AI’s insatiable appetite for computing power, coupled with the current demand/supply conditions for cloud-based AI workflows/use cases, has supercharged the pace of investment and development of data centers. A data center is a facility housing cloud computing and storage resources that enable the delivery of software applications, the training of AI, and any number of additional processing and production applications.

Currently, the US is leading the AI power race, having built the largest number of data centers in the world. Statista reports that as of March, the US was home to 5,426 facilities, followed by Germany with 529, the UK with 523, and China with 449. By 2030, these numbers are expected to increase by about 30-40%. Globally, investment in data centers is forecast to reach $7 trillion.

How does the investment needed to build a data center break down?

“If someone owns a land parcel where data-center development is feasible, then the value of that land is significantly higher than it would be absent that demand,” says Tim McGuire, senior director of Project Finance at Rowan Digital Infrastructure, a developer and builder of data centers in the US. “For example, we see land in core markets like Northern Virginia exceed $2.5 million an acre, and to fit a hyperscaler development—Amazon Web Services, Google, Microsoft—we’re typically buying a hundred acres plus.”

Energy and water are both crucial cost components, and energy has been the gating issue in most geographies, McGuire adds.

“Data centers are very energy intensive,” he notes, “and even if the energy infrastructure is there to power them, building an interconnection can take months if not years. The cost of building those interconnections can be high. We’re therefore seeing more and more utilities—particularly utilities where the data center boom has really put strain on them—require some form of security for them to undertake the interconnection work.”

Well-capitalized developers that can afford to meet those requirements, have the advantage he says.

The dynamics related to power availability are different for data centers, observes Gordon Bell, principal at EY-Parthenon Digital Infrastructure. “Europe is particularly challenged with respect to power availability, given some of the local regulatory hurdles around expanding the power infrastructure,” he says. “The same thing is also true in North America, whereas in Asia it is relatively fast to build out that infrastructure.”

Graphic processing units (GPUs) are essential for all things AI, and some countries face further restrictions to data center development depending on how many GPUs they can import at any one time, Bell adds.

“Countries like Canada, Japan, Australia, and many in Europe don’t have restrictions on GPU imports,” he says, “which has created another catalyst for growth in the market in those regions.”

Also, different countries will offer specific incentives around the development of data centers. Some Middle Eastern countries, including the United Arab Emirates, are aggressively incentivizing data center development within their borders, he adds.

Because building a data center is extremely capital intensive, backers are typically global companies like Blackstone, notes Claus Hertel, managing director at Rabobank, an active lender in the space and developer of its own green data center in the Netherlands. A lot of investors and lenders have relationships with these big firms and have assembled large project finance teams that are active in renewables, clean tech, and digital infrastructure.

“At the basic level, you have project financing, which incorporates construction, financing, and term financing,” Hertel says. “Once the data center is complete, you have a certain amount of time—typically a three- to four-year period—where the sponsor can decide how to access permanent capital or permanent financing. That could be in the form of asset-backed securities, commercial mortgage-backed securities, or a private placement to long-term investors. So there are different pockets of capital, short-term or longer term.”

Like many of its peers, Rowan Digital Infrastructure is sponsored by a private equity firm, Tim McGuire says.

“Typically, a private equity investor will front some of the pre-development costs, which could include acquiring the land parcel and doing some of the horizontal development,” he notes. “Rowan doesn’t put debt financing in place for projects until we have a signed lease, because at that point, we’re able to obtain very attractive terms. The hyperscaler customers are large, well-capitalized, profitable public companies with high investment-grade credit ratings. After signing a long-term lease with them, it opens low-cost debt capital that provides 80% to 85% of the capital needed to build the project.”

“The context for all of this is that the industry has grown tremendously over the last couple of years, and it’s expected to accelerate going forward,” says Gordon Bell. “That just requires more and more capital—more capital than a lot of the existing owners of these assets originally underwrote. They’re looking for ways to raise new capital as well as recycle capital.”

One of the possible solutions that is starting to percolate in the market, he says, is the introduction of dedicated funds that hold a portfolio of stabilized assets.

“That would then provide some diversification of risk and allow various investors looking to get exposure into the space to invest in a fund that holds a portfolio of assets across different markets and different customer,” he says.

“Typically, the stabilized asset deals that we’ve seen are for individual facilities or a handful of individual facilities,” he adds. “Those facilities provide exposure to very specific markets and within each of those facilities there’s oftentimes only a single customer. So, you’re placing a concentrated bet on a single customer and a single market. The private equity deals that have been made thus far have been more one off in nature, a handful of assets, or single assets. It’s not been anything that can programmatically scale globally, which is really what the industry eventually needs—a fund that would hold all these stabilized assets. Investors looking to get exposure into stabilized assets would then just be able to invest into this fund.”

Whatever the mechanism that gets it done, McGuire sees continued strong demand for data center development going forward, driven by continued investment from hyperscalers. AI will be a catalyst, but so will demand for cloud services.

“There’s a lot of support for the data center business for the foreseeable future,” he predicts.

Oliver Jones: I think I would start by saying that many of the issues that are affecting companies are global in nature. So the way that I often see it is to understand the trends that underpin both the risks and the opportunities across multiple regions.

If you look at the outlook for 2025, we identify three really big themes. One is the shift from this election super cycle of 2024 into new government, and therefore new policy making.

Underlying trend two is the kind of reemergence or the strengthening of geopolitical rivalries, almost a type of old-fashioned geopolitics around who has the most energy, and the active conflicts/wars that sadly still exist and continue.

Thirdly, is a shift to economic competition. No longer is it just about near shoring, or friend shoring. There’s a real premium on industrial activity being onshore in one’s own domestic market. Now we see some of the more recent interventions, for instance, aimed at seeking to compete around things like the large language models and generative AI, and that’s seen as an area of economic competition.

GF: What does that mean for international business, and how they should plan for the future?

Jones: One of the features of this landscape is that geopolitical risk, but also geopolitical opportunity is to be found across almost all geographies at the moment. And so the interesting question for boardrooms and the C-suite is where the opportunities may lie. Where is the playing field becoming more level? How do I change my investment planning away from being almost in survival mode to being about thriving and taking the opportunities.

GF: So if we could think of geostrategic risk and opportunity analysis in terms of a framework. Where do we start?

