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Making the circular economy business case to your CFO | |
admin | |
2019-11-14 | |
发布年 | 2019 |
语种 | 英语 |
国家 | 国际 |
领域 | 资源环境 |
正文(英文) |
Published: Thu, Nov 14, 2019
Type: Insight
The concept of the circular economy resonates with executives from around the world because it presents a remarkable economic opportunity. The fact that it simultaneously delivers environmental benefits is just the icing on the cake. What is the circular economy? It’s a business strategy that harmonizes financial and environmental priorities. Although not always synonymous with sustainability, the circular economy aligns incentives for “doing well” (economically) and “doing good” (sustainably) by requiring companies to take a life-cycle perspective of their products and services. The business case for circularity The USD $4.5 trillion opportunity that the circular economy presents is a number that’s often referenced. However, what does that mean for one company? How do you begin to quantify that? In 2017, the World Business Council for Sustainable Development (WBCSD) published the 8 Business Cases for the Circular Economy. They cite three types of benefits that a company may experience from adopting circularity in their strategy: accelerating growth, enhancing competitiveness and mitigating risk.
So then, how do you put those general, qualitative benefits into convincing, quantitative justifications? Building the business case for circularity within your company should be done with the CFO in mind. Using cash flows to make the case for circularity in your company In making the business case for circularity, forget the mass flows, speak cash flows! When speaking to a CFO, remember one thing: “cash is king”. Whether discussing working capital, operating cash flows, current ratios or quick ratios, cash-on-hand and the rate at which it is expected to come into the company are at the top of any CFO’s priority list. As it’s the financial opportunity that puts the circular economy on the radar of company executives, making the case to a CFO for circularity should be a cash flow discussion. A company’s cash flows are determined by its operating, investing and financing activities. These three elements provide an architecture for communicating how integrating circularity into the company will affect the business – positively or negatively, it maybe both. In fact, a circular product, service or process will likely affect multiple areas of a company’s cash flows. All these changes should be identified and accounted for in the business model. For example, the shift from a single-transaction, volume-based business to a service-based business will result in changes to the schedule of cash flows, magnitude of cash flows, allocation of assets and liabilities (including the depreciation costs associated), inventory and more. The identification and quantification of all these impacts allows a company to build a more comprehensive business case by using them as levers to optimize the business model itself. The diagram below presents a structure for how to estimate and communicate the implications of a company’s circular economy strategy on its cash flows. It can be used as a starting template for building a business case for a specific product, service or project. Changes in cash flow from Operating Activities Most of the cash flow implications of a business’s circular economy strategy will fall under Operating Activities. The subcategories of Operating Expenses that should be considered are Gross Profit, Selling, General and Administrative Expenses (SG&A), Working Capital and Others. Gross Profit may be affected by:
SG&A Expenses may be affected by:
Working Capital may be affected by:
Other implications that may affect Operating Activities include:
Changes in cash flow from Investing and Financing Activities There are a handful of examples of how circular strategies may impact either Investing or Financing Activity cash flows. In shifting investment priorities from product-purchasing to service-based models, a company may observe that expenses that typically qualified as Capital Expense (CAPEX) may now qualify as Operational Expense (OPEX), or vice versa. As growth in green bonds issued and investor interest in the circular economy continues, companies will have more support in acquiring debt or equity for further investments in circularity. Closing the deal The “business model” concept is used quite loosely when speaking about the circular economy. Unfortunately, it’s not as simple as changing procurement priorities or improving design features. It demands an understanding of how key value-chain stakeholders are affected by those changes, and whether the value added by that circular upgrade outweighs the cost. Increasingly, that cost should include not just conventional financial costs, but the costs of natural and social capital as well. To effectively communicate the business case of a circular economy strategy to a CFO, you have to speak their language. That means articulating the qualitative benefits of a circular investment in quantitative terms like cash flow. In summary, be prepared to answer these questions when communicating the value proposition of your circular solution to your CFO:
In bringing answers to these questions, your CFO may not just endorse your circular solution but become an advocate for it when convincing the CEO. However, take the underlying message from this article when approaching your CEO: the key points and language used to convince your CEO will be different than those used to secure support from your CFO! |
URL | 查看原文 |
来源平台 | World Business Council for Sustainable Development |
文献类型 | 新闻 |
条目标识符 | http://119.78.100.173/C666/handle/2XK7JSWQ/215998 |
专题 | 资源环境科学 |
推荐引用方式 GB/T 7714 | admin. Making the circular economy business case to your CFO. 2019. |
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