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Living in the Uncertainty of Tariffs: A Survival Guide for Businesses
Welcome to the wild West of global trade! The ongoing debates about tariffs have left us all guessing, especially when it comes to goods imported from China, Canada, and Mexico. As a result, business leaders are on edge, trying to shield their operations from the additional costs these tariffs can impose. But making big decisions in unstable times shouldn't be a gamble – let's break it down and take control.
Finance executives are facing a tightrope act in this rapidly changing landscape, where tomorrow's tariffs can defy even the most educated predictions. The tariff minefield spans across various financial and accounting aspects, from cost of goods sold, inventory management, reporting, compliance, tax planning, integrated business planning, forecasting, and risk management.
The Economic Policy Uncertainty Index recently discovered that consumer uncertainty concerning the intersection of economics and politics is at an all-time high since the pandemic. Alarmingly, this trend is set to substantially impact consumer spending patterns. Coupled with erratic business spending, it signals troubling times for the economy.
But have no fear! In the face of the financial maze, there is a silver lining. By incorporating some proactive measures and strategies, businesses can equip themselves to swiftly adapt to changes in demand and regulatory status. Here's how:
Embrace Risk Management: It's a Team Game
Managing tariff risk goes beyond just financial oversight. A multi-layered approach centered on collaboration with multiple internal functions such as supply chain, compliance, operations, and government relations is essential for safeguarding organizations against both direct and indirect tariff-related risks. Businesses can mitigate financial and operational risks through the implementation of comprehensive risk identification and mitigation strategies. Continuous monitoring of these risks ensures organizations remain resilient in the face of tariff-driven challenges.
Adopt a Financial and Operational Risk Mitigation Strategy
Financial Mitigation Strategies
- Diversify your sourcing to shift to suppliers in non-tariff regions
- Tariff engineering to minimize duty rates through legal means
- Currency and commodity hedging to offset fluctuations in prices
By taking these steps, businesses can assess the impact of inflationary pressures and currency fluctuations on inventory valuation and collaborate with auditors to ensure transparency in financial statements regarding tariff-related risks.
Operational Risk Management Strategies
- Expand geographically to counter losses from tariff-heavy regions
- Balance stock levels to avoid supply chain shocks due to tariffs
- Track compliance with evolving regulatory policies
Additionally, the rise of third-party risks and fraud requires enhanced due diligence during vendor onboarding, as supplier networks shift. Striking the right balance between mitigating tariff-related cost pressures and maintaining compliance with regulatory and tax requirements is crucial.
Plan Ahead: Create "What-if" Scenarios for Different Tariffs
By developing "what-if" scenarios to model the impact of various tariffs on the business, organizations can leverage dynamic risk assessments to gauge their current risk and control frameworks' resilience. Monitor key risk indicators like cost impact, working capital efficiency, and margin stability to assess risk and prompt appropriate responses. The adoption of AI-driven analytics and continuous risk monitoring tools is no longer optional – it's essential for maintaining agility and foresight in today's volatile risk landscape.
Adopt an Integrated Approach to Business Planning
Integrated business planning has become a vital foundation for decision-making and keeping all teams aligned on common objectives while focusing on individual key performance indicators. Finance and supply chain teams should work closely together to ensure that cost and pricing strategies remain in harmony.
Here are a few ways they can collaborate to reduce the impact of tariffs:
- Examine alternative suppliers in non-tariff or lower-tariff regions
- Improve negotiations with existing vendors to secure better terms
- Explore additional avenues for cost reduction and efficiency to offset increased input costs due to tariffs
- Develop adaptable pricing strategies to absorb tariff costs or pass them on to customers as needed
- Respond to customers who wish to expedite orders to bypass tariffs by sourcing and warehousing in advance for near-term needs
- Evaluate tariff recovery strategies like importing goods from Mexico and reselling them in other countries such as the UK to recover paid tariffs
By nurturing a close relationship with other teams that influence financial performance, organizations can avoid becoming isolated from informed, cross-departmental decision-making.
