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The University of Michigan Consumer Sentiment hit a seven-year high in November, and in the recent Bank of America Merrill Lynch 2015 CFO Outlook, CFOs rate the U.S. economy at its highest level in six years. Importantly, three-quarters said they have a positive outlook for their business in 2015.
Business leaders are responding by making plans to expand their businesses: According to our CFO Outlook, 96 percent of U.S. companies are implementing one or more growth strategies. Top strategies include increasing market penetration (cited by 82 percent); market expansion (cited by 74 percent) and introduction of new products or services (cited by 56 percent).
But as companies formulate growth plans, top financial executives will be called upon to thoroughly assess the associated risks. From currency exchange with overseas expansions to managing cash flow when introducing a new product, financial executives need to balance growth with sustainability.
The following are important initiatives to identify and manage when expanding domestically and overseas:
Manage Growth With Adequate Cash or Credit
It seems there are always reasons why a project goes over budget, and that is true whether a company is opening a new branch in a U.S. city or expanding operations halfway across the world. But business leaders can reduce stress – and set up processes for more success – by carefully ensuring sufficient liquidity during expansion.
As always, success comes with having detailed expansion plans that address everything from the hard costs of a building, labor costs, consultant fees and local travel expenses. Rigorous project management will help keep a project on budget and ensure the full team understands the financial risks and opportunities. Financial executives should be sure their team is leading the process to manage this growth, by continually analyzing cash reserves or access to credit.
At the same time, expansion provides a number of ways for companies to offer creative financing, and the finance function can lead the discussion while being proactive about ways to finance every aspect of expansion. Credit and equity financing are just some of the ways companies can make the most of the assets they already have to ensure ongoing liquidity during the project. Bankers, attorneys and other outside financial experts should be tapped to make sure all of the financing options are considered.
Understand Financial Exposure in Overseas Markets
It seems financial media and social media platforms are providing near-constant updates about the regulatory, political and commercial risk of certain regions or countries. Even so, many business leaders do not have adequate plans to manage the business risk in international markets.
Consider that in our most recent CFO Outlook, only 42 percent of executives whose companies have foreign market involvement said they had a plan to manage their international business risks, including local laws and culture, taxes and foreign exchange.
Companies looking to expand overseas need to plan for business risks, and that starts with collecting the right data. How to get that? The best way is to partner with people on-the-ground who have a deep understanding of the political and regulatory situation, while also understanding your overall business objectives. Also, ask your research colleagues to conduct ongoing analysis of the new markets. By engaging other people in the company to determine the level of risk, finance officers will develop other advocates who can assist them when making recommendations.
Once the research platforms are in place, finance executives must set up detailed scenario-planning for the currency trading and liquidity needs for each region. Plans must take into account:
- Exchange rate volatility, and plans to mitigate this issue.
- Cash flow, and ways to provide predictable and adequate cash flow for each region – especially when ramp-up costs may exceed incoming revenue streams.
- Global capital deployment and ways to most efficiently fund projects.
Because of the unique treasury practice rules for each country or region , it is imperative for finance teams to update their models continually.
Build a Strong Global Supply Chain
Today’s finance executives must be deeply involved in managing the global supply chain because of the risks to the business. We know that CFOs already care about this: In our recent CFO Outlook, a full 81 percent said they have a plan for operational risk, including problems with suppliers or distributors. That is encouraging, and CFOs must make sure these plans include ways to diversify sources of supply and develop alternate trade lanes. Doing so mitigates against the risk of lowered revenue during crises or issues.
In addition, contingency plans must include opportunities to access liquidity to enhance supplier stability. Many multinational corporations work closely with their suppliers to ensure continued operation, even by offering financing during normal operations. But companies with expansion interests should identify ways they can help suppliers during a natural or economic disaster by offering access to credit or liquidity to keep operations going.
In fact, finance executives should be involved in the overall contingency plans for disaster recovery and business continuity. These plans should specify how team members can work remotely and communicate in the event of a disaster, as well as the leadership team that is in charge of managing the overall company response.
Moving Into 2015
The end of the year is a great time to think about expansion, and many indicators point to a positive 2015. Finance leaders can cement their roles as trusted business leaders by carefully evaluating the risks for domestic and international expansion, while still providing creative ways to finance new projects. By doing so, the finance team will remain integral to the business and ensure greater success for expansion.
Mark Perry is West Region Middle Market executive for Bank of America Merrill Lynch