June’s unexpected Brexit vote was the latest crisis for many corporates. For some CFOs, the result was a myriad of important questions from their board, investors, and other C-level executives. Among them?
— How exactly were we effected?
— What will the impact of this be on a go-forward basis?
— Is what we’re doing to mitigate risk working?
Unfortunately for some CFOs, these were important questions that were difficult to answer with precision or within a short period of time— impacting strategy, human capital and even revenue.
Although Brexit was the first domino to fall in what’s predicted to be a long, volatile process, it wasn’t the first crisis. And it certainly won’t be the last.
So what can CFOs do to ensure they not only have the answers, but are also prepared for the next “Brexit?”
1. Don’t fixate on visible currency
Especially when you’re seeing currency moves as big/fast as what’s happening now with the U.K.’s Sterling, your instinct might be to focus on the currency directly visibly effected by a crisis. However, remember that these impacts can create major shifts in other currencies (like the dollar and euro) as well. What’s more, other ripple effects— with Brexit, central banks (like China) lowering their currency due to dollar strength, for example— should be kept top-of-mind. Be sure to keep a comprehensive view of your currencies as a whole so that you’re able to strategize and keep an eye on all changes that will effect your business.
2. Take advantage of predictive/scenario analysis
Go back to the beginning of last year. The rapid devaluation of the ruble and the unpegging of Swiss currency were both surprises that were mostly unforeseen. However, if you were utilizing predictive analysis, you had the opportunity to see how a currency shift of that magnitude would influence your business. Even more, once the shifts occurred, you would have had access to the results of any additional potential moves.
If you aren’t already, continuously running predictive and scenario analyses are extremely important. Most people access these analyses instantaneously through technology (like FiREapps analytics), and one of the biggest benefits is that they give CFOs the power to predict the outcome/nail down a strategy for “what if” situations. By utilizing predictive analysis (combined with an impact analysis post-crisis), corporates can get into a pattern of consistently gauging causes/effects and more, understanding the protective steps they should be taking.
3. Know if your corporate currency policy is up-to-date
Depending on the industry you’re in, you may be more or less capable of responding to currency crises. For example, you may be in an industry that doesn’t historically hedge or that uses pricing markets to offset local currency rates. What that being said, the question of whether or not your risk tolerance and policy are still valid is something that very possibly could come from your board. For every CFO, the question of whether or not market conditions/business has changed enough to warrant a change to one’s currency policy is something that should be regularly reviewed, but especially should be when major currency moves occur in the market.
4. Understand where FX is carried throughout the company
Ensure that you understand how FX is impacting both your central and local teams. In scenarios where corporate FX numbers look ok, but local entities are dealing with a much heavier burden, it’s extremely important to understand where FX impacts are carried in the management hierarchy. In other words, big currency moves could cause a lot of stress on local affiliates if they’re carrying your company’s FX impact, but your central treasury is not seeing nearly as much. If you have a different global objective than locally, this can become a major pain-point, source of tension and a difficult equation to solve.
5. Know the effect on those you support
Remember that the decisions that you make for your corporate, and the collective corporate currency decisions of your team, can have a very real monetary impact on paychecks. In one of our June blogs, we discussed how FX results ended up being a factor in the substantial pay cut for Burberry CEO, Christopher Bailey. With these types of incidents on the increase, having a real understanding of exposures and quickly accessing those insights has never been more important— both to one’s company earnings, one’s personal career track and the careers of your team.
Especially in a post-Brexit environment, it’s important to be currency aware and be ready for the possibility of even more volatility. Even if Brexit caught you by surprise, by ensuring you’re prepared for the next crisis, you’ll be in a position to strategically help your team and protect your company.