Jones: It’s really important to professionalize your approach. The first thing to do is to scan the environment, and scan means to understand the outside world and understand the forces that are shaping your environment. It sounds very basic but we know that many companies really struggle to do this. It’s also really important to take a quantitative approach to this rather than simply a qualitative approach and to have a wide range of voices and evidence base in order to really understand what’s going on. The second is to focus, and what we mean by that is to focus on what it means for the business—the impact on future strategy. You have to really incorporate geopolitics into your existing risk management frameworks and it’s centrally important that those risk management frameworks have a voice at the Board.

GF: Who should have the responsibility for understanding geopolitical risk and opportunities?

Jones: The evidence we have at the moment is that there’s not one specific governance format. Sometimes it is one individual being given responsibility. Sometimes it’s a committee given responsibility. But there’s a couple of things that are absolutely crucial, one of which is that a specific person or a specific body must have lead responsibility. This can’t be something that is distributed between three or four parts of the company. There must be a single entity that has ultimate responsibility.

The second crucial thing is that that entity—whether it’s an individual or a group—will have to span across the whole of the company. They need to be able to automatically see the picture across all the different functions because geopolitics is affecting all parts of businesses.

GF:  Where do you see the CFO and finance function best fitting in terms of the analysis of geostrategic risk?

Jones: I think the CFO and the finance function should be central to every stage, and the reason for that is coming back to the point that geopolitics is affecting so many different dimensions of your business. For someone like the CFO it’s crucial that they understand these issues, but that all the different aspects of the business are understanding these issues as well and are reacting in the right way.

I think the finance function, more generally can play an important role in quantitative modeling of these impacts—what happens to the cost base; what it does to potential revenues across all the different dimensions of the business and how to incorporate that into the strategic plan. Clearly that’s front and center of any CFO’s agenda.

Geopolitical pressures are reshaping global economic and financial activity leading to what is commonly called a “fractured” global economy. Among other things, a fractured economy is characterized by increased trade barriers and tariffs, geopolitical tensions and shifts to specific trading blocks (like US vs China), changing investment patterns, and supply chain disruptions.

These are not new phenomena, and over time companies have responded by implementing a variety of strategies, such as rationalizing production lines, finding new markets, or near shoring sources of supply to name but a few. 

However, 2025 is not business as usual. According to the most recent outlook, in January, by chief economists at the World Economic Forum, this global fragmentation will lead to price increases for consumers and cost increases for business, for the next three years. They also agree that developments in the US will alter the trajectory of the global economy, with the majority saying that US domestic policy will bring a long-term global economic shift rather than a short-term disruption. 

In a recent interview, Suzie Petrusic, Senior Analyst in Gartner’s Supply Chain Practice, explains that with respect to US trade policy, the big difference between the way that tariffs have been applied in the past and how they are now, is the sheer scope of the tax.

“In the past it’s usually been like taking a scalpel to the tariffs—market by market,” she said. “But these new tariffs are broadly applied, so it’s actually hard for me to imagine an industry that’s not impacted.”

Impending US tariffs, and the retaliatory protectionism expected from China, the EU, Canada and Mexico will likely have highly complex, long term disruptive effects on traditional supply chains and are expected to impact industries and economies world-wide.

For example, it’s anticipated that US tariffs on EU imports will reduce Europe’s GDP by 1.5% in 2025, US GDP will fall by 1.6%, and a 25% tariff on Canadian exports will push that economy into recession. 

Global corporate investment patterns will also be impacted.  According to recent research by Ernst & Young, the negative direction of US-China relations (as reflected in the recent US ban of TikTok) will likely prompt high-profile Chinese companies to pursue IPOs in alternative markets like Hong Kong or the European exchanges. (EY Global IPO Trends 2024)

And when it comes to specific sectors, there will be winners and losers. At a recent investor conference, Ford CEO Jim Farley, described the potential impact of these sweeping tariffs on both the US automotive industry in general, and more specifically, the bottom lines of non-American automakers.

“Long term, a 25% tariff across the Mexico and Canada borders would blow a hole in the U.S. industry that we’ve never seen,” Farley said. “Frankly, it gives free rein to South Korean, Japanese and European companies that are bringing 1.5 million to 2 million vehicles into the U.S. that wouldn’t be subject to those Mexican and Canadian tariffs. It would be one of the biggest windfalls for those companies ever.” In contrast, upon the announcement of the tax on Canadian producers, American steel maker Alcoa saw a significant bounce in their stock price as investors anticipated higher prices and bloated profit margins for American steel companies. 

So, what levers will companies pull in 2025 to strategically navigate through this volatile and uncertain environment? As MP Biomedicals CFO Hendry Lim explains, “Companies like ours will continue to adjust sourcing strategies to countries not impacted by the tariff,  which allows for diversify of supply and reduction of risk.”

MP Biomedicals—a manufacturer and distributer of life science, fine chemical and diagnostic products with offices and facilities throughout Europe, Asia, Australia and the Americas— has turned its eye to imports from India and Singapore. The company is also rerouting production to their other facilities before entering the US. However, this strategy isn’t clear cut. It’s a complex modelling exercise, Lim explains. 

“Of course we’ll have to weigh the freight cost versus the tariff as well as other options, looking at things like geopolitical risk, natural disasters in certain countries, market fluctuations, and then thereafter use financial models to quantify the financial impact and to develop risk mitigation strategies. We then incorporate all these factors into our forecasting. At the end of the day it’s a matter of everyone collaborating and working together to develop a strategy, to actually counteract these risks,” he adds.

Ultimately, companies will need to bring geostrategic risk into the fore of their scenario planning.

“In doing so, the most helpful thing that any C-suite executive can do, is create alignment at the C level and clarity all the way down through the organization. If you can create that clarity and alignment strategically at the C-suite then you’re able to more confidently know that your people are making decisions that are pulling and pushing towards the same goal,” she explains.

The ability to understand risk also boils down to a company’s investment in technology, explains Rizwan Khan, Managing Partner at Acclime Vietnam, and experienced regional CFO, CIO and auditor.

“There are multiple factors that will affect production costs in this region, like Chinese investment in a company or the percentage of Chinese inputs or raw material in their products.  So overall, the tariffs that are being imposed pose a significant risk to companies in Southeast Asia as well. Vietnamese companies will need to focus more on cost reducing efficiencies to remain competitive,” Khan says. 

