Trends in Finance for 2019, Part 4: Managing the Financial Impact of Uncertainty
The economic climate has changed rapidly in recent years. Changes in national and international financial and environmental regulations, new tariffs on imports and exports, and the decision by the UK to leave the European Union are just a handful of events that have created uncertainty in world financial markets. In fact, nearly half of finance leaders surveyed feel that they are exposed to more uncertainty today than they were three years ago. This global uncertainty has the potential to disrupt business both in the US and abroad.
In this fourth installment of six blogs, we focus on the impact uncertainty has on the financial professional’s ability to forecast performance results and evaluate risk. Be sure to read other blogs in this series:
Part 4: Managing the Financial Impact of Uncertainty
Today’s CFOs are taking on more responsibility. Financial teams are not just reporting on the financial health of the organization, but also making decisions on where to invest in company resources for future products, growth opportunities, and navigating risk. There have always been turbulent times, but recent years have seen major movements on several fronts that have made it difficult for financial professionals to accurately assess risk and advise the leadership team appropriately.
Financial regulations. Recent changes in revenue recognition, lease accounting standards, and the US tax code have required many businesses to adapt quickly by changing their financial reporting processes. New tariffs on steel, aluminum, solar panels, and 1300 additional proposed tariffs might jeopardize economic and job growth and adversely affect businesses in the US and abroad.
In a 2018 report by PwC, 50% of North American CEOs said over-regulation was a top concern, and, in a report by Ernst and Young that same year, 54% of CEOs cited industry-specific regulation was creating more risk for their companies.
Data security. Companies are already struggling to manage data security, protecting their customers and themselves from data breaches. Now, GDPR regulations in the EU have gone into effect, allowing customers to ensure their data privacy. In a 2018 study by EY, only 33% of companies reported having a plan to accommodate GDPR, while 39% were not even familiar with GDPR at all!
Policy changes. Changing government policies have added to the confusion. New legislation in the areas of immigration and labor affect the ability for companies to attract and retain talent. And changing environmental policies can seriously affect business operations and material sourcing.
In June 2016, Britain passed a referendum to leave the European Union (E.U.). As of this writing, Britain has yet to leave the EU, but if and when it does, it can seriously affect British, European, and global businesses and markets. The initial market reaction to this decision was very negative, with the British Pound losing nearly 15% of its value compared to the US dollar.
Many of the trade agreements between the UK and the countries that are part of the EU have yet to be renegotiated. Companies with interests in Europe must anticipate where they should be targeting their investments before any of these decisions have been formalized by the UK and the EU.
This uncertainty makes it difficult for international companies to determine long-term business strategies in Europe. Some international businesses who had set up or were considering business offices in the UK in order to access the European markets are now deciding to bypass the UK entirely and establish operations in the EU itself.
The U.K. was originally scheduled to leave the E.U. on March 29, 2019.
The impact of uncertainty
A 2010 study by the National Bureau of Economic Research showed uncertainty, whether regulatory, financial, political, social, or other, has an adverse economic impact. Uncertain environments cause businesses to reduce their investments in research and development, manufacturing, new construction, and expanding their workforce. According to a 2015 report by Accenture, over 70% of finance professionals said that forecasting risk was as difficult or even more difficult than in prior years, and over half of those felt that it was only going to become harder to predict in the coming years.
Financial professionals require reliable financial tools to proactively anticipate and manage risk. AKA can deliver the technology to help businesses with security, privacy, and compliance in order to limit their exposure to risk and provide insightful reporting to remain in front of changing developments that might be adversely affecting your company. Our solutions can be deployed how and where you want and allow you to scale easily as your business requires new capabilities.
Stay tuned for more blogs in this series. Part 5 will discuss the changing workforce. As the baby boomers age and millennials become managers, businesses find they must adapt to a different and ever-changing workforce. Catch up on the other blogs in the series here:
Download the Microsoft whitepaper, 2019 Finance Trends Report, to learn more about trends in finance.