Tighten the Budgetary Reins
One of the most critical levers businesses can pull is closely monitoring and managing spend to ensure alignment with a set budget. In invest in technology tools that offer granular tracking across cost centers and regions, finance executives are becoming more integrated in the company's day-to-day finances.
For example, agentic AI is emerging as an invaluable tool, helping finance chiefs proactively identify and respond to crises or issues as they occur. Agentic AI operates independently to make decisions and pursuing goals and can ask for human guidance when needed. This advanced technology enables businesses to swiftly respond to crises or issues that may arise by providing timely recommendations.
Embrace Continuous Accounting Practices
Lastly, finance executives should examine continuous accounting practices that bridge the gap between business transactions and accounting dates. By recording transactions as soon as they occur, businesses can develop resilience, improve accounting efficiency, and enhance compliance with evolving regulations and reporting requirements.
In summary, the ongoing uncertainty surrounding tariffs necessitates businesses to make proactive risk management decisions and adapt to new challenges swiftly. By embracing multi-layered risk management strategies, creating what-if scenarios to model the impact of different tariffs, adopting an integrated business planning approach, tightening budgetary controls, and implementing continuous accounting practices, businesses can develop the resilience required to navigate these unpredictable waters.
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To adapt to changing tariffs and maintain financial stability, businesses can employ several strategic risk management moves, including:
- Proactive Supplier Monitoring:
- Financial health checks and compliance reviews
- Strengthen partnerships with suppliers
- Pricing and Contract Adjustments:
- Updated supplier contracts
- Modified pricing strategies
- Collaborative Supply Chain Solutions:
- Collaborative planning with suppliers
- Shared risk mitigation strategies
- Scenario Planning and Contingency Plans:
- Analytical weighing of potential tariff impact scenarios
- Preparation for potential shifts in trade policies
- Supplier Diversification:
- Geographic and supplier base diversification
- Balancing the risk of single supplier reliance
- Adoption of Advanced Technology and Insurance Solutions:
- Trade risk analysis tools
- Insurance products to protect against severe disruptions
- Reshoring and Nearshoring:
- Refocusing production closer to key markets and customers
- Enhancing resilience by reducing dependence on expansive global supply chains
- Review and Adjustment of Corporate Structures:
- Ongoing assessment and adjustment of corporate domiciles, financing structures, and entities
- Efficient use of Special Purpose Vehicles (SPVs)
- Financial Planning and Operational Adjustments:
- Tariff impact assessments and cost tracking
- Adjustments to cash and capital flow projections
By incorporating these strategies, businesses can effectively manage tariff risks and maintain financial stability.
- Finance leaders are juggling a precarious balancing act in the ever-changing tariff landscape, where the predicted tariffs of tomorrow can be unpredictable.
- The tariff minefield encompasses a wide array of financial and accounting aspects, including cost of goods sold, inventory management, reporting, compliance, tax planning, integrated business planning, forecasting, and risk management.
- The Economic Policy Uncertainty Index reported an all-time high in consumer uncertainty regarding the intersection of economics and politics, impacting consumer spending patterns significantly.
- Businesses can mitigate financial and operational risks through the implementation of comprehensive risk identification and mitigation strategies.
- Diversifying the sourcing of goods to suppliers in non-tariff regions is one strategy to minimize duty rates.
- Vendors should be vetted with enhanced due diligence during onboarding, as supplier networks shift, to mitigate third-party risks and fraud.
- Finance executives can collaborate with suppliers to examine alternative suppliers in non-tariff or lower-tariff regions.
- By developing "what-if" scenarios, organizations can simulate the impact of various tariffs on the business and measure their current risk and control frameworks' resilience.
- Adopting an integrated business planning approach is crucial for decision-making and keeping all teams aligned on common objectives.
- Analyzing tariff recovery strategies like importing goods from Mexico and reselling them in other countries such as the UK can help businesses recover paid tariffs.
- To swiftly respond to crises or issues that may arise, finance executives can invest in agentic AI technology, which makes decisions and pursues goals independently.
