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7 Ways Your Company Can Be More Like Amazon

As we transition into Quarter 3 of 2017, companies are already planning for what 2018 is going to look like. Over the past year, we have seen a lot of change in the business landscape. Amazon acquired Whole Foods and dramatically sliced prices. Apple released not just one, but two iPhones in the past month. President Trump took office at the beginning of the year. Great Britain voted to Brexit from the European Union. Alfred Angelo, a bridal store giant, filed for bankruptcy. There has been innovation, disruption, uncertainty, destruction, and so much more in the business landscape. One thing that we do know for 2018 is that to survive, you must be innovative. Fast Company has already named Amazon to be the most innovative company in 2017, so let’s learn how your company can be more like Amazon.

7 Ways Your Company Can Be More Like Amazon

Amazon has impacted how businesses must compete in today’s world. Instead of just competing in one market, Amazon now competes against retailers, grocery stores, logistics, technology providers (Apple, Google), and many more industries and markets. After researching how they have grown, especially over the past 5 years, we have created a list of 7 ways your company can be more like Amazon.

1. Experiment

NASA has been around for 59 years. In that time, they went through ample amounts of experiments to get people into space… They tested every aspect of the shuttle, the gear, the computers, the communication, etc. While there were thousands of failures, they were the first to walk on the moon. Likewise, Amazon has used the same theory to experiment in many different fields. Ever heard of Amazon Webstore, Amazon Destinations, WebPay, Askville, and Amazon Auction? These are just a few examples of products that Amazon either shut down completely or morphed them into a product more successful.

Obviously, you may not have the same cash flow as Amazon does. But that doesn’t mean you do not have the capabilities to conduct an experiment. The most important part of experimenting plenty is to change your perspective to innovate. Start by testing variations of your product through A/B testing. Then test everything! Your product, your processes, your departments, your services, your customers, your placement. Everything. Continue to test until you are pleased with the outcome, then test some more. As technology advances and society changes, things will change more rapidly than ever before. These experiments should never stop.

Amazon’s Advice About Experimenting

In Amazon’s 2015 Letter to the Shareholders, Jeff Bezos discuses this concept on experimenting frequently.

Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten.

We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

If you are looking to start experimenting, you need to know what external factors could impact the success of your experiment. Download our External Analysis whitepaper to learn more.

2. Expect to Fail

When you begin to experiment, you can expect to fail more than you succeed. Once your company has created a culture of encouraging failure, innovation will begin to happen. Thomas Edison, one of America’s greatest inventors and businessmen, once said, “I have not failed. I’ve just found 10,000 ways that won’t work.” Your company can be like Amazon if the leadership encourages each employee to fail. Although that sounds counterintuitive, this aspect has resulted in Amazon’s massive growth.

As the financial leader of your company, structure the company’s ability to fail. Because you need to protect the financial future, put in some guidelines for each experiment. Check that they are going to improve something that will move the needle. You don’t want your employees to be experimenting on senseless things – wasting both time and resources.

3. Innovate Everything

If your company wants to be more like Amazon, you should innovate everything in your company. Ask even the lowest employee why you do things a certain way. If your team responds, “that’s just the way we’ve always done it,” it is time to innovate. There must be a reason for everything you do, and if there isn’t, then you either need to cut that process out or innovate it.

Check out Amazon’s product listing that can be found at the bottom of their website. Notice how they cater to various customers, needs, and desires. From cloud storage to groceries to comics to videos and movies to publishing, every customer can find at least one product that they can use. When we say to innovate everything, we mean everything. Amazon is continually updating, improving and innovating their systems and products to better serve… Their customers!

your company can be more like amazon

Now, providing various products does not necessarily work for every company – and it shouldn’t. But Amazon has made the web their playground and has innovated everything related to the web. Find your playground and start innovating.

4. Be Customer Centric

One thing that has set apart Amazon from the rest is their customer centric, customer obsessed culture. In a Forbes interview with John Rossman, a previous executive at Amazon, he said that “there are 14 leadership principles at Amazon. They weren’t written down, they weren’t codified when I was there, but you saw them being used every day. The first one is ‘Obsess over the customer,’ and the 14th is ‘Deliver results,’ and there’s 12 in between those two.” To get results, you must start with the customer. A business can have all the best processes, accounting, logistics, etc., but if your company does not have a customer, it doesn’t exist.

