April 25, 2024
Finance

Managing risk in today’s ever-changing global environment


By Jason Wang

For many CFOs, guiding businesses through interlinked economic, environmental, and technological upheaval with a steady hand has been no easy feat in recent years. Given the intricacies of today’s operational landscape, the management of risks spanning various business functions has become increasingly complex and interrelated, further accentuating the CFO’s role in navigating these challenges effectively.

For global businesses, there is the added challenge of cohesively enacting international financial and operational strategies and tailoring these to regional risks. As the business landscape evolves, so does the role of a CFO, as operational efficiency becomes further intertwined with financial wellbeing and CFOs must transform to meet new and recurring business risks head on.

CFOs see geopolitical factors as the greatest external risk to their own businesses over the next 12 months. Operational, energy, and supply chain costs are the first line items on financial statements to balloon when geopolitical events occur. As such, diversifying supply chains is sensible financial hygiene and can help to minimise risk.

Thorough financial and operational scenario planning should outline two scenarios: first, a business-as-usual scenario, and second, a steeply volatile scenario where different pricing mechanisms can be rapidly mainstreamed across regions and entities, to determine optimal courses of action across the value chain.

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Wang: CFOs can ensure sustainability projects are effective, impactful and deliver on ROI

For instance, conflict in the Middle East has caused impact to transportation via the Red Sea which in turn has impacted part of our cross-border business, along with many other organisations due to delays and supply shortages. To mitigate this, seeking alternative transport routes, including cargo train routes in Europe, helped to alleviate pressure on supply bottlenecks and overall transportation costs.

It’s also important to look at optimising ingredient and material sourcing strategies to reduce costs and create efficiencies across regions. Prioritising regional sourcing where possible can create a stronger, more sustainable product portfolio across global supply chains, particularly when global pressures can mean access to offshore raw materials becomes difficult.

Contingency strategies, informed by financial risk analysis, safeguard operations, ensure supply chain continuity, and minimise impacts on customers.

Despite research from KPMG showing an increasing consensus from CEOs that ESG programmes improve financial performance (45% in 2022, an increase from 37% the year prior), it’s of great concern that half of them were “pausing or reconsidering their existing or planned ESG efforts” in favour of recession-proofing their business.

Rather than de-invest in ESG initiatives, finance directors are instrumental in ensuring sustainability projects are effective, impactful and deliver on ROI. Not only is financial and operational expertise imperative when setting clear carbon emission reduction targets and processes, but it’s also essential in delivering rigorous and quality ESG reporting and regulatory disclosures (that are becoming mandatory).

The shared value of a strong ESG proposition for people, profit and planet has been proven multiple times over. At H&H Group, sustainability is a cornerstone of our decision-making process, a key lever to managing risk and ensuring we have a competitive advantage in our sector whilst delivering a positive impact on people and the planet.

Alongside finance, operational leaders are instrumental in ensuring that businesses remain abreast of industry advancements

The finance and operations teams collaborate closely with our Group’s ESG Committee which advances effective corporate governance. The committee is involved in the Group’s materiality assessment, which highlights how ESG topics can impact the Group’s economic value creation.

The use of financial incentives is also an opportunity that we have been harnessing in the form of our sustainability-linked loan. It has not only sharpened focus on our three key ESG performance targets, but it has also greatly improved the Group’s capital structure and liquidity position.

Amid economic challenges, short-term profit often takes precedence over longer-term sustainability goals. Yet, disregarding sustainability commitments, despite pressure from climate-related disclosure regulators and more sustainability-conscious stakeholders, poses risks to financial performance, corporate reputation, and business growth.

Finance holds a pivotal role in fostering innovation within organisations, as the function responsible for strategically allocating resources towards R&D initiatives, capital management and building a concrete business plan. Alongside finance, operational leaders are instrumental in ensuring that businesses remain abreast of industry advancements. At H&H, product innovation is an important pillar in driving sustained growth, and the success of some of our new ranges could not have been achieved without the support and investment from these teams.

While automation and AI adoption promises a new frontier in productivity and operational efficiencies, it’s a common cautionary tale for machine algorithms to create unintended headaches due to gaps in human, expert oversight.

We’ve kept this front of mind when launching innovative processes in our core functions, for example through the introduction of a ‘digital employee’ in robotic process automation (RPA) to issue over 90 per cent of VAT invoices for our H&H China operation. The same consideration must be taken when introducing new supplier management processes, such as through cloud-based enterprise resource management (ERP) across global teams, partners, and retailers.

Recent experience has shown businesses with interlinked financial and operational leadership are better placed to shoulder the risks ahead and in turn reap the benefits

The era of finance functions operating in silos, buried in static modelling spreadsheets, is far behind us. Instead, financial innovation can enable greater business resilience. There is no better time than the present for finance and operational chiefs to seize the opportunity to demonstrate an innovation-mindset, to offer even greater value-add to business productivity and growth.

Businesses are increasingly looking to finance to go beyond accounting and controlling, to provide decision-makers with analytical support and valuable insights. One of the biggest uncertainties for companies isn’t necessarily in the pendulum swings of consumer sentiment – it’s broader demographic shifts that can have a deeper negative impact on margins.

An advantage for a company in the health and wellness sector, is that nutritional supplements, our largest revenue contributor, are less susceptible to the whims of consumer fads. Yet, understanding population dynamics and conducting financial feasibility studies on target demographics are essential for informed revenue targets and robust investment strategies.

Take declining birth rates in China and France, for instance; overarching population insights helped to shape where and how our business developed and marketed infant milk formula and baby care products across those regions.

We also can’t ignore the impact of inflation has had on consumers, who have drastically adjusted their spending behaviours, with the majority (53%) of global consumers “holding back” on non-essential spending. We have seen the impact of inflation affect our own portfolio across the pet and baby food categories, though we anticipate this will normalise over the coming year.

Revenue forecasting and pricing strategies must anticipate the ebbs and flows of population and market growth. Doing so informs operational decision-making and risk mitigation plans, increases business resilience, and helps to deliver overarching strategic objectives.

Looking ahead, managing multifaceted, evolving complexity in a business’s risk profile will undoubtedly require close alignment between financial and operational expertise.

Finance and operations represent two sides of the same coin. What’s more, recent experience has shown businesses with interlinked financial and operational leadership are better placed to shoulder the risks ahead and in turn reap the benefits.

Cohesion between these critical roles at a C-suite level has untold potential to help businesses stay agile and durable, innovate, and deliver sustainable regional and global impact.

Jason Wang is Executive Director, Chief Financial and Operations Officer, H&H Group

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