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In Volatile Market, CFOs Need a Clear View of Risk

  • By Mark O’Toole
  • Published: 9/13/2016

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The era of high volatility looks set to stay. But what does this macro uncertainty mean for CFOs and group treasurers, and how exactly do they go about managing commodity and currency risk across the business?

A CFO-level challenge

The approaches various companies have taken to address these risks may have worked in the more predictable, less globalized climes of the past. But the current environment—marked by intense volatility—is pushing these old approaches, even the more sophisticated ones, to the limit. The level of risk is now such that this is no longer just a challenge for the group treasurer—it is a problem to be managed at the CFO level. Wild price fluctuations can create real accounting and forecasting difficulties and hamper the CFO’s ability to manage business risk more generally. Better management of these risks is becoming ever more crucial to the age-old chief mission of the CFO: to reduce bottom-line costs and increase top-line returns. There is also of course the fact that price fluctuations of this sort, poorly managed, can cause swings in a corporate’s share price—something that is bound to get the board’s attention. 

The fact that this is now very much a CFO-level challenge highlights the fundamental problem with all of the traditional approaches. It goes without saying that many companies relying on a maze of error-prone spreadsheets or nothing at all should consider the benefits of moving to an automated system, both to better manage risk and also save money and resources.

But even the companies with sophisticated group treasury teams out there that are using central systems tend to deal with commodity and currency risk separately and in a siloed fashion, via different departments. Treasury does currency, procurement takes commodities, and never the twain shall meet. In an environment where commodity and currency risk are not only heightened but more interwoven than ever before, this cannot suffice. The CFO needs to have a bird’s eye approach to commodity and currency risk—that is, a single, holistic, transparent view of commodity and currency risk across the whole of the business. After all, currency risk can be embedded into a physical commodity risk exposing the balance sheet and income statement at any time—if the currency and commodity risks are being calculated alone and never put together, how is a CFO going to know with accuracy if a business is over- or under-hedged at any given time? This also fits with a major pressure facing CFOs at the moment more generally—namely the need to reduce capital expenditure and rationalize systems as far as possible.  

A light at the end of the tunnel

Luckily, given the volatile times we live in, technology has developed to a point where there are sophisticated, cost effective systems out there that can achieve precisely this single, enterprise-wide view of currency and commodity risk, and in real-time. In addition to all the logistical and vendor cost-related savings that come from having a single system—as well as the reduction in man-hours and error-rates for those relying on spreadsheets—these platforms allow treasury and procurement teams to communicate and share information seamlessly and automatically. They support and provide help with financial hedging, should that be appropriate for the business, and provide the CFO with enough joined-up data to be able to make better decisions, faster, in response to market volatility.

Once upon a time, such a system would be a nice-to-have for many CFOs and difficult to justify to the board. But today, a CFO without full insight into their company’s exposure to volatile markets is putting their value and reputation at risk. In times such as these, investing in such a system can be a powerful way to make a dent in costs, improve margins and gain an edge over competitors.

Mark O’Toole is vice president of commodities and treasury solutions for OpenLink.

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