Refocus every employee on the customer. What do they want? How quickly can you get what they want to them? What does your customer need? How can we better serve our customer? What needs do they not know aren’t being met? Every decision made in the company should be directed towards the customer. You company can be more like Amazon if you are customer centric. Jeff Bezos once said, “Focusing on the customer makes a company more resilient.”

5. Get Out Of Your Comfort Zone

Change for some can be uncomfortable. Even those that thrive on that adrenaline pumping adventure, some change can feel like walking on a tight rope across a canyon. Get out of your comfort zone when you are innovating. Just because you are in the financial leg of your company doesn’t mean you need to stay there all the time. For a company to be effective, every employee needs to be involved in every aspect of your company. For example, you should be concerned how marketing is spending their budget. Marketing, likewise, should be wary of how their decisions impact the bottom line.

6. Base Strategy on Reliable Facts

Your company can be more like Amazon if you base your strategy on reliable facts. While this seems like a simple task, many companies base their strategy on what they want to outcome to be… Not on fact.  At re:Invent 2012, Jeff Bezos elaborated on why you need to base strategy on reliable facts.

“I very frequently get the question: ‘what’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘what’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two – because you can build a business strategy around the things that are stable in time….in our retail business, we know that customers want low prices and I know that’s going to be true 10 years from now. They want fast delivery, they want vast selection.

It’s impossible to imagine a future 10 years from now where a company comes up and says, ‘Jeff I love Amazon, I just wish the prices were a little higher [or] I love Amazon, I just wish you’d deliver a little more slowly.’ Impossible [to imagine that future]… When you have something that you know is true, even over the long-term, you can afford to put a lot of energy into it.

For your company to be successful, you need to start identifying what is going to be true ten years from now. They are going to want a better product or service. Your customers want to get that for a lower price. And they want value.  Once you write down the facts, you can strategize your company’s next move.

7. Remove Any Risks

Obviously, we are not going to recommend that you innovate or experiment without having thought it through. In fact, you need to prepare before you begin the experiment. Remove any known risks associated with that experiment and be aware of any potential risks that could come about. Create an External Analysis to overcome any obstacles that come your way and be prepared to react to those external factors. Although you may not be able to prevent those obstacles from occurring, you can prepare how you are going to react to them. Download our free External Analysis whitepaper to gear up your business for change and your company can be more like Amazon.

your company can be more like amazon

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It’s All “Japanese” To Me!

We decided to write something a little different this week. The Strategic CFO partners with the University of Houston’s Wolff Center for Entrepreneurship by assisting with their education on financial leadership. In exchange, we hire interns from the program every year. This past November, the program was involved with a Japanese business networking initiative called “The Kakehashi Project,” where they experienced Japanese tradition, attended lectures about the current economic flaws, and familiarized themselves with Japanese business culture. One of our interns, Lauren Remo, decided to share with us her experience and opinions about the current economic conditions.

Diversification and globalization are the keys to the future – Fujio Matarai.

A Modern Romance

japanese business culture

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My daughter recommended (and I now recommend to you) that I read a book called Modern Romance by Aziz Ansari and Eric Klinenberg. Ansari and Klinenberg comment on the international cultures of dating in Paris (where casual romance is common), Buenos Aires (where romance is aggressive), and Tokyo (where romance is minimal). They also note that 65.8 percent of Japanese women 16-19 years old were not interested in romantic relations, and 39.2 percent of Japanese women 20-24 years old also lacked interest.

When Lauren visited Japan, she also witnessed this isolation and distance between people. Lauren says,

“Due to the lack of child-bearing, the government started this initiative to find successors and business relationships outside of the country. And because there are a lot of mom-and-pop shops, there are hardly any children to take over.”

