The European sovereign debt crisis continues, with the Spanish economy coming under increasing scrutiny this week. Politicians, economists and central bankers attempt to find a solution, as further defaults, bail outs and even exits all remain on the table as possible outcomes.
Changes to the Eurozone will impact on some South West businesses but KPMG’s new global business leaders survey has found that more than one in three (36 percent of) corporates are making no contingency plans. This suggests that boards and management teams are unclear of the impacts that a deepening of the crisis could have on their company.
David Clarke, KPMG’s Restructuring Director, says: “The first step for South West businesses is to consider whether and how they might be impacted by scenarios such as an exit by a Euro economy.
“Certainly the boards and management teams of local companies with customers, operations or critical suppliers in the Eurozone should be making plans and taking actions here and now to protect themselves from the heightened risks of the crisis, preparing for a range of potential outcomes as the situation evolves over the coming weeks and months.
“Immediate defensive tactics should form the business response, accompanied by planning for continuity, considering group-wide consequences and being poised to take advantage of resulting potential future opportunities. Currently less than a quarter of businesses are undertaking group wide contingency planning.
“The initial focus for action is treasury and management of cash in the business, which just one in five companies have underway. Attention also needs to be paid to the current and potential impact of the crisis on customers, operations, supply chains and the back office.”
KPMG advises South West management teams to take five key steps:
Defensive – prepare for the worst
Minimise risk and increase balance sheet resilience in the event of a large scale default or Euro exit scenario. This may involve reviewing financing and funding positions, assessing counterparty risk, monitoring the tax impact of any changes and addressing contractual terms.
Initial areas of focus are developing mitigation and failure risk plans for critical suppliers – tier one and two – internal controls and monitoring processes.
Trading response
Focus on forecasting and analysing management information. Cash flow forecasts should be altered to improve visibility, while reviewing business plans and key performance indicators is a starting point for addressing current trading realities, as well as considering different routes to market and terms of business. Response plans should be prepared for scenarios where trading could fall significantly.
Continuity and contingency planning
Revisit continuity and contingency plans in the context of a default or Eurozone exit, agreeing trigger events and covering group and local businesses as well as critical distributors and suppliers. This should consider how the business will be funded under different scenarios, as well as governance and monitoring, while stakeholder communication plans will become even more critical.
Group-wide consequences
Consider the impact on the group’s manufacturing footprint and supply chain, IT systems and tax structures in light of possible fundamental changes in demand impacting on operations planning and capacity requirements; systems changes in response to new currencies; and the tax impacts of any business restructuring.
Seeking advantage
Post the crisis, strategies and operating models may be very different; some businesses may exit or limit operations in some countries. Such change may offer market share and margin opportunities, while the tax environment may change, warranting assessment for both the negative and positive.
Clarke concludes:
“There are an unsettling number of potential impacts on businesses in this region, from bank liquidity issues to fraud risk, which can rise during times of confusion and rapid change, but the key message is that corporates need a good radar and decision making process; they need to be able to monitor the situation and have plans in place, allowing them to respond quickly as the Euro situation unfolds.”