Competitors around the world that are exposed to the same tariffs will have to win on cost reductions, he adds. “My focus is making sure companies are utilizing technology in the most productive way to minimize those costs. In the past, we used to say that cash is king—in the current environment, data is king.” 

With so much data available, whether it is from the procurement point of view or from the production point of view, corporate strategies in a volatile trade environment require end to end visibility, he adds. 

“When it comes to technology innovations, advanced predictive and prescriptive analytic technology can help companies understand the impact of tariff-related disruptions, by helping them quantify the impact across a supply chain, or help identify specific supplier risks, or forecast changes in demand across regions in real time. This type of end-to-end visibility ensures that companies can respond to shifting market dynamics,” he says.

For now, many are still trying to figure out how 2025 will unfold when it comes to the bubbling trade war of the worlds. How companies will fare this year will depend on how quickly they can respond to emerging barriers to trade and a volatile risk environment.

For years, alternative financing models have been changing the way companies access cash. Now, fintech is offering innovations, from subscription and fee-based online lending marketplaces to blockchain, that are changing the alternative financing landscape itself. That, in turn, is altering the competitive balance as traditional banks go head-to-head with financiers to provide CFOs with better terms and greater flexibility for managing working capital.

 “Businesses rely on access to growth capital, yet due to their risk appetite and stringent regulation, banks are constrained,” Deloitte explained in a 2021 paper. Direct lenders can offer attractive rates with little or no equity dilution of the business, enabling companies to “make acquisitions, refinance bank lenders, consolidate [their] shareholder base, and invest in growth.”

Varieties of alternative financing already range from venture capital, crowdfunding and equipment financing to peer-to-peer lending, angel investing, factoring and revenue-based financing. The factoring market alone reveals the thirst for alternative means of raising cash. The most recent estimate by Researchandmarkets.com placed the global factoring market at $3.8 trillion in 2024 and forecast that it will reach $5.3 trillion in 2028 at a CAGR of 7.8%. 

The latest, fintech-fueled innovations promise to expand alternative financing even further, pairing lenders and loan seekers through algorithms generated by artificial intelligence. 

Marketplace financing means the company submits a loan application online, where it is assessed, graded and assigned an interest rate using the provider’s proprietary credit scoring tool. For a flat fee or subscription, direct marketplace lenders facilitate all elements of the transaction, including collecting borrower applications, assigning credit ratings, advertising the loan request, pairing borrowers with interested investors, originating the loan and servicing any collected loan payments.

A leading provider is Leverest FinTech, which launched its financing platform in 2021. With offices in Frankfurt, Berlin, London, and more recently in the US, it connects private equity investors, debt and M&A advisors, and corporates with lending partners, including banks and debt funds, anywhere in the world.   

Leverest has thus far completed over 100 transactions with 600 lenders in Europe, amounting to more than $1 billion managed via the platform. But in addition to being a lending marketplace, it is also a specialized customer relationship management tool.

Instead of tracking your relationship bank’s offerings on an Excel file, “you always have up-to-date data to see who fits your project,” says Leverest COO Janik Bold. “You always get the answer from the tool because we have so much data and so many financing parties on the platform.”

The platform is also geared toward making the financing process more efficient, he adds: an especially valuable characteristic for CFOS of small to midsize enterprises who want to free up time and resources.

“We see a lot of parties that might have a marketplace,” Bold notes, “but then at the same time they have internal consultants that need to help the parties finalize the financing. We took a different approach, using digital tools to enable a do-it-yourself solution. You really need both to put that power back into the hands of the CFO.”

Many CFOs have limited time to manage a competitive process, which is why they tend to rely on just two or three relationship lenders. Bold argues. “The process management software we offer, be it a data room or a deal cockpit, helps to send out invites and share and receive information. With just a marketplace alone, they still would have to manage that process manually.”

Other than corporates, some of Leverest’s marketplace clients are bigger investment banks that manage financing processes for private equity.

“Why they’re also using the platform is because it’s also making them much more efficient,” Bold says. “The whole investment banking space is still not digitized. They’re still using Excel and Outlook. They love our platform because they can save hundreds of hours of time.”  

CFOs can expect further financing innovations to roll out this year.

Blockchain is set to revolutionize loan transaction efficiency, say consultants at Lexington Capital Holdings in a recent report, and as the technology gains traction, it will redefine the way transactions occur.

“The decentralized and transparent nature of blockchain can streamline the loan approval process, enhance security and reduce fraud,” Lexington concludes. “Smart contracts, enabled by blockchain, have the potential to automate and expedite various aspects of lending, making the entire process more efficient.”

Artificial intelligence-driven credit scoring, the technology behind platforms like Leverest, will continue to streamline the risk assessment project. “AI is poised to revolutionize credit scoring, allowing lenders to assess risk with unprecedented precision,” Lexington foresees. This shift toward more accurate risk assessment will be particularly relevant for businesses with nontraditional credit profiles. 

New and innovative marketplace models not only allow CFOs to navigate the complex financing market more effectively, but also provide value-added process management technology to their clients. The provider universe is likely to undergo its own transformation as well; Lexington anticipates this year will see increased collaboration between traditional banks and alternative lenders, creating hybrid financing solutions that cater to a broader spectrum of businesses.

These factors are squeezing the bottom line at many global companies this year, forcing CFOs to redouble their supply chain management efforts.

Why the CFO?

“It’s one of those things that happens in one area but cascades through the rest of the business,” says Sean Fitzgerald, senior research director of the Finance Executive Advisory Practice at The Hackett Group. “Physical supply chain volatility clearly has an operational implication, which has a financial set of implications, including cost profile implications around where the business is staffed, where you spend money and where you’re looking to save money. You have this real-world set of dynamics that permeate all these other dimensions.” 

So, what are companies and their finance chiefs doing to manage the impact of yet another round of supply chain disruptions?

For Ali Sarfaraz, global controller at Qikiqtaaluk Corporation, a Canadian exporter of lobster, shrimp and other fishery products, anything affecting cost structure gets pushed forward.

“We sell all our product through a marketing company in Europe, which then distributes it mainly in China and the EU,” he explains. “For us, our catch and processing costs are fixed through binding agreements, but the variable marketing and distribution costs have gone up by anywhere from 10% to 15%. Given the nature of our industry, there’s not much we can do about it, other than push prices forward.” 