Japanese Business Culture

Tradition plays a large part in Japanese business culture. The Japanese government made note of it as soon as the economy started reflecting this change in population. Not only are there fewer people to take over these family businesses, but this phenomenon also affects larger industries. Lower population means fewer people to work, which results in financial changes that directly affect the bottom line. Sound familiar? Well, they knew their economics, and adapted to the change as quickly as possible.

What are they doing to change? One, they are tackling their budgets. Two, they are finding new opportunities and business ideas in which to invest their money. And three, they are opening their country to new international networking opportunities, such as what Lauren experienced a few weeks ago.

Don’t wait for a crisis to occur! Download the free Know Your Economics guide to monitor what’s happening in your business. 

Talking Toilets

japanese business culture

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“There were innovative Japanese technologies that we wouldn’t even think of in the United States!”

Another observation that Lauren made was the Japanese innovation she came across during her stay in Japan. One technology was a carbon-fiber cord that held a building in place. The walls were supported by these cords, rather than our typical wood support beams. This technology was created to protect the building from earthquakes, which Japan often is plagued by. Although this and many other technologies serve a useful purpose, Lauren found that some investments were focused on fixing the wrong problems.

The technologies in Japan ranged from toilets that make noises for conservative use, to dome-like movie screens, to vending machines that heat canned coffee. From our perspective, to produce these items on such a large scale seems to be minimally beneficial. Sure, they are interesting inventions, but do they solve the industry’s needs? Do they prevent any potential business crises?

It almost sounds like they are doing things backwards: problem-solving for the sake of innovating, not innovating for the sake of problem-solving. In business, it’s much easier to do the latter. Once you’ve identified the issues within a business or industry, that’s where the real opportunity lies.

High Risk, High Reward

japanese business culture

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I began to wonder if Japan’s conservative nature led to the slow progress to fix their national debt.” 

In 2013, the national debt of Japan exceeded over one-quadrillion yen, an equivalent to 10.5 trillion U.S. dollars. Since then, the government debt to GDP ratio grew from 220 percent to about 230 percent.

Japanese business culture reflects their conservative nature. Decisions are based on many meetings, approvals, and caution. This contrasts greatly from America’s “high risk, high reward” mentality. The main purpose of their process is to minimize error.

For all we know, Japan might be correct to think this way. More calculations, less error, less money to be spent to fix the problem. However, problems can’t wait for months, maybe years of approval. If a company is increasingly losing money each month, what will they do? Wait for the customers to get back to them next week? If you know your economics and KPIs well enough, you won’t have to dwell on calculating decisions.  Understanding how your business makes money can make decision-making much more efficient.


By no means do we believe that Japanese business culture is any better or worse than ours. Everyone has their own style of doing business, even within their own nations. Based on our observations, the Japanese government and companies are extending their culture and businesses internationally, initiatives that will hopefully improve their current situation. We also found that their culture is one of respect and approval from many different hierarchies. Finally, their priorities differ from ours as well, such as technology and work ethic. We can learn from Japan because they take note of their issues and work to fix it – one of the perks of knowing one’s economics.

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Risk-Taking | The Emergence of the New CFO

Generally speaking, financial-minded people are taught not to take risks. CEOs and sales-minded people are taught to take risks. This stark difference between the two roles (CFO and CEO) can cause friction if not addressed.

Risk can be expected within any organization, regardless of how much due diligence you do. Someone once described risk and uncertainty this way…

risk-takingYou are a football player and have the ball in your hands. You throw the ball to another player who is wide open. You’ve evaluated and concluded that this is the perfect opportunity to take a risk (letting the ball go) because it’s an open field with a clear path. But unexpectedly, a player from the opposing team comes between you and your teammate. Risk-taking is full of inevitable surprises.

With risk becoming a bigger conversation starter, there is a new role set emerging for CFOs and financial leaders alike.


Risk-taking and being a realist are not really compatible. Financial-minded people typically see themselves as realists and, consequently, tend to avoid risk.  The challenge is to combine the view through both of these lenses in order to decrease uncertainty from risk and increase opportunity.


A realist can be defined as someone who identifies things for what they really are. Most CPAs, financial analysts, financial leaders, and CFOs can easily relate to the “realist” role.  Realists tend to predict the future based upon past results.

