Why continued market volatility leads CFOs to see the bigger picture
From managing balance sheet risk to reducing operating costs, Mark O’Toole explains why it has never been more important for CFOs to have a full view of risk across the business to address these challenges as commodities and currencies continue to fluctuate.
Another quarter, and another period of intense volatility across the commodity and currency markets – a sense of déjà vu anyone? You have to go all the way back to the heady days of June 20th 2014 for when Brent Crude Oil was last on the up – trading at $114 per barrel. Since then, the commodity has been on a seemingly never ending tale of steep decline which has injected increasing bouts of volatility quarter by quarter. All this is reflected in the currency markets of today and company valuations – which are dependent on managing both currency and commodity price risk.
This continuous flow of commodity and currency price fluctuations has created accounting and forecasting challenges for CFOs, specifically those working for companies that produce finished goods with raw materials and commodities inputs, or trade commodities, and those that depend on commodities to manage and use them as feedstock into their business. Any swings in the price of raw materials or commodity exposed currencies, such as the Russian Ruble, can affect those companies who rely on their CFO’s ability to effectively manage their risk exposure to volatility from contractual commitments, foreign currencies, as well as feedstock/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. Perhaps most importantly though, these swings affect a corporate’s share price, creating uncertainty in the value of the company. And that’s one thing that will immediately grab the attention of the boardroom.
With this in mind, how exactly do CFOs with exposure to commodities meet the traditional demands of the business against the backdrop of a highly volatile macroeconomic environment? The answers 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. Admittedly easy to say, but much harder to do in practice, particularly as many finance officers have been weighed down with anywhere between 3 and 7 different systems just to manage 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 into 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 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 that 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, as well as 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 saves numerous man-hours, multiple vendors costs, reduced integration points that all need to be supported, and lowers error rates. All of which translates directly into an improved bottom line, which should be music to the ears of the boardroom.
And it is the boardroom that 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 just be 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 OpenLink