To reduce the impact, QC has implemented a natural hedge. “We pay our fixed costs and any other costs in our local currency, but we sell our product in US dollars,” Sarfaraz says. “This always gives us a nice cushion for circumstances beyond our control.”

Other companies are bringing to bear lessons they learned during the Covid-19 pandemic. In the wake of the pandemic-induced economic slowdown, Estee Lauder worked to eliminate the traditional long distribution haul between the US, Europe and Asia, says Julie Teh, the company’s senior vice president of Finance Digital Transformation. 

“We’ve restructured our manufacturing footprint, opening several locations in China, India and Japan and moving our product closer to our growth markets,” she says. “That in part is how we’ve protected ourselves from these black swan events.”

These kinds of organizationwide shifts are where the CFO comes in.

“The CFO has 360-degree vision into the potential financial and strategic impacts across the enterprise,” says Courtney Rickert McCaffrey, global insights leader at EY Geostrategic Business Group, “and can be instrumental in building scenarios around these types of risk and the potential impacts on their companies.”

The CFO’s job expands into coordinating internally between different teams.

“What we often find is there are pockets of geostrategic activity going on within companies, but that the different teams might not necessarily be collaborating,” McCaffrey notes. “CFOs can help ensure that everyone is working together, rowing in the same direction in the same boat.”

This includes forging tighter ties with supply chain managers, says Fitzerald.

“It’s really important that the CFO and the entire executive suite are clearly aligned on what incentives people should have that are consistent with these supply chain challenges,” he says.  “You need to make sure that you don’t have different parts of the organization working against one another because they have misaligned objectives in relation to inventory optimization.”

CFOs should also be looking carefully at their currency hedging strategies, says Josh Nelson, principal of Strategy & Operations at the Hackett Group.

“You can use treasury as one of the cost-management levers to pull,” he suggests. “If you’ve got local currency issues related to either the procurement of raw materials, or even the costs around packaging and transporting those materials, that’s purely a finance lever to mitigate cost variability.”

CFOs should also consider factoring receivables to smooth this year’s cash flow, Nelson adds. “If companies have to hold more inventory in order to ensure stability or relative stability of supply, or if they have liquidity concerns due to increased costs, then factoring is certainly something that the CFO is going to look at.”

The impact of shipping delays on the bottom line is forcing companies to focus more on working capital.

“Companies should be reining in days sales outstanding (DSO), getting collections in place,” Nelson advises. “On the flip side, we should see companies trying to push out days payable outstanding (DPO) to help improve their cash positions in the face of rising costs. 

Also, when it comes to inventory,  he adds, “it’s like a pendulum this year.” “During the early days of the pandemic, there was no inventory in the system. Then the pendulum swung the other way where companies bloated up their warehouses. They wanted to make sure they had coverage with the goal of hedging against supply risk and maintaining supply continuity. But in doing so, they lost focus on optimizing inventories, in other words placing inventories at the right location to drive appropriate service levels without bloating the balance sheet.” This year, inventory optimization should be a key priority for CFOs, he advises. “They may not directly control it, but they can partner with their operations and supply chain counterparts and really drive down inventory, reduce working capital costs and overall operating costs.”

“At the end of the day, it’s all about intelligent cost management,” says Fitzerald. “Figuring that out is not about just cutting costs wholesale; it’s about focusing on near-term benefits without putting long-term capability at risk.”

The world must achieve zero carbon dioxide emissions by 2050 to stave off further climate disaster, according to the 2015 Paris Agreement. Buildings are the largest source of emissions of any sector, accounting for 40% of energy-related global carbon emissions. Yet, only 3% of investment in new construction is currently green and efficient. 

Big as the challenge is, climate change is typically classified as a regulatory issue: the domain of compliance and sustainability officers, engineers, and designers.

For building owners, developers, and REITs, “it’s the responsibility of CFOs and their team to maintain financial viability and to steer a company’s portfolio decisions,” says Julie Emmrich, sustainable finance lead at the World Green Building Council (WorldGBC). “There needs to be close communication between finance and other stakeholders to understand the economics of future-proofing a building.” 

When it comes down to the financial management of building companies, the WorldGBC identifies several reasons why CFOs should care about building green, including the potential for greater access to investment, improved corporate reputation, higher asset value and desirability, resilient investment and lower risk of stranded assets, increased ROI, and preferential insurance premiums.

Green buildings can also amass substantial cost savings. In North America, Leadership in Energy and Environmental Design (LEED)-certified buildings reported $1.2 billion in energy savings, $715.3 million in maintenance savings, $149.5 million in water savings, and $54.2 million in waste savings from 2015 to 2018. Other savings come from lower remediation or refit costs and potential federal, state and local government tax benefits. 

Ignoring Net Zero Risky

Beyond the benefits of building green, CFOs need to be aware that the financial risks of ignoring a net zero carbon agenda can be significant now that more governments are cracking down. In France, landlords can no longer increase rent on properties with poor energy efficiency ratings, and as of January 1, it is illegal to rent out the least energy efficient properties: those consuming more than 450 kilowatt hours per square meter per year.  In the UK, by 2025, buildings will require Energy Performance Certificates or they cannot be rented out; it’s expected that energy upgrades will apply to 15 million homes in England and Wales, according to Lloyds Banking Group.

Local governments are also weighing in on reducing building CO2. Vancouver, Canada declared a climate emergency in 2019 and set a goal to reduce embodied carbon (carbon from construction materials) 40% by 2030. The city has since established an aggressive building carbon reduction strategy, including new zoning requirements, by-laws, and guidelines for new builds.

In the US, New York City Local Law 97 sets limits on buildings’ greenhouse gas emissions, starting in 2024. As part of the Climate Mobilization Act of 2019, the law aims to help the city reach the goal of a 40% reduction in greenhouse gas emissions from buildings by 2030, and an 80% reduction in citywide emissions by 2050. Some 3,700 properties could reportedly be out of compliance with the new law next year and collectively face more than $200 million per year in penalties. By 2030, this number is forecast to grow to over 13,500 properties that cumulatively could face penalties as high as $900 million each year according to a January 2023 report from the Real Estate Board of New York.