Risk equates to uncertainty. Risk means making assumptions that may not be based upon reality, but on what could be.  Realists prefer to deal with the certainty of reality rather than the risk involved with dreaming.

Types of Risk Takers

Like it or not, risk is unavoidable.  Everything we do involves risk; whether you’re crossing a road or investing in a risky stock. Since you’re taking risks whether you know it or not, let’s investigate the type of risk taker you are.


Have you ever met someone who tries to avoid all risk? This person likes to identify all outcomes and won’t make a decision unless it results in absolute certainty. They take the “cautious approach” too seriously.

The avoider is someone who truly believes that taking any action is the biggest risk. What they fail to see is that refusing to make a decision is a decision itself.  By not taking any action, they expose themselves to the whims of fate.

Think back to the emergence of the Internet. There were countless companies that assumed that going on the Internet was a risk because it was a new fad that would eventually go away.   Their decision not to take a risk definitely put them at the mercy of early adopters.  Avoiding the elephant in the room will not make it go away.


A mitigator typically does not take any risk unless he or she has compiled and vetted a significant amount of research to rule out any uncertainty. This type of risk-taker is only one step removed from the avoider, and is subject to the same consequences from their inaction.  But for those who do not have the experience or wherewithal to make a snap decision, this is may be their comfort zone.


Like any typical manager, a risk manager simply knows what’s going on.  What often separates the mitigator from the manager is experience.  Since they’ve had experience that the mitigator might not have, a risk manager is better equipped to make a quick judgement call when evaluating risk. They are a lot more comfortable in their decision-making and risk-taking roles.


risk-takingSome people simply enjoy jumping out of airplanes, going all in at the poker table, or quitting their nine-to-five to start a company.  There’s a certain aura around entrepreneurs that just screams “RISK!” To financial leaders, risk means bad.

An embracer typically seeks high-risk for a high-return. They don’t do a whole lot of research before they act. The embracer can be compared to an adrenaline junkie, or someone who does crazy, dangerous things for the adrenaline rush.

The risk-embracer is at the extreme end of risk-taking.

helicopter-983979_960_720What type of risk-taker should I be?

As with everything, it’s important to find a balance between the two extremes. Do avoid dangerous risks. Do recognize that there is going to be uncertainty in your actions. Do embrace calculated risk-taking.

As a financial leader, your job is not to avoid all risk, but to help your CEO calculate risk, have their blind side and determine the best course of action. In short, it’s to be their wingman.  Learn more about how to guide your CEO as a trusted advisor by downloading your free guide on How to be a Wingman.

Enable Your CEO

Enabling your CEO is simply the most important part of your job as a wingmanCEOs generally like to take risks. CFOs generally avoid risks (which begs the question, can a CFO be a CEO?).  Your job is to help your CEO calculate the risks.  And I know you’re good at calculating…

Embracing risk isn’t always easy or comfortable, but creating a controlled environment will allow your CEO the creative freedom they need while still giving you a measure of certainty.

Risk Management and Control

So how do you create this “controlled environment”?  Through risk management and risk control.

Business Insider defined risk management as a practice of “creating economic value by the qualitative and quantitative identification and measurement of risk sources and the formulation of plans to address and manage these risks.” Risk-taking is an expected function that a financial leader has to manage.

They defined risk control as a “support function for financial risk takers and risk managers… [involving] the measuring and monitoring of risks versus pre-determined limits…”

In order to bridge the gap between the realist (You) and the risk-taker (your CEO), you need to re-examine your role.

The Emergence of a New CFO

brene-cc-880x1320Over the course of the past 25 years, I’ve spoken with hundreds, if not thousands, of CFOs, Controllers, and financial-minded people (financial analysts, accountants, bankers, CPAs, etc.). When I tell them that I work with entrepreneurial companies and that I’m an entrepreneur myself, they begin to get nervous. Why?

Dr. Brené Brown, research professor at the University of Houston, studies vulnerability, courage, worthiness, and shame within people, relationships, and organizations. She concisely puts it, “vulnerability is basically uncertainty, risk, and emotional exposure.” Taking risk in financial decisions or business decisions or even personal decisions is exposing yourself to uncertainty, more risk, and emotional exposure.

