Adjusting to Duties Alterations: Strategies to Safeguard Profit Margin

Adjusting to Duties Alterations: Strategies to Safeguard Profit Margin

Staying Afloat in a Tumultuous Tariff Sea:A Guide on Cash Flow, Supply Chain, and Currency Risk Management for Uncertain Times

This post comes from Lou Longo, a partner and the head of the international consulting practice at Plante Moran. Opinions expressed are the author's own.

In the wake of 40 years without navigating a tariff-oriented economy, many businesses in the United States are left ill-equipped to face the new challenges posed by the current tariff landscape. With concerns mounting over the potential impact on margins, it's high time for businesses to bolster three essential skill sets in their toolbox: cash flow analysis, supply chain expertise, and currency risk management. Let's dive in.

Cashing in on Knowledge

Cash flow is crucial in all economic climates, but escalating tariffs amplify its importance. Why? Well, newly imposed tariffs can serve as hidden production costs for businesses importing supplies into the U.S. Take, for instance, duty drawbacks — they're not included in executive orders, meaning organizations can't recoup tariffs on imported parts used in products manufactured within the U.S. and sold outside the U.S. Moreover, tariffs could increase the possibility of businesses finding themselves in a liquidity crunch, requiring access to funds beyond their immediate cash flow.

To plug these gaps, here are a couple of strategies to strengthen your cash flow:

1. Explore Non-traditional Opportunities:Look beyond recurring business to identify possible sources of cash, their liquidity options, and their associated costs. Document these in a user-friendly dashboard, ensuring the C-suite has a clear understanding of their available options and their relative advantages and disadvantages. This might include options that seem less desirable at first glance, such as getting a loan, issuing additional shares, or taking on mezzanine debt.

2. Renegotiate Vendor Contracts:Vendors may not be eager to swallow increased tariff-related costs. Nevertheless, you might be able to gain some extra breathing room by extending payment terms. However, businesses should carefully consider the implications of such an approach, as slowing down payments can impact relationships with vendors and create potential issues further down the line.

Supply Chain Savvy

The vast majority of U.S.-made goods are part of a global supply chain, whether we're talking about raw materials, components, or finished goods. But many companies only have a vague idea of their immediate subcomponents' origin. To get a more accurate sense of tariffs' overall impact on their operations, businesses must delve deeper into their supply chain, tracing the origin of materials used in their products.

With the help of technology, supply chain optimization reviews can help companies uncover hidden tariff exposure. Ideally, companies should examine multiple tiers of their supply chain. For instance, in a complex industry like automotive, companies should go three layers deep to minimize blind spots in their supply chain.

And don't be shy about asking your suppliers about their own supply chain — understanding where sub-tier components are sourced can reveal potential tariff-related risks.

Mastering Currency Crashes

Currency risk is a critical factor in tariff discussions, especially given the U.S. dollar's historical stability. However, as the world becomes more interconnected, the dollar will likely face more frequent adjustments. To succeed in this environment, businesses must gain a better understanding of their exposure to foreign currency exchange rates.

Companies that originate products from outside the U.S. will typically have some currency exposure. To protect themselves, businesses should create a dashboard that tracks the major currencies to which their business is exposed, such as dollar-to-euro or dollar-to-peso. Once they understand their risk, they can take several steps to mitigate exposure:

1. Negotiate cost adjustments for contracts, particularly within predefined currency bands.
2. Consider getting expert advice from boutique currency groups, community banks, and other financial institutions to evaluate your currency risk management strategies.
3. Establish forward contracts to lock in favorable exchange rates for a set period.
4. Request open credit, if necessary, to minimize the risk of incremental transaction costs associated with posting guarantees.

Turning Turmoil into Triumph

In the face of constantly evolving tariffs and trade policies, it's tempting to be reactive. However, businesses should choose a different path: instead of just reacting to the news, view the current environment as an opportunity to build long-term financial resiliency.

Stay informed about your industry's position on tariffs by reaching out to trade associations and other industry groups. In the meantime, follow best practices to strengthen your knowledge of cash flow, supply chain, and currency risks to better navigate tariffs, protect margins, and foster a mindset of continuous operational improvement. This will help your business make informed decisions, adapt to change, and thrive in the long run.

Additional Insights from the Enrichment Data:

• Proactive risk management is essential to navigate an ever-shifting tariff landscape.
• Strategy should focus on enhancing operational flexibility and scenario planning.
• Key actions include rebuilding cash flow forecasts, renegotiating vendor contracts, pursuing supply chain diversification, implementing real-time cash forecasting, and using currency hedging.

1. In uncertain times, businesses must bolster their cash flow analysis, supply chain expertise, and currency risk management to navigate the tariff landscape effectively.
2. The author suggests businesses explore non-traditional opportunities to strengthen their cash flow, including taking on loans, issuing additional shares, or using mezzanine debt.
3. Renegotiating vendor contracts can provide businesses with extra breathing room, but it's crucial to consider potential implications on vendor relations and future issues.
4. To better understand tariffs' overall impact on operations, companies should delve deeper into their supply chain, tracing the origin of materials used in their products.
5. Technology can help companies uncover hidden tariff exposure through supply chain optimization reviews, with a recommended depth of analysis of three layers in complex industries.
6. Understanding currency exposure is crucial in tariff discussions, and businesses should create a dashboard to track major currencies they're exposed to, such as dollar-to-euro or dollar-to-peso.
7. To mitigate currency risk, companies can negotiate cost adjustments, seek expert advice, establish forward contracts, or request open credit if necessary.
8. Proactive risk management is more beneficial than being reactive, as it focuses on enhancing operational flexibility and scenario planning.
9. Key actions can include rebuilding cash flow forecasts, diversifying the supply chain, implementing real-time cash forecasting, and using currency hedging.
10. Businesses should remain informed about their industry's position on tariffs by reaching out to trade associations and other industry groups.
11. By strengthening knowledge of cash flow, supply chain, and currency risks, businesses can make informed decisions, adapt to change, and maintain a mindset of continuous operational improvement.
12. Leverage, education-and-self-development, personal-finance, career-development, growth, wealth-management, business, and finance are essential components of resilient wealth management in the face of tumultuous tariff seas.

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