IMGCAP(1)]It has never been more important for CFOs to have a full view of risk across their business as commodity prices and currencies fluctuate.
Currency markets and company valuations depend on managing the risk of both currency rates and commodity prices.
The continuous flow of commodity and currency price fluctuations has led to accounting and forecasting challenges for CFOs, especially those who work for companies that produce finished goods with raw materials and commodities inputs, or trade commodities, and those who depend on commodities to manage and use them as feedstock into their business. Any swings in the prices of raw materials or commodity-exposed currencies, such as the Russian ruble, can affect those companies that rely on a CFO’s ability to manage their risk exposure to volatility from contractual commitments, foreign currencies, as well as feedstock and inventory risk.
This puts added weight on that age-old demand from business on the CFO: reduce bottom-line costs and increase top-line returns. These swings can affect share prices, leading to uncertainty in the value of a company and grabbing the attention of the boardroom.
With this in mind, how do CFOs with exposure to commodities meet the traditional demands of the business against the backdrop of a highly volatile macroeconomic environment? The answer lies in having a holistic and transparent real-time view across treasury and procurement to see any exposures that can negatively impact the bottom line. That’s easy to say, but much harder to do in practice, particularly as many finance officers have been weighed down with different systems for managing day-to-day operations.
However, there has been a sea change recently, as pressures to reduce capital expenditure and increase margins have forced the hand of the CFO. Gone are the days of running multiple different systems just to manage day-to-day business operations. Today, it’s all about reducing the number of systems and manpower to operate them, and having the tools to gather detailed insight into activity. After all, currency risk can be embedded in a physical commodity risk, exposing the balance sheet and income statement at any point. If the risk in the physical commodity or currency alone is not getting transferred back into the treasury department, how is a CFO going to know if the business is over hedged or under hedged?
Take the example of the United Kingdom’s currency, pounds sterling, in light of the EU referendum result. There is no telling what level it will be trading at over the coming months. This sort of uncertainty is precisely why finance officers need to have full visibility into their exposure at any given time to actively manage situations like this.
To ensure they can implement the most effective strategies to manage these scenarios, CFOs need to have full visibility across treasury and procurement. The two departments need to be integrated in such a way that the financial officer has a single, timely view of commodity and currency risk.
This involves the use of technology that enables the two teams to communicate so CFOs can make faster decisions in response to market volatility. It also means the use of sophisticated analysis and financial commodity hedging, should this be appropriate for the business. Furthermore, for a business previously reliant on spreadsheets, it reduces the man-hours, vendor costs, integration points and error rates—all of which translates directly into an improved bottom line, which should be music to the ears of the board of directors.
The boardroom is key to all this. Without full insight into today’s highly volatile macroeconomic conditions, C-level execs put their company’s value and reputation at risk. Investing now to handle the impact of today’s market volatility, coupled with intense pressure to reduce costs and provide value to shareholders, may be just what’s needed to convince the business that having a complete view of risk exposure is a necessity, instead of a nice-to-have for the CFO.
Mark O'Toole is vice president of commodities and treasury solutions at