Today’s CFO cannot just be the person who always plays it safe. To stay relevant it’s important to become more than an number-crunching realist.

Manage and control the financial risk of your company by being a wingman to your CEO. If you’re interested in becoming the trusted advisor your CEO needs, download your free How to be a Wingman guide here


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Why do most sales projections fail?

One common perception is if most sales projections fail, why do it? As you probably know, sales forecasts are used to predict a certain amount of revenue over a given period of time. Whether this is based on a gut feeling or on historical data, the worst thing you can do is over-promise and/or under-deliver.

Remember: “What gets measured gets managed.”

Why Do Most Sales Projections Fail?

Projecting revenue is essential. Two weeks ago in our blog, How does a CFO add value?, I mentioned the three legged stool analogy. If your sales fall short of projections, you’re going to run into some issues with respect to cash flow, inventory, or a lack of resources. Whether you are releasing a new product or are continuing to project growth in your sales, it’s imperative that your sales projections are accurate.

Sales Manager vs. CFO

Sales managers and CFOs normally have different perspectives, mainly because their roles contrast greatly. The sales manager is often more concerned about his or her team and maintaining customer relationships. They’re also generally fairly optimistic (sometimes overly so) in their projections.

The CFO looks at the bigger picture. They move 3-5 months faster than sales people or accountants, because they’re forward-thinking and continuously making plans on how to improve the company as a whole. This often leads to conflicting predictions with the sales force.

For example, Bill (the CEO of ABC Company) asks Steve (the CFO of ABC Company) what he projects sales to be in the next quarter. Based on previous performance, Steve predicts about $3.8 million, because last quarter they generated $3.7 million. That’s about 2% higher than the actual revenue generated, which is reasonable considering their historical record.

But then Steve the CFO asks Ben, the Sales Manager, what he thinks. Ben’s top salesperson, Lillian, performed over 40% better this quarter compared to the previous quarter, and he expects her to positively influence the sales team with her success over the next quarter. Ben optimistically projects $4 million, which is almost 8% higher than last quarter’s revenue, and 6% more than Steve’s projection.

When you increase revenue by just 2%, the bottom line also increases by a substantial amount. When comparing the bottom lines of a 2% increase in revenue versus an 8% increase in revenue, which would you think is more realistic? And which number would you accept as a CFO?

Let’s look at a more recent example.

Case Study: The Apple Watch Dilemma

Let’s refer to the Apple Watch situation last year… Apple optimistically projected to sell 41 million watches. Shortly after releasing the product, analysts altered that projection down to 31 million. Pretty soon, Apple decided to be a little more realistic in their projection. Thus, they reduced it yet another 10 million. Why do you think that is?

1. Their “gut” feeling was poisonous.

It’s natural for a company to be excited about the release of a new product.  They were absolutely ecstatic that this product was finally going to launch. This positivity created a bias for future projections because they were the only ones formulating this prediction, not an outside group of differing opinions.

2. The idea that a new product equals new data.

“We don’t need to check our historical figures because this product never existed in our company before, right?” Wrong. True, this is a new product. However, there are other ways of comparing and predicting your sales.

For example, if I was the CFO of Apple, and Apple Watch decided to launch a new app, I would look at similar, previous apps that cost the same for marketing, production, and other direct costs associated with the app. It’s common sense – how much can you usually afford to produce?

projections fail

Apple quickly saw that their projections were wrong and just as quickly adapted. But companies that are worth $10-100 million can’t necessarily afford to be 20 million units off of their projections. A projection that wrong could have easily put a company without the resources of Apple into the grave.

How to Prevent Your Sales Projections from Failing

projections failNate Silver, author of  The Signal and The Noise (pg. 19-20), generally spoke to the failure of projections…

“The most calamitous failures of prediction usually have a lot in common. We focus on those signals that tell a story about the world as we would like it to be, not how it really is. [Then] we ignore the risks that are hardest to measure, even when they pose the greatest threats to our well-being. [Thus] we make approximations and assumptions about the world that are much cruder than we realize. We abhor uncertainty, even when it is an irreducible part of the problem we are trying to solve. If we want to get at the heart of the financial crisis, [then] we should begin by identifying the greatest predictive failure of all, a prediction that committed all these mistakes.”

