Tariff Troubles & Beyond: Here’s How CFOs Can Mitigate Risk

by James Daly

With the right tools and proper preparations, CFOs will be able to both protect and grow their business no matter what the risk landscape holds.

The modern CFO is facing a global economic and political landscape unlike one we have ever seen, and there is no shortage of new risk factors that have the potential to impact businesses in a negative way. Executives across industries have expressed concerns about everything from national security to trade wars to the tightening labor market. 

Tariff Troubles  

A new survey released by Euler Hermes North America, the world’s largest credit insurer, reveals that 70 percent of CFOs believe that the Trump administrations’ tariffs could at least moderately affect their company. These CFOs say that tariffs have the potential to disrupt cash flow, increase input or output costs and could impact supply. Achieving growth was a top priority going into 2019 for the CFOs surveyed, but an ongoing trade war could threaten that growth. 

The cost of trade uncertainty is building up. Euler Hermes estimates that while US tariffs hampered global trade growth by -0.3 percent, U.S.-led uncertainty cost -0.5 percent last year. While China and the U.S. reached a trade truce at the end of 2018, global trade growth continues to slow and indicators suggest more deceleration coming. This is because remaining tariffs continue to weigh on growth. 

Though ongoing trade talks could temporarily put an end to fears of a trade war, it is important to keep in mind that China-U.S. relations have already moved from engagement to rivalry – hence the need to keep an eye on both protectionisms at-large and very fragmented (and distended) supply chains, spanning both regions. 

Other Risk Factors 

With all of the risk ahead, it’s not surprising that CFOs do not feel totally secure. In fact, 75 percent said they are least moderately concerned about the risks they might face in the next 12 months and 58 percent say they don’t feel fully prepared to handle the current risk landscape. Beyond risks related to global trade relations, CFOs are dealing with an increased level of politically agnostic risks including: cybersecurity, industry convergence and new forms of competition, and a lack of cash flow predictability and non-payment events. 

While some flashier risk events impact some industries more than others, non-payment events are a worry for companies in all industries. In fact, 72 percent of CFOs have experienced a non-payment in the last three years, with CFOs reporting an average of 17.2 nonpayment events during the last three years. A focus on potential cash flow issues and non-payment only amplifies other risk factors for CFOs. The Euler Hermes survey found that the more a CFO is concerned about nonpayment events, the more likely they are to be concerned about the overall risk landscape in the next 12 months. 

Some CFOs are taking actions to mitigate non-payment risk - but at what cost?

Mitigating Risk Without Risking Growth  

Two popular options that financial leaders use to address this problem include prepayment or deposit requirements for new or risky customers, and factoring invoices. These tactics might seem like the most straightforward, but they have consequences. Enacting stricter payments can mean loss of business, as was the case for more than half of CFOs surveyed. According to Euler’s survey, 57 percent of CFOs have experienced a loss of business after enacting stricter payment terms, smaller credit limits or deposit requirements.

Today’s market conditions can change in the blink of an eye, and to make matters worse, the U.S. economy is likely creeping toward a recession. Signs of a slowdown have been showing themselves for months, but the inversion of the yield curve for several weeks is the most concerning yet. Out of the last seven times the curve has inverted, a recession has followed. 

What’s more, an inversion is a sign that the Federal Reserve has already raised interest rates too far. Fed interest rate hikes (or cuts) can take a full year to work through the economy, the most recent hike in December 2018 has yet to flow all the way through the economy with its accompanying slowing effect. 

It’s important to note that a yield curve inversion rarely happens in isolation. There is normally a more encompassing story surrounding the situation, and at the present time that story includes: tepid consumption, a faltering housing market, worries over Brexit, a global slowdown (Italy, Argentina, and Turkey in recessions), CFOs fearing risk, a divided government, diminishing fiscal stimulus (no tax cut this year), concerns over the trade dispute with China and more.  

But with the right preparations, CFOs can weather any potential storm. They can do this by: 

  • Preparing for all scenarios by having the right partners and tools in place, such as trade credit insurance, to create proactive risk mitigation strategies. 
  • Having a better handle on risk factors like cash flow and non-payment events puts CFOs in a better position to deal with more unpredictable market events. For example, the survey results show that companies that consider themselves highly prepared for risk are least likely to think tariffs will affect them.

While the global economy is nothing short of unpredictable (and with the 2020 elections heating up in the U.S., there’s no sign of this changing anytime soon), the fact remains that with the right tools and proper preparations, CFOs will be able to both protect and grow their business no matter what the risk landscape holds. 

James Daly is CEO of Euler Hermes North America.