms across key customers could have a crippling impact on cash flows especially if there is a client concentration risk.
- Operational Risk; mainly internal risks that involve processes and innovation. Especially around changes in resources such as employees, equipment and materials, this could include impacts of suppliers ceasing operations or supplier concentration risk that pushes up prices or alters quality making you uncompetitive against your competitors. Alternatively, your competitor deploys new innovative technology into their operations to reduce their operating cost and improve their competitiveness.
- Compliance Risk; failure to comply with laws, regulations and policies that risk penalties or worse.
- Reputational Risk; in a downturn market when businesses are very sensitive to the many risks inherent in doing business, sometimes it is not the act itself but the perception of the act that matters. Maintain a strong reputation and be seen to maintain your reputation.
Your part-time CFO is ideally placed to be your Chief Risk Officer. In larger organisations this function should be reported directly to the board as part of the periodic board or advisory reporting to ensure transparency.
A process that could be employed by your part-time CFO could include:
- Review and identify the risks that are relevant to the organisation
- Assess the risks and the potential impacts to the business
- Identify and gain agreement of actions and strategies that mitigate the risk
- Allocate managers with responsibility for actioning the mitigation strategies
- Measure and monitor the progress of the mitigation.
The result will a stronger more resilient business more capable of surviving and growing whatever the world throws at it.
About CFO Evolve
CFO Evolve provide exceptional part-time CFOs that can review and implement the strategies most suited to recession proofing your business. Contact us today if you would like a confidential conversation.
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