Although Silver is analyzing financial crises, the same analysis applies when we look at sales projections of a mid-size business. The most important factors you have to calculate are risk and uncertainty. If you neglect to consider risk and uncertainty, you are most likely over-shooting your projections.

Risk & Uncertainty

People often overlook risk and uncertainty when projecting revenue. However, life happens every single day, leaving you with failed projections.

Most projections fail due to inability to calculate these two factors: risk and uncertainty. So where do you start in assessing risk and uncertainty?

For risk:

  1. Identify any risks that could occur (events, etc.)
  2. Calculate the probability of each risky event occurring
  3. Create alternatives and figure the cost/benefit analysis of each response
  4. Choose a response that would best allow you to reach your sales projections
  5.  Reassess after your company responds
  6. Continue to monitor those risky events

For uncertainty, identify those events or situations that you are not sure of. Acknowledging your ignorance is key in this situation. It allows you to put focus on places where you are not sure. Uncertainty is not the same thing as inaction as many business or financial leaders like to define it. That’s an important distinction that you must continue to remind yourself of when analyzing what risks and uncertainties your company is facing.

By completing a SWOT analysis, you’ll be better equipped to understand where risk and uncertainty is found within your company.


If the problem is either over-shooting or under-delivering sales in their projections, then the answer is relatively simple but is often overlooked. The Goldilocks Sales Method will help you project revenue that is not only more accurate, but will help you utilize your projections.

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Projecting Revenue

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More Questions Your Banker Wants Answered…

monopoly bankerIn a recent post, I talked about a conversation I had with our banker and the three questions she’d most like answers to.  In case you missed it, her questions were…

  1. How are you feeling about your business and the local economy?
  2. What is the outlook for the rest of the year?
  3. What are you doing about it?

More Questions Your Banker Wants Answered…

In response to the article, several of you reached out with questions of your own to add to the list.  Not surprisingly, the questions largely focused on what is going on in the Houston economy right now as a result of the decline in oil prices. Here were your thoughts:

1.  How is the current economic situation impacting your specific industry?

If you’re doing business in Houston you’ve likely felt (or will soon feel) the effects of the drop in oil prices.  Even if you’re not in the energy sector, your banker wants to know that you’ve taken a look at how the economic situation may affect you.

2.  What are the recent trends in your industry that impact your operations?

What other trends are affecting your industry?  Government regulation, increased competition, technology, substitution, etc.?  Your banker wants to know what your plan is to deal with these trends whether it entails mitigating risks or exploiting a competitive advantage.

3.  What are your 5- and 10-year goals and what are you doing today to achieve those goals?

It’s important to your banker to know where you’re headed in the long-term.  It’s easy to get wrapped up in the day-to-day operation of a business, but your banker wants to know that everyday decisions are made with the bigger picture in mind and not just reactions to the situation on the ground.

In the original article, I talked about the 5Cs of credit and how Character was the most important “C”.  Based upon your comments, I’d have to say that Conditions may be of greater importance (or at least more immediate) to you in the current economic climate.

Thanks so much for your feedback!  I’d love to hear what other questions you have.

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Translation Exposure

See Also:
Transaction Exposure
Currency Swap
Exchange Traded Funds
Hedge Funds
Fixed Income Securities

Translation Exposure

Translation exposure is a type of foreign exchange risk faced by multinational corporations that have subsidiaries operating in another country. It is the risk that foreign exchange rate fluctuations will adversely affect the translation of the subsidiary’s assets and liabilities – denominated in foreign currency – into the home currency of the parent company when consolidating financial statements. You can also call translation exposure either accounting exposure or translation risk.

Translation exposure can affect any company that has assets or liabilities that are denominated in a foreign currency or any company that operates in a foreign marketplace that uses a currency other than the parent company’s home currency. Simply put, the more assets or liabilities the company has that are denominated in a foreign currency, the greater the translation risk.

