What do you do when costs go bad?

CFOs in the mining, resources & engineering sectors are facing cost pressures and pricing volatilities that are squeezing profits.

Key risks on the radars of many CFOs include:

Declining commodity prices
How to reduce wage, salary and contracting costs (that are often combined with diminishing productivity).
Increasing taxes at both state and federal level and uncertainty in relation to these.

Indeed, a report by Ernst & Young states:
“The risks continue to grow and we don’t expect a slowing in this trend. The bottom line is that if returns start to wane, then there is a greater imperative for organisations to tightly and effectively manage their risks to maintain an adequate risk/reward balance.” (Michael Elliot, Global Mining and Metals Leader, Ernst & Young).

Strong words indeed.

Adding to these risk factors are other concerns such as cost inflation, capital project execution, social and environmental complexities, price and currency volatility, capital management and access, as well as fraud and corruption. While production and revenue numbers are strong, the price peaks have passed and so there is a much greater imperative for mining and resources companies to remain nimble and sure-footed in how they manage these fast-changing risks.

A “new normal” of relatively low growth, depressed prices, cost pressures, increasing supply capacity by low-cost producers, and pronounced volatility is intensifying pressure. When the significant new regulatory burdens on the sector are included, the pressure on profits is incredibly intense … and it is only likely to increase.

To stay on top in this challenging environment, CFOs must work smarter to understand how changes to underlying assumptions might affect overall profitability.

Implications for CFOs and finance decision-makers

Cost control. The need for CFOs to manage and control their costs is always cited as an imperative regardless of where we are in the cycle. This is particularly relevant for resource companies who basically cannot control their revenue (since this is dependent on the commodity price as set by the markets). The only thing they can focus on to generate more profits is costs. With increasing commodity price fluctuation, companies need the ability to quickly and accurately analyse the impact of price changes, understand how this affects their business, and then determine where they need to make cost savings.
Improving efficiency. Productivity gains and improving efficiency have become key to surviving intensifying competition and market price pressures.

With the increasing complexity of doing business, businesses need access to the right information, within the right timeframe, with the right level of summarisation and detail more than ever to make decisions that are based on facts and data, rather than gut-feel and estimations.

However, this needs to be an ongoing process, not just a once-off, knee-jerk reaction to particular market events. In addition, everyone in the company needs to be involved in making better decisions about costs and realising the implications of their actions on the bottom line.

The best-performing companies achieve this through the effective use of enterprise-wide, analytical applications.

Yes, complexity presents challenges for all CFOs, however, these challenges can be crippling for the whole organisation; particularly if the challenges are combatted with inadequate IT systems and poor finance IT capability, not to mention the increasing demands from the board or executive management for information.

How to Stay on Top

With the appropriate skillsets and analytical systems, business users can have the tools they need to investigate issues, track down the causes of problems, and make decisions about how to improve the company.

When these systems also allow the analysis to be distributed to the right managers and staff within the organisation, and presented in a way that is useful so that each person gets access to what they need in a form they can make sense of, the power that comes from the alignment around the company’s objectives is amazing!

Better information means that CFOs can make better and informed decisions. By implementing systems that utilise all the relevant, timely, accurate information that the business has, CFOs and their organisations will be able to plan better, meet regulations, improve decision-making and ultimately, maximise profitability.

To know you’re making decisions with confidence, call Access Analytic on +61 8 6210 8500 or +61 412 581 486, or leave your details below.