It is clear that today’s working environment is one of the most challenging for company treasurers and chief financial officers. A range of factors have combined to create uncertainties that were perhaps unforeseen. Understanding the nature of these changes and capitalising on them is key to the value that finance functions bring to organisations.
Many companies in Asia have customers in regions such as the U.S. and Europe that have been severely affected by the credit crisis, both directly as demand in their industry sectors has slowed or indirectly as the availability of credit has reduced. This customer demographic is looking extremely uncertain in terms of future order flow.
Although intra-region demand is buoyant and credit availability in Asia has not been hit as hard as in many other regions of the world, the spectre of inflation is raising its head in most of the major economies. For Asian companies exporting to customers in the U.S., this inflationary problem is proving especially awkward. If they are manufacturing in countries such as China, they may find themselves confronted with a combination of inflating local factor costs priced in local currency and sales revenues priced in weakened U.S. dollars.
At the same time, credit conditions are proving extremely taxing. Companies have noted the impact of the credit crisis on many banks and are asking themselves some serious questions about which of their banks will actually be capable of supporting them. The condition of some bank balance sheets is problem enough, but this is being further compounded by continuing liquidity constraints in the interbank market.
This lack of available bank credit obviously feeds through into a liquidity shortage for companies, but is further exacerbated by the generally low level of business confidence. As a result, organisations are looking to extend their days payables outstanding (DPO) while simultaneously contracting their days sales outstanding (DSO) to improve their liquidity.
The final toxic ingredients in this decidedly unpalatable recipe are global commodity prices. General price inflation in some Asian countries is a serious issue in itself, but it almost pales into insignificance when compared with the explosion in certain raw material prices. Apart from the immediate impact on the price of finished goods, these are not risks that are easy to hedge as the sheer volatility of commodity prices has pushed pricing on hedging instruments such as options to unattractive levels.
Risk Management
The implications on risk management of this inclement environment are significant. At the most fundamental level, company treasuries have had to undertake a re-assessment of all their trading relationships. Particularly where they are dealing with customers in depressed markets such as the US, there is the question of credit limits to be considered. Should these be reduced or the credit terms shortened?
The company’s funding situation may also need review. Is there sufficient contingency funding available from banking partners? Can it actually be relied upon? And what about the balance sheet? In calmer conditions, shareholders and analysts frown upon anything other than the bare minimum of cash on the balance sheet, but in the current environment should cash levels be increased? Can they be increased?
The counterparty risks of financial as well as commercial partners need re-evaluation. The risks of lenders withdrawing support have already been mentioned, but there is also the matter of the robustness of fund managers and deposit holders, especially if the company is attempting to hold a greater percentage of its assets in cash.
There are also the hedging implications to consider – is there a need to diversify risk counterparties for foreign exchange, interest rate or commodity hedges? What contingencies should be put in place for existing positions?
Finally, there is the matter of business continuity planning with regards to the supply chain. If economic activity is depressed, it is imperative that available sales opportunities are not squandered through a failure to deliver caused by the demise of a key supplier.
Should additional suppliers be considered as a contingency? Or could a banking partner provide a supply chain finance solution that would strengthen the working capital position of key suppliers?
2012, Feb 09 
0 comments
Print
Digg