Uncertainty, uncertainty and uncertainty. Difficult to define and near on impossible to measure, uncertainty is a real problem in today’s business environment.
Judging by recent global events, should we be surprised?
- We’ve the seen the biggest financial meltdown since the great depression of the 1930s.
- A resulting balance sheet recession occurred in many countries as businesses and households reduced debt and built cash reserves in preparation for an unpredictable future.
- A calamitous sovereign debt crisis that still threatens the future of the European single currency – plunging this vital global market into recession.
- An anaemic economic recovery in the United States.
- A slowing of growth in China (bad news for our resource sector, already in a fight over domestic tax policy).
- The Japanese tsunami and its disruption to global supply chains.
- Political turmoil: the Arab Spring, the Iranian nuclear program, a Syrian civil war, a divisive US election campaign and a changing of the Chinese party leadership (to name just a few).
You can, no doubt, add a few things to this list yourself. So it is not surprising that uncertainty about the future is a concern. And it doesn’t take Nostradamus to predict this state of flux and unpredictability will continue for some time yet.
All this uncertainty means that markets, suppliers, costs, customers and economies are becoming increasingly volatile. Yet because of this boards and managers are demanding more accurate forecasting.
So how does a CFO deal with this pressure?
The problem is you’re unable to have much personal affect on these global events. But instead of simply getting buffeted by the stormy macro-economic winds, there are important steps you can take now.
Like the Scouts: be prepared
You can’t always know exactly what will happen in your market. But you can ensure you’re fully aware of the potential impact changes could have on your business e.g. what is the impact of a 1% change in exchange rate on profit and cash flow?
You should have financial models in place that are sufficiently smart, flexible and robust so you can run fast and accurate what if analysis. You might not know what outside force will affect you, but you will know what to do when it does.
Plan how you’re going to plan
You can’t know for sure what’s coming, but you can build your thinking about potential scenarios and make a range of plans to deal with these accordingly.
Planning for potential future outcomes is often neglected because it is difficult, time consuming and, therefore, costly. But for certain vital areas and functions of your business, forward planning like this could be the difference between a company that thrives and one that dives.
Try your models out on the catwalk
To be prepared and to plan ahead requires an intimate understanding of the business and a solid financial model that can effectively conduct and compare scenarios is a critical part of this.
However, solid financial models are more rare than you’d think. As expert creators of financial models for some of the biggest companies in Australia, we see countless examples where models are not built to withstand the demands put on them – particularly in volatile and fluid business environments.
Ensuring that your financial models are audited or reviewed by internal teams or external professionals is a very smart move; a move that can save you huge sums of money.
So get your financial models in order and should the market, the government or your competitors throw you a curve ball, you’ll have a range of planned strategies to deal with it. You might even be able to take advantage of opportunities your competitors were too slow to spot.