What this demonstrates, says Emmrich, is that policy risk is always on the horizon: “CFOs need to understand that the ROI they calculate today may change very quickly if they don’t consider net zero or ESG considerations.”

Market Forces

Public-company CFOs are also at the mercy of shareholder expectations—and the repercussions that negative perceptions can have on share price.

Consider the value of REITs. Finance teams need to consider how their buildings’ compliance with net zero standards will likely impact future market share, Emmrich cautions, and whether the company is keeping up with its competitors in the transition to net zero.

“Future proofing the business must include an understanding of the demands of investors,” says adds, “and it’s the job of the CFO to ensure that investments or projects are in alignment with market demands.”

Net zero carbon initiatives are also forcing CFOs into new territory with regard to reporting. Evolving reporting regulations place the responsibility for disclosure on environmental, safety, and governance matters in their hands.

In the EU, sustainability issues fall either on the chief sustainability officer or the strategy department, says Lydia Neuhuber, sustainability consulting lead at Deloitte Germany. Over the past two years, however, “this has changed dramatically, and the big driver of that first and foremost is regulation.”  

That results from two key moves by EU regulators. “First, sustainability issues are now closely integrated with financial issues,” Neuhuber says. “Take revenues, for example. Suddenly, the sustainability department must report a specific percentage of green revenues overall. That’s resulted in the fact that somebody needs to understand the overall revenues—and that’s the finance function. So, there is this kind of incorporation of the two topics by establishing new KPIs that are regulatorily binding.”

Second, the 2021 Corporate Sustainability Reporting Directive (CSRD) expanded and standardized the sustainability topics that need to be reported on—all of which needs to be audit-assured.

“This is a total shift, because previously, sustainability reports were not standardized and there was no warranty assurance of information,” says Neuhaber. Now, “both the CEO and the CFO are responsible for the ESG information that is communicated to external stakeholders.”

Of course, the finance team isn’t going to solve the challenge of going to carbon net zero by itself, she adds. But it will be up to the CFO, increasingly, to make clear what’s at stake financially and to marshal the troops to take action.

“That’s the core message for CFOs when it comes to sustainability,” says Neuhaber. “What really matters is that the topic is anchored within the entire organization and that net zero is driven forward in a cross-functional way.”

Currency risk has always been part of doing business globally, but most CFOs who are now at the financial helm of their companies haven’t managed this type of FX volatility—ever. The last time we saw major currency fluctuations of this sort was in the 1980s.

Recall in 1987, when the euro ranged between $1.06 and $1.29. Fast-forward three decades, and the euro was swinging again between $0.95 and $1.14, or up over 20%, in 2022.

For international companies, the negative impact of FX fluctuations can be significant. Foreign exchange exposure can affect virtually every level of financial statements. It generally comes in the form of translation impacts when consolidating international revenue to local dollars, or in the form of expenses in foreign currency-denominated payables.

“FX has a broad impact across the income statement,” notes Andy Gage, senior vice president of FX Solutions and Advisory Services at Kyriba, a cloud treasury and financial solutions provider. “It affects operating decisions, debt considerations and other strategic considerations central to how business is conducted.”

If not properly hedged, FX exposure can not only eat into profits but also change the competitive landscape for companies caught off-guard, according to Donald Lessard, MIT Sloan professor of International Management.

“In addition to the impact on the financials, companies also need to understand the potential impacts of a change in currency values on the competitive landscape and other aspects of business risk,” Lessard says. “My sense is that the financial management of foreign exchange is still myopic,” he adds, “and tends to focus mostly on contractual and translation exposures. This doesn’t really address the impact of changes in effective exchange rates on costs, prices, margins and cash flows.”

Despite these impacts, Chatham Financial estimates that only half of US multinationals are hedging their FX exposure. While it’s difficult to determine the opportunity cost of that, estimates show that FX volatility can impose a considerable financial burden.

According to Kyriba’s January 2023 Currency Impact Report (CIR), the combined pool of North American and European corporations reported more than $17 billion in tailwinds and about $47.2 billion in headwinds (i.e., a negative impact on corporate earnings) in the third quarter of 2022 due to FX fluctuations. 

North American companies reported a 26.6% increase in FX headwinds compared with the previous quarter, Kyriba says, whereas European companies reported a 68% increase in FX-related headwinds. The fall in the value of the euro against the US dollar was to blame.

In the EU, the electronic-equipment instruments and components sector felt the greatest pain when it came to the negative impact of currency volatility. In the US, healthcare equipment and supplies were hardest hit, as of the third quarter of 2022.

For companies that chose not to hedge, year-over-year volatility could have eliminated margins entirely, explains Chatham Financial managing director Chris Towner.

“For example, if you were a UK business importing from the US and started the year at $1.35 GBP/USD, and you gave yourself a $1.30 budget rate, that would be a major concern when the pound went to $1.05,” Towner says. “That would’ve impacted profitability—or even, for some businesses, completely wiped out profitability because they would be required to pay 20% more in [pounds] sterling.”

These kinds of extremes have led to a lot more hedging requirements and a lot more hedging inquiries from corporates, says Towner. “While companies still tend to use plain-vanilla FX forward hedges, we’re starting to see companies combine more optionality and much more usage of participating forwards,” he adds. When the environment becomes more volatile, options provide more flexibility than straightforward contracts. The downside is that options are more expensive than regular contracts.

For some companies, FX hedging is the least feasible choice for managing currency risk. As Taswer Ahmad Khan, Middle East CFO of Güntner, explains, it can all depend on where your customers are.  

Güntner, a manufacturer of refrigeration and heat-exchange products, is headquartered in Germany and Austria, with customers in the Middle East, Africa and India—and working with hedging instruments in countries across the Middle East and Africa is quite risky, says Khan, citing political volatility in those regions.

“One country improves, another goes down and then improves again, and the result is payment delays from our customers,” he says. “That’s one reason we don’t want to bind ourselves into an FX commitment when we’re not certain about the timing of that revenue.” As a result, Güntner Middle East has a wide, sweeping policy of selling only in euros, he adds: “We have kept it pretty straightforward, which is more secure for us.”

Other companies, like Qikiqtaaluk Corporation (QC), a diversified Canada-based resource company located in Nunavut, Northwest Territories, have a natural hedge. Ali Sarfaraz, QC’s corporate controller, says the company maintains all revenue inflows in USD and any multicurrency inputs are paid through their US dollar account—only converting to the weaker Canadian dollar when necessary, and at a gain. 