(NOTE: Want to take your financial leadership to the next level? Download the 7 Habits of Highly Effective CFO’s. It walks you through steps to accelerate your career in becoming a leader in your company. Get it here!)

Ultimately, for financial reporting, the parent company will report its assets and liabilities in its home currency. So, when the parent company is preparing its financial statements, it must include the assets and liabilities it has in other currencies. When valuing the foreign assets and liabilities for the purpose of financial reporting, translate all of the values into the home currency. Therefore, foreign exchange rate fluctuations actually change the value of the parent company’s assets and liabilities. This is essentially the definition of accounting exposure.

Accounting Exposure Example

Here is a simplified example of accounting exposure. For example, assume the domestic division of a multinational company incurs a net operating loss of $3,000. But at the same time, a foreign subsidiary of the company made of profit of 3,000 units of foreign currency. At the time, the exchange rate between the dollar and the foreign currency is 1 to 1. So the foreign subsidiary’s profit exactly cancels out the domestic division’s loss.

Before the parent company consolidates its financial reports, the exchange rate between the dollar and the foreign currency changes. Now 1 unit of foreign currency is only worth $.50. Suddenly, the profit of the foreign subsidiary is only worth $1,500, and it no longer cancels out the domestic division’s loss. Now, the company as a whole must report a loss. This is a simplified example of translation exposure.

Hedging Translation Risk

A company with foreign operations can protect against translation exposure by hedging. Fortunately, the company can protect against the translation risk by purchasing foreign currency, by using currency swaps, by using currency futures, or by using a combination of these hedging techniques. Use any one of these techniques to fix the value of the foreign subsidiary’s assets and liabilities to protect against potential exchange rate fluctuations.

If you want to learn other ways to add value to your company, then download the free 7 Habits of Highly Effective CFOs. Find out how you can become a more valuable financial leader.

Translation Exposure

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Transfer Risk

See Also:
Electronic Funds Transfer (EFT)
Transfer Pricing
Transaction Exposure
Hedging Risk
Accounting Controls

Transfer Risk Definition

Transfer risk is defined as the risk associated with currency conversion from the money of one nation to another. It is a large factor in international business and currency trading alike. Transfer risk may be associated with changes in currency value, currency exchange restrictions, the value of a given set of goods, and more. Many businesses keep a reserve of cash, often referred to as a transfer risk reserve, to deal with these issues.

Transfer Risk Explanation

Transfer risk, explained also as the risk of transferring money across boarders, has many implications. For currency traders, this risk mainly effects the value of a trade they have or were going to make. This could cause the trader to loose a substantial percentage on any unit: marks, pesos or even dollars.

For companies doing commerce across boarders transfer risk is more comprehensive. This risk can effect the value of funds, made in another country, upon conversion. More than this, transfer risk can effect other parts of the deal. It can also be cause by surprising restrictions on the amount of money pulled out of a country, the value of the goods which a company imports or exports, and more. When a company does business internationally it is subject to the regulations of that government. So, the company can quickly experience changes in banking regulations, commerce regulations, port laws and much more. In this way, transfer risk can become a substantial variable which could lead to failure of the business as a whole.


Don imports products to be sold in the eastern European nation. Working mainly with music from the USA, Don has a lot of work to do before one deal is completed and the product is sold. Though Don has experience in transfer risk management he is not infallible.

Recently, Don fears he may be a victim of transfer risk. The federal bank of one of these nations is considering a few new regulations: these restrictions could ruin his deal by requiring him to keep his funds in the nations bank for 6 months before removing them to his home in the USA. Additionally, the international markets are recoiling from this change and the currency of the nation Don does commerce in is expected to decrease in value as compared to the dollar. From a former multi-million dollar deal Don could come out with a loss.

Don is at ease when he sees that the nation decided not to change regulations. This has been a wakeup call for him; his business could be closed in an instant. Don resolves to continue regular research to keep abreast with trends in the nations he works within.

If you want to mitigate your risk, then download your free External Analysis whitepaper that guides you through overcoming obstacles and preparing how your company is going to react to external factors.

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