This revision presentation for business students outlines (with examples) some of the key things that can go wrong in business and explains the basics of risk management and contingency planning. Keep up-to-date with businessstories, resources, quizzes and worksheets for your business course.
As the once unthinkable becomes commonplace, effective scenario planning is now crucial to survival and success. Reflecting the challenges and dilemmas facing many such businesses, the article pays particular attention to treasury, finance, sales, procurement, legal issues and IT, though scenario plans could cover many more areas than this.
Although we have invented EuroEngineers to illustrate the points in this article, it would be typical of many other mid-size enterprises in Germany and other parts of the Eurozone. The structural reforms and austerity measures of the first scenario would primarily consist of reduced public spending and higher income taxes. To offset these risks, the preservation of a common currency for most of Europe would keep transaction and administrative costs at a relatively low level and enhance planning security. Alongside these risks, there are also long-term opportunities emanating from a Eurozone breakup. To prepare for these extreme scenarios, EuroEngineers might open its short- and long-term contingency planning with a focus on sales, procurement, financing, treasury, legal issues and IT.
Procurement: To address falling demand in the short term, EuroEngineers might also move to more flexible payment and delivery arrangements with suppliers. Finance: As both scenarios might cause liquidity problems in the short term, EuroEngineers should check its readiness to fund its operations for the next 12 months and to pay back its debts in the absence of its usual access to bank credit or bond markets.
In both scenarios it is important to check readiness to fund operations, to enhance supply chain security and contract and claims management, and to broaden the customer base. Legal issues: In addition to measures in treasury, EuroEngineers should include contractual issues in its contingency planning. IT: EuroEngineers should also check whether its IT systems are ready for a potential change in the invoicing currencies and in cash flows, which would follow the introduction of new currencies.
Procurement, production and administration: Finally, contingency planning should include measures to take advantage of opportunities arising from the Eurozone crisis. Given the serious impact of the Eurozone crisis, contingency planning could provide a valuable way to reduce risks and make sure the business is prepared for different eventualities.


While there has been a lot of focus on scenario planning in large financial corporations, how to anticipate and mitigate the threats facing mid-size enterprise has attracted less attention.
There are essentially two extreme and disruptive outcomes that the company will need to plan for. In the long run, the structural reforms that are likely to follow in the wake of austerity measures might cause markets in weaker Eurozone member states to grow, equalise European tax systems and push further deregulation. The breakup might lead to an immediate drying up of orders and investments, and plunge the Eurozone into an even deeper recession than in the first scenario. Given the immediate risk of insolvent business partners, EuroEngineers may also wish to think about enhancing its contract and claims management for business partners in crisis markets, for example, by insisting on bigger upfront payments for services and products or by reducing payment periods. Whether the company is able to introduce flexible payment to suppliers and at the same time tighten contract and claims management with customers depends on its bargaining position in the supply chain. The company should also take into account that its loans and bonds might have covenants linked to specific key performance indicators, its rating or the country where it is located. Lower wage levels in troubled markets relative to those in stronger Eurozone member states allow EuroEngineers to gain maximum competitive advantage in the long run from moving production, procurement, financing back office activities and IT services to former Eurozone member states.
However, the multitude of potential scenarios should not confuse CFOs and risk managers, as the impact of most scenarios differs less in quality than in intensity and timing.
Using an illustrative mid-size business as our focus, this first article in our Eurozone series explores the impact of the crisis on the company and offers practical solutions to cope with them. On the one side is the preservation of the common currency within the Eurozone through structural reforms, austerity measures and shared fiscal policy in a more deeply integrated EU. Suppliers in weaker Eurozone markets are especially likely to suffer from these difficult conditions and might fall into bankruptcy. Over time, low interest rates and regained trust in capital markets would also boost investments and growth in the Eurozone.
In addition, our company should figure out whether critical suppliers are located in troubled markets and pay particular attention to their financial stability. It might move spare cash out of a troubled country into currencies such as the US dollar or the Chinese renminbi and transfer its cash deposits to the safest possible bank. Instead of getting lost in theoretical scenarios, they should be geared up with a comprehensive overview of the major risks caused by the Eurozone crisis, and develop short- and long-term action plans to adequately manage them.


Thereby, we focus on two extreme scenarios, as many feel lost with the multitude of various development paths and the necessary precautionary measures will in many cases be very similar. The company is listed on the Frankfurt Stock Exchange and mainly finances its operations through bank loans. Falling demand would also curtail exports in more stable Eurozone markets and lead to lower growth prospects within the Eurozone.
However, once a smaller Eurozone with stronger member states is established, its value would probably rise even higher relative to the first scenario. Governments in former Eurozone markets might also offer lower taxes and investment incentives in order to attract investment. To enhance supply chain security, EuroEngineers could work with critical business partners on some win-win propositions for both sides.
For example, some big companies such as engineering group Siemens and carmakers BMW, Daimler and Volkswagen have already acquired banking licences and are therefore able to deposit funds with the ECB, the safest of all safe havens in the Eurozone. It could offer credits to its suppliers to make best use of its cash resources, as this can generate a good interest income and secure supply.
Therefore, a specific in-depth analysis is important and should be the starting point for all further actions. However, some minor production facilities are located in Ireland and Hungary and supply of components and assembly takes place in the sales markets. This will make sure that companies can see through what really matters in these uncertain times and come through stronger.
This increase may even accelerate in the long run: While the current period of uncertainty is causing investors to seek safe havens and the euro to depreciate, its value is expected to increase again in the long run as trust in the European currency returns.



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Comments

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