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When the going gets tough

Mar 19 2012, 04:25 IST
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SummaryConfucius once said, “By three methods we may learn wisdom: First, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest.”

Confucius once said, “By three methods we may learn wisdom: First, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest.”

Indeed, what we are experiencing is the bitter taste of this tumultuous and uncertain environment. We have embraced the year 2012 with mixed sentiments. While Indian GDP growth projections have been slashed in the backdrop of high inflation and a volatile currency, the economic turmoil in the US coupled with the European crisis have triggered a much bigger fear in the developed West—the fear of the unknown. The economic impact of such events is anybody’s guess. So as I analyse the ground for future, here are a few aspects that have to be deliberated as we prepare to sail through unchartered waters.

Since the onset of the financial crisis, CFOs around the globe have been redefining the risk matrix. The financial crisis and its aftermath have forced CFOs to reconsider their idea of ‘risk’ and ‘risk appetite’. This risk, in addition to operation, financial and strategic risks, is about managing the potential effects of uncertainty throughout the business operations. This is not in context of any particular function but is all pervasive across business. Moreover, the pace of emerging risks has been unprecedented in recent times. The key macro risk factors playing in the market such as liquidity/credit crunch, regulation policy risk, financial market volatility and economic de-growth have made the task of effective risk management more challenging and dynamic.

Amidst uncertainty and risk aversion, there have been other challenges including a protectionist stance that is being adopted in some countries due to political compulsions and intervention in the foreign exchange market to protect export competitiveness. Hence, CFOs need to re-apply risk definition in strategy setting across the enterprise in order to identify potential events that may affect the entity.

The next perceptible change will be in the way in which CFOs address the issues of fiscal discipline. CFOs are facing the toughest business environment in today’s corporate environment. This is characterised by the ever increasing pressure on resources. Moreover stringent commercial terms from customers and suppliers have not made their jobs any easier. This has forced CFOs to think innovatively on controlling costs leading to improved profitability.

Though the underlying parameters for optimising costs and improving profitability remain the same, the traditional ways of working on these parameters are passé. In today’s

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