5 Pillars to Protect Your Business Amid Economic Uncertainty
Leverage data to develop a comprehensive strategy that can help you minimize risks to your business and respond quickly during market shifts.
To read a more detailed version of this article that ran in Treasury & Risk, you can download the PDF at the bottom of the page.
How will your business react—not if, but when—unexpected events occur?
Business resiliency plans are rapidly changing from hypothetical situations to practical actions, as leaders respond in real time to the COVID-19 pandemic and its impact.
While it’s impossible to completely eliminate risks to your organization, you can minimize them. If you don’t have an appropriate risk framework in place, now is the time to create one. And if you do, it’s time to build upon your risk strategy so your organization can remain strong during challenging times.
Draw on these five pillars to establish and improve your risk strategy.
1. Create a Scorecard for Counterparties
Your business works with many counterparties. Banks may be the first that come to mind, but customers and vendors are counterparties too. While reputation and past experience may inform these relationships, it’s important to develop a risk profile using research and data, which are more effective evaluation metrics. Start by creating scorecards to assess each counterparty’s risk to your business. Be sure to use quantitative and qualitative metrics when developing your scoring system, and consider the following questions, which should be part of a broader set of considerations:
- What is the market confidence in the bank’s ability to meet future obligations?
- Does the bank have an adequate capital structure to withstand an adverse stress scenario?
- Is the bank profitable and investing into its technology infrastructure to improve its services and capabilities?
- Does the bank offer a full suite of electronic payment and collection services that can operate even if mail or physical facilities are disrupted?
- What is the level of risk tolerance toward customers’ ability to provide full or partial payment of the invoiced amount due?
- How profitable is the relationship? For example, is it a sticky business with multiyear contracts?
- Are the products and services tied to any single buyer?
- What is the level of security protecting confidential data from cybersecurity threats and fraud breaches?
- Does the company accept check payments exclusively?
- What percentage of production is affected by interruptions to the flow of raw materials or parts within your supply chain?
2. Analyze Data to Anticipate Your Future Risk
The next step is to examine objective risk indicators and financial ratios for similar counterparties, so you can see how your banks, customers and vendors stack up to their peers. This benchmarking analysis can also help you anticipate future risks by illustrating patterns, trends and blind spots, as well as the target company’s emerging gaps relative to its peers. When building your peer assessment, consider the following key components:
- Cash conversion cycle, calculating the number of days to obtain liquidity through the operating cycle
- Liquidity risk, examining available cash balances versus used bank lines
- Financial risk, measuring capital structure costs and any FX exposure
- Operational risk, calculating the company’s employee turnover rate
- Compliance risk, looking at reported breaches and events with negative press
3. Reduce Liquidity Risk With Visibility and Access
For many organizations, the strategy to manage liquidity exposure is determined with limited visibility into their global cash. Rather than make intuition-based decisions, implement end-to-end technology, optimize global liquidity sources and rationalize account structure to enable real-time visibility into your liquidity at the domestic, regional and global level.
Forecasting global cash flows continues to be an important tool to evaluate access to primary and secondary liquidity sources. Incorporating stress scenarios will also help provide data-driven insights to assess future liquidity needs. For example, what are the potential effects of FX and interest rate shifts; a 30-, 60- or 90- day delay in accounts receivable; or significant outflows? Determining those effects will help establish a diverse, well-developed contingency funding plan.
4. Reduce Operational Risk
From people, processes and technology to volatility in the markets, a wide range of factors can drive operational risk. That’s why it’s critical to establish:
- A robust control framework with standard business-wide policies and processes. Be sure to include a dedicated cross-functional response team that can provide real-time internal and external communications.
- A strong internal accountability structure that clarifies roles within the organization, team and individual ownership of tasks, and expectations during and after disruptive events.
- A business resiliency plan that covers management, communications and procedures, plus tests and reviews to ensure your organization is operational as soon as possible during a crisis.
In addition, concentrate on initiatives that provide high value not only to customers and vendors, but also to your organization.
- Prioritize efforts that increase efficiency and savings: Focus on freeing up working capital and streamlining your processes and systems. This way, your organization can be agile and resilient enough to adapt to rapid market shifts.
- Commit to long-term strategies: From employee training and professional development to upgrading company systems, long-term strategies are valuable to your business. Your knee-jerk reaction may be to tighten discretionary expenses amid uncertainty, but continue to evaluate long-term investments even while focused on short-term performance. Whether your current plan is to grow your business or to maintain profitability at your current size, industry best practices and changes in technology don’t halt because of economic concerns—so neither should your business strategy.
5. Leverage Big Data to Monitor Risk
Big Data analysis can help your business predict and plan for disruptive events that traditional means cannot identify. For example, some Big Data tools can replicate specific scenarios to analyze the potential impact of disruptive events ranging from natural disasters to military conflicts. Likewise, these platforms can help you develop a better business continuity plan by identifying operational inefficiencies, issues with internal systems and cybersecurity and fraud threats. As a result, your organization can make thoughtful, data-driven decisions, rather than relying on intuition.
A comprehensive risk strategy is always critical in minimizing exposure to your business and increasing its stability. That strategy is even more important now, especially with the anticipated uptick in mergers and acquisition activity as we come out from the COVID-19 pandemic.
Organizations that successfully navigate this challenging time period can emerge stronger by taking proactive measures. Follow suit with corporations that have grown during difficult times and perform due diligence as your business recovers. That means identifying the right targets and integrating operational and strategic aspects into your plans going forward. These efforts will be core to your mergers and acquisition strategy and position you to grow into a market leader.
J.P. Morgan’s Corporate Treasury Consulting team can help clients like you build a comprehensive strategy that works for your organization. Fill out the form below to get in touch with us today to learn how to get started.
Read a more detailed version of this article that ran in Treasury & Risk.