It’s no secret that the strength of the US dollar has heightened currency volatility in many countries around the world. In 2023, most observers and analysts alike expect it to remain strong.  

What To Keep In Mind

For international companies with exposure not only to USD, but to other world currencies, there are two things that they should keep top of mind when it comes to managing FX exposure, says Chatham’s Towner.

“First, it’s important for companies to have an FX policy or strategy that’s signed off by the board, that everyone bought into. Adhere to the strategy and take a disciplined approach—don’t be deterred by market moves,” he says.

“Second, whenever companies have an FX exposure, they should look at ways to offset that risk organically. What can they do internally or strategically to reduce their exposures? For example, can they do foreign currency debt swaps, before making any decisions to go to external FX markets?”  

Kyriba’s Gage tends to agree.

“I’m a huge advocate of looking inside before you look outside to manage your FX risk,” Gage says. But you’ve got to have good analytics to understand where your exposures are coming from. “If you see that [data], then you should be compelled to ask questions like, ‘How can I work with the business to reduce those risks?  What can be done differently?  Can we rethink our supply chain?’ That’s the best practice even in periods of light volatility.”  

Companies also need to be looking at how they’re accounting for transactions. “Make sure your business is really clean and precise in terms of accounting for foreign exchange transactions,” he says. “Make sure you’re netting your hedges so that you don’t have one business unit hedging Euros in one direction and another business unit hedging Euros in the opposite direction.”

To combat the host of supply chain issues created by the Covid-19 pandemic, as well as the new ones that have emerged in March as a result of the war in Ukraine and subsequent sanctions, CFOs are focusing on risk mitigation strategies and optimizing working capital. They’re building budgets around business drivers as opposed to historical costs and are smoothing cash flows by joining digital ecosystems that connect the entire financial supply chain through automated payments.

As Craig Bailey, associate principal at The Hackett Group global consultancy, explains, supply chain backlogs have caused many companies to double up on inventory orders.

“Companies are spending more than usual trying to replenish inventories. Some are even using costly air freight options for emergency inventory orders, knowing they also have goods stuck at sea,” he says.

Generally, whenever organizations react that quickly to supply chain shortages, it leads to a buildup of inventories, Bailey adds. “Most companies are still trying to catch up from 2021.”

Restarting the production that was shut down by the Covid-19 pandemic in 2020—especially in China—led to a shipping bottleneck throughout 2021 when shipping rates soared, as did the number of ships waiting to offload their cargo. In mid-December 2021, as many as 101 containerships were waiting to berth at the Port of Los Angeles and the Port of Long Beach.

Meanwhile, Brexit’s aftermath complicated the UK’s and EU’s business environments by introducing new red tape and increased border checks for imports and exports.

This was in play before Russia invaded neighboring Ukraine on February 24. The subsequent sanctions and trade restrictions placed on Russia by much of the rest of the world have furthered trade complexity.

Interos, a company providing supply chain risk management solutions, estimates that more than 2,100 US-based firms and 1,200 European firms have at least one direct (tier-1) supplier in Russia, while more than 450 firms in the US and 200 in Europe have tier-1 suppliers in Ukraine. Adding tier-2 suppliers—those who purchase from companies with suppliers in the affected countries—of course enlarges the number of affected companies. More than 15,100 firms in the US and 8,200 European firms have tier-2 suppliers based in Ukraine, and Interos research found more than 190,000 firms in the US and 109,000 firms in Europe have Russian or Ukrainian suppliers at tier-3.

Whether alternative sources of supply can be found for Russian and Ukrainian goods like wheat, corn, minerals and oil, above all, remains to be seen. Grain importers in Africa and the Middle East are in trouble should Russian wheat supplies cease to reach their shores. At the same time, interference with Black Sea shipping will have broad consequences for global supply chains. As of the beginning of March, approximately 200 cargo ships were reportedly stranded in Ukrainian ports while more are stranded around the globe without access to the Black Sea route to market, increasing already soaring shipping costs.

According to January data from shipping rate provider Xeneta, Asia-US contract rates had gone up 122% from early 2020. The Shanghai Containerized Freight Index, which reflects the Shanghai export container transport market’s spot rates, also reached a new high in late December 2021, up 76% year on year, breaching the 5,000-point level for the first time. As of mid-March of this year, the index had reached 4,625 points.

Managing The Risks

Reduced supplier access and increased shipping costs have hit the bottom line for many companies hard and have CFOs turning increasingly to factoring their receivables, or selling their accounts receivable, to smooth out their cash flow and reduce risk.

The recent crises in Ukraine fueled the demand for factoring, with companies looking for working capital financing facilities in those sectors with the highest exposure to commodity prices, according to Johannes Wehrmann, managing director for corporate sales at London-based supply chain finance platform provider Demica.

“Companies are looking to more effectively manage cash, paying off higher debt by selling receivables at more favorable terms,” he says. “In Europe, for example, companies are taking advantage of the fact that various large, reputable finance providers are aggressively trying to grow their factoring business by providing very competitive terms. They’re quite a low risk compared to other debt products and enable sellers to repay older incumbent debt facilities.”

For CFOs to know whether factoring is a good option to manage their corporate cash flows, they must have a deep understanding of their receivables portfolio, Wehrmann adds. “They need to know the value drivers behind their portfolios, how they’ve performed historically and how the contracts are structured. Then they need to think about the impact on their balance sheet, liquidity and profitability.”

Deep insights into the factors driving profitability are critical when costs are rising, according to Tom Seegmiller, vice president of Financial Planning and Analysis at financial management software provider Vena Solutions.

Finance executives, as well as financial planning and analysis professionals, are increasingly using driver-based budgeting to link resource usage, activities and costs to the bottom line.

“Driver-based budgeting, from my perspective, really acknowledges that the budget is your financial output, the articulation of a series of operational items or activities that happen within the business,” Seegmiller says.

Such an approach shifts the focus from the budget item to the activities the company will undertake in the future, he adds. “That’s how you drive the budget. It moves the ownership of the budget from finance, one of the criticisms of traditional budgeting, to ownership that very clearly resides within the business.”

