The following is a guest post from Lou Longo, a partner and the leader of the international consulting practice at Plante Moran. Opinions are the author’s own.
Businesses in the United States haven’t had to navigate a tariff-oriented economy for the past 40-plus years. As a result, many don’t have the depth of expertise and data necessary to confidently meet the new challenges posed by the current tariff landscape.
With many organizations concerned that tariffs will have an impact on margins, now is the time for CFOs to strengthen three skill sets that will help their organizations navigate the current business environment: cash flow analysis, supply chain expertise and currency risk management.
While most CFOs know the fundamentals of all three skills, traversing today’s tariff impacts requires a deeper level of expertise. Fortunately, reinforcing these skills may enable organizations to protect their margins in the short term, as well as improve their financial resilience over time.
Intensify your cash flow analysis
Cash flow is always crucial, but continually evolving tariffs magnify its importance for several reasons. First, many recently imposed tariffs represent true added production costs for businesses that bring supplies into the United States. Duty drawbacks, for example, have not been included in executive orders. That means organizations cannot recoup the tariffs imposed on imported parts used in products manufactured inside the U.S. but sold outside the U.S.
Additionally, tariffs could increase the likelihood of organizations needing liquid assets in amounts that surpass their immediate cash flow.
To shore up cash flow, CFOs should leverage two strategies:
1. Look for cash flow opportunities outside immediate recurring business. This includes identifying all available levers for getting cash, their liquidity options, and their costs. CFOs should keep a running tally of their most liquid and lowest-cost opportunities for getting cash, as well as their most difficult and highest-cost cash flow choices. These might include “less preferable” alternatives such as:
- Doing a sale lease-back on owned facilities
- Taking on new shareholders
- Considering mezzanine debt
CFOs should know not only the various sources available but also the degree to which their business might want to tap into them. This vital information should be documented in a dashboard that the entire C-suite can use to help make organizational decisions.
2. Renegotiate vendor contracts. Not surprisingly, vendors don’t appear to have much appetite for voluntarily absorbing tariff-related cost increases. Nevertheless, CFOs might be able to gain a little extra cash flow by adjusting vendor payment terms (e.g., renegotiating payment on net 60-day purchase orders to 75 days or 90 days).
While this “slow pay” approach is not uncommon, it can carry negative implications. Consequently, CFOs should have a clear understanding of its potential impact. How much cash flow does the extra 15 or 30 days give the organization? Do the benefits of that cash flow outweigh the possible drawbacks? Businesses should clearly comprehend their vendor relationships and their priority with their customers before using this option.
Dive deeper into the supply chain
The vast majority of tangible goods produced in the U.S. are part of a global supply chain. Whether raw materials, components, or finished goods, some piece of nearly every product has likely crossed borders at some point.
However, many companies know only when their immediate subcomponents cross borders. Non-public organizations, particularly, often don’t delve deeper into the supply chain to understand their second and third tiers (i.e., their suppliers’ suppliers and beyond).
For CFOs to understand tariffs’ true impacts on their organizations, they must recognize multiple tiers of their supply chain and bring “hidden” tariff exposure to light. The more complex their product, the deeper into the supply chain they should go.
At a minimum, CFOs in any industry should be aware of their suppliers and their suppliers’ suppliers, or the second tier. In complex industries — the automotive industry, for example — CFOs should go at least three layers deep.
While most suppliers aren’t eager to reveal their own suppliers, tariff and free trade environments should embolden CFOs to ask about the geographic locations of the vendors supplying elements on the bill of material for their subassemblies. At the very least, suppliers should be able to show where the materials originate, which allows a company to see if sub-tier components are crossing borders.
Ideally, CFOs should continually work to uncover their supply chain by engaging in rotating supply chain optimization reviews. They should start with the highest-volume supply chain items, then move to lower-volume-but-high-value items, etc.
Although continual review processes may require investments in technology, support resources, and targeted internal expertise, the resulting data and information are critical for making well-informed decisions and protecting margins at risk.
Mitigate your currency risk
Currency risk is a unique factor in tariff conversations, especially given that the U.S. dollar has long been a stable currency. However, the dollar will likely be subjected to more frequent adjustments in the current tariff landscape, necessitating that CFOs better understand their exposure to foreign currency exchange rates.
First, they must recognize that buying and selling in dollars does not necessarily protect against exchange rate risks. By looking closely at their supply chains, most companies will find they have at least some exposure to foreign currencies. For instance, a company that originates products from Europe will have direct or indirect exposure to what happens to the euro. Therefore, it makes sense for CFOs to review their currency exposure while examining their supply chain origination.
To support executive management decisions, CFOs should create a dashboard that tracks the major currencies to which their business is exposed — dollar-to-euro or dollar-to-peso, for example. Then, once CFOs understand their organizations’ currency exposure risk, they can:
- Set metrics within vendor contracts to adjust costs within currency bands, typically tied to an index. Contracts could stipulate: “Prices won’t change if the currency exchange rate is between X and Y; otherwise, they are subject to negotiation.”
- Get expert bids to evaluate and perhaps even manage the business’s currency risk. Boutique currency groups, community banks, and others can offer competitive reviews of an organization’s currency options.
- Establish forward contracts in which the bank agrees to lock in the rate (and risk) for a foreign currency for a set period. While not terribly flexible, this approach encourages companies to, at a minimum, analyze how much they need to buy in foreign currency.
- Request open credit if required by foreign vendors to post letters of credit or other guarantees on purchases. Although this practice is not as prevalent now as in the past, posting guarantees adds to transaction costs. So, organizations should move toward open contracts if they don’t have them already.
Turn margin protection into continuous improvement
For CFOs worried about how to keep up with the constant evolution of tariffs, the answer may be deceptively simple: don’t.
Rather than suffer whiplash trying to react to every piece of tariff-related news, use the current environment as an opportunity to strengthen the longer-term play. Instead of making tariffs situational, consider them endemic to doing business.
CFOs should turn to their trade associations and other organizations for insight into their industries’ position on the tariffs. After all, these organizations are tasked with tracking and educating about the impacts.
In the meantime, CFOs should follow best practices to strengthen their knowledge of cash flow, supply chain, and currency risks. Doing so will enable their organizations to better navigate tariffs and protect margins, as well as foster a continuous improvement mindset that drives ongoing operational efficiency. Thus, CFOs can help their businesses make decisions, absorb change and remain successful for years to come.
