No business is immune from some combination of the impact of these emerging trends:
inflationary trends, including commodity price changes,
supply chain issues, and
cybersecurity concerns.
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These trends are individually and collectively more impactful than most people and businesses have experienced for twenty or more years. This means it is time for businesses to fully embrace risk management with an eye to developing alternative plans and strategies to ensure future success.
Change Agent or Disruptor or Risk Manager
Irrespective of the name or title, each company needs a champion who will drive the company to evaluate financial and operational impacts of these emerging trends and to work with all members of senior management to develop alternative strategies and plans to further ensure success. This champion will need to use the outline of best practices to drive the company to capture information needed to make the best decisions for future success.
Best Practices Should Include
An outline of best practices should include:
Manage client relationships.
Profitability by customer.
Profitability by product.
Profitability by division or by location.
Contracts with customers.
Ability to increase prices?
Auto renewal of contracts?
Renewal dates?
Escalation terminology?
Contracts with suppliers.
Ability to lock in prices?
Hedging capabilities?
Auto renewal of contracts?
Renewal dates?
Escalation terminology?
Bid processes.
Are key input pricings updated frequently?
What is the bid lock period?
What is the escalation wording during the bid period?
What is the escalation wording for the period between bid acceptance and project start?
What is the proposed escalation wording for the contract?
Deposits
How are deposits reported on the balance sheet and income statement?
Where are customer deposits reported in AR? In one line item? Netted against each customer's accounts?
What deposits are provided to vendors and where are they reported on the balance sheet?
How are deposits treated in the BBC structure?
Reliance on Commodities
How much reliance does the company have on specific trackable commodity products? What percent of costs are in commodity products?
Working capital management.
Accounts receivable.
Inventory.
Accounts payable.
Operating Cycle Management.
Line of Credit
Sizing?
Asset relationship limits?
Ineligible changes?
Deposits?
Temporary increases in the line of credit tied to commodity prices?
Analysis techniques should also include:
Price Volume Variance Analysis
Revenues.
Key inputs.
Sensitivity Analysis
How does a $1.00 per unit change in key inputs affect financial performance? For example, a $1.00 per bushel change in corn, a $1.00 change in lumber prices, a $1.00 change in flour prices.
How does a 1% change in all nonlabor costs impact performance?
Will cost structures be impacted by escalation clauses in contracts, such as lease or rental agreements? Are those clauses tied to CPI or PPI and when do they reset?
Each business should start with a review of all CPI and PPI categories that have increased at a faster rate. For example, impact of fuel costs on transportation costs.
Matrix Performance Analysis
This type of analysis considers the number of combinations of events that result in break even performance or adequate FCCR performance. Most importantly, this analysis results in a better understanding of the number of combinations of sale prices and input costs, coupled with company size, that result in break even operations.
Two Approaches to Dealing with Emerging Trends
It seems that companies are taking one of two approaches. In one approach the company puts its head in the sand, and reacts to trends as impacts occur. In the second approach, the company is proactive and works to employ best practices, analyze alternative strategies, and manage its risk profile.
What are the next steps?
Risk managers have typically been part of the structure of larger companies. That needs to change. Every business needs a change agent, who is an advocate for deep analysis of financial and operating performance. If a business does not have the skill set needed internally, the business should determine the trends which have the largest impact on that business and prioritize the best practices that need to be addressed. Then outside resources can be utilized on a project basis to facilitate this analysis. Every company needs to employ risk management techniques and create a champion, or a disrupter or a change agent. The name or title is not as important as the commitment to completing this analysis quickly.
Part 1: Labor Market
Part 2: Inflation and Commodity Pricing
Part 3: Cybersecurity
Part 4: Supply Chain