In an environment of rising costs, traditional budgeting falls short. “In the current environment of uncertainty over input prices, growing wage bills and the impact of the Ukraine crises on the global supply chain, it’s even more important for finance executives to dive deep into the operations side of the business to manage costs,” says Seegmiller.

Going Digital

To create more-stable supplier relationships while reducing risks, companies are rapidly joining “digital payments ecosystems,” according to Gavin Cicchinelli, COO at working capital and business-to-business payment platform provider PrimeRevenue.

No matter where companies are located today, supply chain issues remain prevalent. One of the biggest challenges for companies is ensuring they have adequate cash flow to produce the products, ship the products and then track everything.

“Roughly 40% to 50% of businesses still rely on manual vendor management and payment processes across their supply chains,” says Cicchinelli. “Last year, PrimeRevenue focused on delivering enhanced platform solutions that solve these problems for our clients by automating accounts payable and working capital solutions. As a result, companies can pay their suppliers early or on time at invoice maturity and reduce the friction in their entire supply chain, whether they have 100 suppliers or 15,000 suppliers.”

He adds that automating the process saves time and money from an accounts payable perspective and smooths and accelerates cash flow from suppliers.

Despite being given three full years to prepare for new lease-accounting standards from the International Accounting Standards Board (IASB), even after two years operating under the new rules, many CFOs around the world find they are still feeling the impact and making adjustments to their lease and accounting practices.

US private company CFOs, only now forced to face a similar standard from the Financial Accounting Standards Board (FASB), could learn much from the experience of their international peers.

The IASB standard, IFRS 16, effective as of Jan 1, 2019, requires a lessee to recognize assets and liabilities arising from leases on its balance sheet. “It’s a completely different way of looking at leases,” says Kim Vinkler, finance director for Partnership Countries and former head of Group Accounting and Cost Controlling at ISS, a publicly listed workplace experience and facility management company based in Copenhagen with leases in 50 countries. “In the past, you expensed them. Now you need to capitalize them as an interest-bearing debt.”

The FASB granted private companies a reprieve until fiscal 2021 to align with the parallel US standard, ASC 842, so CFOs in the US are only now confronting the impacts. The new standards demand a much higher level of reporting than in the past, with details on every change to leases throughout the year. “You have to make sure that you have all of your leases registered, that you have them all in the system, you have the terms and conditions correct, and that you’ve got the accounting right,” says Vinkler, “and you have you do this monthly, as opposed to quarterly.”

Aside from the actual accounting, the lease standard caused sweeping changes in how leases are managed and controlled. As Vinkler explains, ISS has more than 23,000 leases spread across 50 countries—and they were basically hidden from corporate view.

“As leases were simply an expense, we originally had a very limited understanding of, first, where they were, and second, how effectively they were being managed,” he says. Lease data was stored in a variety of formats, he adds: “Excel spreadsheets, paper in a folder, or somewhere under the couch … we had no idea.” 

IFRS 16 demanded that the company apply much greater discipline to the lease management processes. “We have definitely learned along the way and are much wiser now,” says Vinkler.

Today, he notes, ISS units in each country take responsibility for compliance based on consistent policies across the company. “Once we addressed the nuances of lease accounting, set some parameters and developed a centralized depository for leases, our local finance departments were able to take over,” he says. “Now, Group only handles difficult or complicated leases, or if we find something in our technology that we don’t expect.”

Ultimately, the exercise of complying with IFRS 16 delivered unexpected, sometimes long-term benefits. Vinkler says ISS identified opportunities to renegotiate some contracts for better terms, and implemented strict companywide policies on entering into new property leases. 

Now that leases are figuring on the balance sheets as assets and liabilities, finance executives are also taking a much greater interest in leasing’s impact on day-to-day operations. “CFOs are rethinking how finance works with real estate,” explains Gavin Maze, head of Account Management & Strategic Bids, Occupier Solutions at MRI Software, a global provider of real estate software applications and hosted solutions.“CFOs are trying to eliminate siloed work, moving away from having a property team on one side of the business and accounting on the other side of the business.”

Where lease management technology can support a more collaborative agenda, he adds, is to allow stakeholders to work on the same platform at the same time. “For example, as the real estate teams are completing rent reviews and negotiations with landlords and tenants, the data is captured at source in real time, and then informs the accounting team for their IFRS 16 reports.”

Meanwhile, most companies have adopted radically new and improved control practices in lease accounting, covering a wide range of potential accounting risks around leases. “These typically will include controls around the identification of a lease contract, classification (either financial or operating), accurately abstracting data, around the ultimate recognition of lease payments and the amortization of the liability, and controls around presentation and disclosure in the financial statements,” explains Aditya Mehta, managing director at Riveron, a US-based business advisory firm.

The complexity seems suited to technological solutions. Lease management software mitigates the need to test and double-check complex calculations, Mehta says, but it’s still necessary to periodically test the technology itself to make sure it’s capturing and reporting what it needs to. Furthermore, “some leases will be too complicated for software and have to be handled manually,” he notes. “But the controls still apply.” 

While devising and implementing lease accounting controls has been a big project related to IFRS compliance, the biggest challenge for companies is keeping up with changes to their leases, Mehta concludes. “The biggest lift post-implementation has been changing business processes to successfully account for leases in the future,” he says. “How do I make sure that my population remains complete? How do I account for modifications, reassessments and terminations of my contracts?  How do I make sure that when a lease is impaired that I’m accounting for it correctly? How do I know if someone in the field has dropped a lease or added a new one?  Those are the operational challenges people are dealing with now, and instituting business processes to capture all of that continues to be the biggest challenge, post-implementation.”

While much of the heavy lifting has been done with respect to lease accounting under IFRS 16 and ASC 842 for US public companies, the verdict is still out on whether the intended benefits have been achieved. It provided some clarity in liability obligations for analysts and rating agencies, says Mehta, but for the individual investor, not so much.  “The analysts and ratings agencies typically estimate companies’ lease obligations by looking at their yearly expenses around that, and what IFRS 16 did is confirm whether their estimates were in the ballpark,” he says. “When it comes to private investors, they don’t typically look at those details, so I’m not sure it’s added a lot of insights for them.”   

