Tariffs are currently a major global focus at the moment, particularly for businesses and their finance teams who are emerging from the financial year-end period and are quickly turning their attention to the necessary plans and mitigations, as they seek to manage the consequences and outcomes for their organisation when the proposed suite of tariffs come into effect.
The global nature of today’s business models and the complexity of supply chains means that very few businesses will be immune to the proposed tariffs, at least in the short term. Increased US tariffs (and any retaliatory increases) will impact businesses’ cost of sales and weaken profit margins unless businesses take steps to manage their bottom line.
Our AICPA and CIMA members are at the forefront of helping the businesses they work for and advise navigate this complex and ever-changing landscape. Over the last few months we have been working on a Business Resilience Toolkit, speaking to our members across the world to get their insights. Part of this comprehensive toolkit covers trade and looks at the theme of tariffs and their impact on organisations. It is due for publication next month, and in the meantime, here are five key actions finance teams can take to support their business during these uncertain times:
1) Understand the risk and impact of tariffs on your business, its finances and operations, on your customers and on your suppliers:
The first step you should take is making sure you understand what tariffs will mean for your business, customers, suppliers and wider stakeholders. Communication at this early stage will be critical. Increased tariffs globally have the potential to impact the whole supply chain environment and understanding this and what it means for all parties will be key to making sure you put the right mitigations in place to support your business going forward.
Finance tools such as scenario planning, forecasting, stress testing and risk management are key. When conducting these through a resilience lens you should be looking at both the operational and financial impacts that tariffs might have on your business.
Things you should be considering as part of understanding the business risks and tariff impacts include, making sure you consider the whole production line and chain of your products (country of origin is more important than ever before). Mapping what this looks like can help you and the senior management understand the potential impact of tariffs based on a range of scenarios, and help you forecast the financial risks as well as any necessary mitigations. This action can also help you identify whether or not changes need to be made to your production and supply chain processes to avoid the full impact of any new tariffs.
Make sure you think not just internally about your business but also more broadly around what impact the tariffs and uncertainty might be having on your customers, suppliers and your wider business eco-system. The current landscape has the potential to disrupt supply chains and weaken customer demand and appetite. Taking a holistic view can help you establish and put in place the right actions to support your business.
2) Once you understand the impacts of the tariffs, start to put in a plan to mitigate the effects:
Your plan should not only look to mitigate the impact of tariffs on your business but also seek to improve your resilience to future potential tariffs and general trade uncertainty. It should also consider if there are any new opportunities to be explored.
This plan should also take a short, medium and long-term approach. This can help make sure you put in place the right responses to ensure your business not only stays viable but thrives.
3) Put in place your action plan using tools such as Cost Control, Product Changes, Supply Chain Diversification, Pricing, Inventory, Currency Risk Management to support your business:
Each business plan will focus on different tools and actions as mitigations depending on the level of tariffs imposed, as well as the impact on their suppliers and customers. Some of the key actions finance teams are taking to support their business are:
Shipments – Can you speed up shipments of products or components to avoid new tariffs or can you delay them to give yourself time to understand the full impact and necessary mitigations needed?
Review Contractual Terms and Conditions – re-familiarise yourself with the terms of all relevant key contracts and consider whether there is scope for renegotiation?
Pricing – Making sure products are still suitably priced to consider the business’s likely increased costs but consider price sensitivity.
Product and Material Changes – Some businesses are seeing if they can change any of the components used in the production of their final product. Early questions for operations teams will be whether different components could be sourced from elsewhere to reduce the cost of production (to offset tariffs) or do more fundamental changes need to be made to the country of origin of the product (this is likely to be a long-term strategic business decision, rather than a quick solution to the impending tariff increases).
Supply Chain Diversification – While changing supply chains may not be possible in the short-term this can be part of a medium-long term response. The focus of this should be building more resilience in your supply chain so the ongoing impacts of increased tariffs is reduced to your business.
Inventory – There can be difficulty in forecasting the right stock levels your business needs due to the uncertainty around tariffs and their impacts. However, where tariff increases are expected some businesses are already seeing if they can increase certain stock levels to avoid the immediate shock of the impending tariff increases – this is not a long-term plan but could help provide time to your business to put in place more sustainable responses such as supply chain diversification. Others are reducing stock level to mitigate the impacts and keep their product priced at the right level. How business leaders and their teams manage inventory over the coming months will be very dependent on the nature of the business.
Cost Control and Management – Another key part of the response to tariffs and the increased costs they bring is ensuring your business elsewhere is strongly controlling costs. This can help reduce the overall financial impact of tariffs to your business. Why not task your finance business partners to swiftly undertake a core cost assessment identifying which cost factors could be quickly relieved, bringing an immediate benefit or relief?
Tax and Transfer Pricing Strategies – CFOs will also be exploring tax optimisation strategies within the transfer pricing frameworks to attempt to mitigate the impact of higher tariffs. This could involve re-routing inputs through more favourable transfer pricing structures which will reduce tax through inter-company arrangements to partly offset the impact of higher tariffs.
Understand tariff relief – Many governments globally are putting in place support schemes for business to help mitigate against tariffs. While these schemes are not likely to be long-term solutions, they may be able to help in the short to medium-term until you can change your business strategy and models in response to what the new norm looks like on tariffs and global trade.
4) Review the markets you operate within:
Are there other markets you could operate within? What new opportunities exist? Can you replace some of your loss in one market by increasing in others? This could help you increase resilience in your customer base.
5) Keep your risk assessments, scenario planning and responses under regular review as well as monitoring of ongoing tariff changes:
Make sure you keep a constant review on the impact tariffs are having on your business, its suppliers and customers. You may have to change your plans and approach depending on events outside of your control.
I hope you find these insights helpful. Stay tuned for our Business Resilience Toolkit coming out later this year, which will cover not only tariffs, but also other strategies finance professionals and business leaders should consider to navigate ongoing economic, geopolitical, and policy challenges and uncertainty.
If you would like to find out more about this blog or our toolkit, please contact us GlobalAdvocacy@aicpa-cima.com