The industry’s reliance on commodities and specialized chemical products that have increased dramatically in price has led to the emergence of new items on the CFO agenda.
FREMONT, CA: Compared to many other industries, the chemical and life science sectors are particularly affected by the challenges that recent external disruptions are posing. There are now new matters on the CFO agenda as a result of the industry's dependency on commodities and specialized chemical products that have seen severe price increases. To maintain their productive capacities at a time when raw materials and intermediates are both scarce and expensive, enterprises are being compelled by the high rate of inflation to optimize their liquidity and streamline working capital management scenarios.
The largest price increases have been seen in the prices of raw materials and intermediates, particularly energy. The recent geopolitical upheavals have harmed the competitive position, and have caused businesses to revisit their upcoming investment choices. Price increases for pertinent materials have reached levels that put many chemical businesses' fundamental production operations in danger. Previously, these businesses had assumed that they would resist the price hikes, but this is no longer the case. Now they are compelled to adapt to the new inflationary figures and the pressure this puts on their margins. When compared to businesses providing specialty chemicals with higher margins, this is particularly evident for chemical companies with product portfolios that are concentrated on high-volume commodities. To respond swiftly to changes in the market and anticipate future trends, businesses must comprehend the financial impact of these elements. They are driven by these difficulties to reconsider their goals in light of the CFO agenda and identify ways to secure a cost advantage.
Finance departments will need to manage their inventory well in the future if they want to keep their inventory levels as low as possible and avoid having to pay for external financing through bonds and banks. In addition, they must maintain effective, continuous production while concentrating on demand-driven production, all without sacrificing the timely delivery of goods to clients. The time value of money has long been a critical component of financial models in the field of finance. Interest is paid on a company's bound capital. Borrowing money was inexpensive in recent years due to interest rates in most developed nations being close to zero, and working capital issues related to low inventory levels have largely lost their prior prominence on the CFO agenda. The risk-free interest rate was only marginally above zero, which resulted in a low-weighted average cost of capital (WACC).
The importance of working capital has now grown on both sides as a result of the increase in borrowing rates and other outside price shocks for raw commodities. One factor is the possibility of future interest rate hikes as a means of combating inflation, which could result in an even greater interest yield for capital. The free cash flow condition of many businesses will be threatened by the high inventory levels needed to meet client demand. The second factor is the rise in the yield interest's base rate as a result of significantly higher prices for raw materials and other commodities. There is a considerable increase in value for the same amount of an input commodity compared to the past. With disruptions in supply chains and deferred deliveries, the second factor becomes even more important.
It is now critical for the chemicals and life sciences sector to get working capital back on the CFO's agenda, as well as to optimize working capital and the supply chain, particularly in terms of demand-oriented inventory levels. To ensure that obligations are met while lowering capital costs, working capital needs to be managed. Companies can create more cash flow thanks to efficient working capital management when they are at the top of their peer group in comparison to rivals. They can then reinvest this cash flow to strengthen their market position and gain an edge over their peer group by, for instance, implementing digital transformations, expanding their production capabilities, or engaging in M&A operations. Corporations can do this by laying the groundwork for their future.
Liquidity management is another important item that should be on the CFO's agenda in addition to inventory management. Many businesses face difficulties this year in terms of their exposure to foreign exchange and raw materials, especially energy inputs like energy and gas. Businesses can access a centralized, nearly real-time snapshot of their cash status and forecast using the SAP Treasury and Risk Management application. When used in conjunction with SAP Analytics Cloud as a reporting solution, the application makes it simpler for businesses to keep track of, forecast, and manage cash inflows and outflows.
Financial executives are aware that in the current market, a financial crisis can also be brought on by a customer's failure to make a payment or by exposure to foreign exchange (FX). For this reason, liquidity management is crucial. For a company operating in a currency that has been under pressure for a while, like a euro, for instance, loans or accounts payable that are denominated in dollars constitute a significant risk. Technology is a crucial component of liquidity management because it is essential to businesses' survival and is constantly looking ahead.