However, according to Gavin Maze, where we do see real ROI of IFRS 16,and ASC 842 are in the efficiencies gained in managing leases. First, by being forced to centralize leases and to implement internal procedures and controls as part of the process, companies were able to right-size their lease holdings. “Advanced leasing technology naturally facilitated all that, discouraged incomplete information and provided a single source of truth across the entire organization,” Maze explains. “So, there are lots of analytics that can be run on their portfolio, finding opportunities for streamlining, revisiting lease models and real estate strategies to minimize costs.”

For CFOs who are in the first throes of accounting for leases on the balance sheets—whether that’s because they only now require an auditor’s opinion on their financials or are only now required to comply with the new standards—several key insights can be drawn from the lessons of their peers. Data is king, so data architecture is critical. In giving their standard processes new scrutiny, companies will find ways to refine processes for handling leases and gain insights into their lease needs. Critical, too, is to keep in mind that change can be smooth if managed well, with open communication, a collaborative mindset and a culture of adapatability.

Increased uncertainty and a new world of risk have left many chief financial officers scratching their heads as to how to evaluate the Covid-19 fallout. Is goodwill impaired? How have employee benefits been affected? What is the impact on revenue cycle reporting?

Companies are struggling to provide the answers, says Reinhard Dotzlaw, Global IFRS leader at KPMG. “The current environment is making the normal process of preparing financial statements very challenging. We’ve got increased uncertainty on the recovery outlook. We’ve got dramatic volatility in the stock markets and significant fluctuations in foreign exchange rates and commodity prices. This poses significant challenges for management for making estimates.”

While financial accounting might appear to be a highly structured, rules-based exercise, there’s a lot of room for judgement. “Estimates are pervasive throughout financial statements,” Dotzlaw says, “particularly when it comes to forecasting future cash flows and [assessing things such as] receivables, loans and nonfinancial assets like goodwill and intangibles.”

This means much more work for the finance department of companies reporting in this level of uncertainty, he adds. “Under IFRS, given the economic downturn, there’s the potential for a lot more impairment triggers, and companies will need to evaluate those triggers carefully to determine if they need to do recoverability tests. Companies will also need to revise, review and reassess the various assumptions underlying those tests, as well as model multiple scenarios and probability weight them to come up with a recoverability amount.”

According to Iarla Hughes, CFO of Manx Telecom, a UK-based telecommunications conglomerate, Covid creates unprecedented challenges when it comes to applying accounting standards that were designed for much less volatile times. “In terms of trying to estimate the economic impact of Covid-19, there is no playbook for us,” he says. “You couldn’t draw back in history to say this is how you deal with it.” Furthermore, he adds, “at the beginning, there wasn’t a huge amount of guidance in terms of what you do from a US GAAP or an IFRS perspective—how you validate the estimates required for your financial records in terms of provisions, potential revaluations of intangible assets, goodwill and bad-debt assessments.. In terms of the financial impact of Covid, all of those assessments were relatively new.”

As to how CFOs can provide a clearer picture of their companies’ overall economic position going forward, it’s easy for any organization to just present a set of numbers on a piece of paper in black and white, he adds, but what’s critical in these times is for shareholders to understand the context of how those numbers were achieved. “For me and for our organization, the most important thing is to make sure that there is a narrative, and it’s clearly explained how we’ve arrived at certain positions,” Hughes adds.

Dotzlaw says companies can expect their auditors and their audit committees to continue to go deep into the judgements made by their finance chiefs. “From an audit committee perspective,” he says, “what I’ve seen is that they’re focused on management’s response to this changing risk landscape and making sure they’re comfortable with the conclusions management has drawn.” At the same time, he adds, analysts and other financial statement users expect more clarity around key management judgements and estimates. “What we, as a profession, are encouraging companies to do is to go beyond the bare minimum in terms of the disclosure requirements,” says Dotzlaw. “So what we’re doing differently is, in those areas where there is a significant amount of judgement involved and a significant amount of estimation, we’re doing audit-level work to get to the bottom of things, and be comfortable with the judgements and assumptions that support for those estimates.”

More specifically, he says, auditors are more interested in how the company intends to survive in the coming months and what possible risks the future holds. “The key to this,” explains Dotzlaw, “is to explain how the strategy and the targets of the company may have been modified to address the effects of the pandemic, and the measures that they have taken to mitigate the impacts. As auditors, we’re focusing on the key assumptions that were made by management, where the uncertainty lies, and if there’s a range of reasonable possible outcomes, what are they?”

When it comes to comparing companies, things get even trickier, says Manx Telecom’s Hughes. “The biggest challenge I see, especially for the equity markets,” he says, “is ensuring that companies are taking a relatively consistent approach in what they’re doing; what provisions they’re putting in. I think it’s going to be very, very difficult to decipher what’s really happening from the outside looking in if you don’t have that consistency.”

Therefore, the main message to the accounting bodies when it comes to accounting during the pandemic, he says, is to make sure that they continue to strive toward consistency in how companies are allowed to apply the standards: “When it comes to accounting in the Covid-19 environment, there’s still a lot of room for interpretation.”

Over the past several weeks, the FASB and IASB have been working on ways to provide additional guidance and relief to preparers around certain standards that posed specific practical difficulties in the Covid environment. In early mid-March, the FASB ceased to deliberate on projects on their technical agenda. “Given the situation,” says Shayne Kuhanek, technical director at FASB, “obviously folks had other things to worry about. So we refocused all of our efforts on finishing a couple of projects that were very important to the capital markets and that were almost done, and then turned our attention to Covid-19.”

As he explains, the board is taking a three-pronged approach of deferring dates, providing practical interpretations of the guidance already released and helping develop reasonable applications of GAAP to account for Payment Protection Plan loans. “The Board understood that the economy had a shutdown, and businesses were really just trying to focus on survival at this point, so we deferred the effective dates for two standards [Revenue from Contracts with Customers (Topic 606) and Leases for Certain Entities (Topic 842)], which would shift the focus away from implementation to managing the company.”

“We also explained how to interpret certain standards,” he says. “As an example, in the case of hedging, we said, ‘Here’s when the pandemic happened in the cases of hedging, here’s what you can consider to be rare, here’s how you would account for your hedge under this situation in a pandemic,’ and laid it out in very plain English.” Furthermore, he adds, “working with our capital market partners and the AICPA, we developed guidance around the small-business loans provided by the government that companies didn’t necessarily have to pay back, which didn’t exist in our current GAAP literature.”