What's the biggest headache for corporate finance executives these days?
No surprise it's the unpredictable global economy.
According to a recent poll of 435 CFOs, corporate treasurers and other senior finance executives, nearly three-fourths (72 percent) agreed their top concern is managing financial uncertainty, including the risks associated with credit, liquidity, interest rates and currency/foreign exchange.
In addition, more than one-third of respondents are worried about risks associated with:
macroeconomic conditions, such as the pace of economic growth and inflation (38 percent)
business/operations, including supply chain and/or production disruptions, litigation, labor and outsourcing (36 percent)
External risks (country, regulatory, natural disaster) and commodity risks (power/heat, crude oil & distillates, agricultural and metals) also emerged as concerns for a significant share of the organizations polled, but to a lesser degree.
And, four in ten respondents (41 percent) said they expect even more earnings uncertainty in the coming years.
The survey results, released last month by the Association for Financial Professionals (AFP), also revealed that:
Finance chiefs are particularly concerned about liquidity and credit risks. More than half of the respondents who view financial-related risks as a major concern identified liquidity and credit risks as having the most significant potential impact on their earnings over the next three years. Forty-six percent reported similar concerns about interest rate risk. More than one-quarter (27 percent) expect currency/foreign exchange risk will have a significant impact on their earnings.
The executives surveyed need more tools to mitigate risks. Executives surveyed cite lack of data and tools to interpret it as barriers to mitigating risks. Nearly half of the organizations surveyed have invested in IT system upgrades as a risk mitigation strategy. In addition, to moderate the risk of earnings uncertainty, 31 percent of organizations have increased their use of hedging and 30 percent have increased their use of contractual risk transfer (including through the use of insurance). When managing risk exposures, the two most important factors that executives cited were cash flow predictability (74 percent) and performance forecasts (65 percent). Other considerations noted were the organization's reputation (45 percent), solvency (29 percent), preservation of bond covenants (25 percent) and preservation of debt rating (22 percent).
As we've seen over just the past few months, the global business environment is teeming with a wide range of threats, ranging from economic volatility and key supplier financial failure to compliance issues and potential disruptions due to natural disasters, infrastructure failures or geo-political factors. At times, it can seem like the list is endless.
What's more, off-shoring, emerging market sourcing and spend reduction initiatives have increased exposure, as well and all without a related increase in comprehensive closed-loop risk assessment, planning and mitigation solutions. Clearly, companies that want to stay competitive must now look to more comprehensive solutions, so they can better understand and control their full risk exposure.
"Uncertainty is here to stay," said Jim Kaitz, AFP's president and CEO. "One way organizations can take control of rising uncertainty in their earnings is by adopting a new mindset and making more risk-adjusted decisions. The ones that do this effectively will have a competitive advantage."