A lot has changed in the days since we published the “Treasury’s Opportunity During a Crisis” blog on Thursday, March 11th. I received a lot of positive and insightful feedback from the last blog, where we talked about how treasury teams can perfect business continuity plans, review how effectively they are actively managing their liquidity and collaborate with the controller, credit and procurement teams to mitigate potential liquidity concerns within their supply chains. Below are some additional insights, which I thank my treasury friends and contacts for suggesting.
Working From Home
It seems like much of the world is either working from home or planning to do so. At Kyriba, we have mobilized completely, adopting a corporate-wide work from home policy. On a personal note, I am “self-isolated” in my home in Vancouver, Canada as guidance from my local health authority (not because I show symptoms or have exposure, but simply because I traveled recently). While difficult to execute, it’s not hard to agree with these pragmatic recommendations.
From a treasury perspective, I received much feedback about the difference between disaster recovery plans and the current situation, where it is unclear how long working from home will be required. Many shared that disaster recovery (DR) or business continuity plans (BCP) were intended for relatively short time periods (e.g., up to a week) and did not incorporate long-term technology solutions. For example, several readers pointed out that their business continuity plans included using bank portals for payments, which makes enforcement of centralized payment polices and fraud-detection screening impossible. Some feared that inconsistent payment controls could increase the risk of payments fraud.
With the Fed (in the United States) and other central banking authorities cutting rates so swiftly, treasury teams are challenged to make up this loss of interest income on their short term investments – especially as return on cash is one of the most popular KPIs to measure treasury performance.
Some Kyriba clients pointed out that, for their organizations, prime money funds were no longer an option due to the floating net asset value (NAV) provision of the money market fund regulations implemented a couple of years ago. They could not risk the possibility that the principal of their investment could decrease. Even if the probability of a significant decrease in value is low, the possibility of losing money in a prime fund was enough to keep them looking at FDIC-insured products. In addition, the fact that early redemption gates could be implemented – however unlikely that scenario may also be – was another factor in considering other investment choices.
Conversations with Your Banks
While treasury teams are evaluating their cash positions and projections, banks are also managing their own liquidity against the backdrop of Basel III regulations implemented over the past several years. As a result, keeping a constant line of communication to update your financial partners on your cash and liquidity needs is critical, especially indicating any expected needs to draw on credit lines. Your banks’ plans and strategies are constantly changing, so they need to understand your banking and credit requirements in order to support your organization.
Global Cash Visibility
Several treasury teams we talked to are building cash reserves in all markets around the world, creating a safety net to enable liquidity to be mobilized and deployed more easily to meet unforeseen emergencies. This increases the need for global cash visibility, wherein some CFOs and treasurers are asking to connect their TMS to banks that they currently do not have automated daily reporting for. For most TMS users, it is not difficult to add banks and/or bank accounts to round up global cash visibility to 100 percent.
It is reasonable to expect that fraudsters will double down on their efforts to exploit vulnerabilities in payment controls. Many successful payment fraud schemes prey on lack of communication between treasury and finance team members (e.g.. CFO is out of the office) and emergency circumstances – which unfortunately resembles the exact scenario most every treasury team is in currently. Combine that with even more payment requests managed via email with inconsistent documentation and backup, and the situation is ripe for exceptions to standardized policy. The importance of adopting standardized, streamlined and centralized payment processes – especially now – will continue to help protect organizations from unauthorized and/or fraudulent payments being successful.
Another interesting observation was around cross-border payments. Several people reported that they were considering more effective cross-border payment services, including SWIFTgpi and specialized banking services that could offer more predictability into payment delivery and FX translation rates. In a prolonged crisis, it makes sense that treasury teams would demand options that provide more speed and certainty than they have today.
Most treasury teams are currently reviewing their debt covenants and credit agreements. For many organizations, covenants are linked to the organization’s stock price and ratios such as debt-to-equity. With the panic selloffs in equity markets, the last thing you want is to be surprised that you busted a covenant, leading to a range of expensive and emergency consequences.
Rating Agencies and Financial Reporting
For some organizations, especially those in sectors such as travel and hospitality, insurance, food service, and oil and gas, treasury may be involved in discussions with rating agencies to reaffirm financial ratings. If those conversations have not occurred yet, it may be an opportunity for treasury to provide strategic guidance and analysis to the CFO and management teams to project the message of financial strength and resilience.
Those treasury teams that have already been involved in these discussions reported being asked to clarify cash balances, working capital requirements, access to liquidity and confidence in cash forecasting scenarios. Those that had access to data visualization tools found it easier to allay management fears and instead instill confidence that treasury was a reliable strategic partner.
In fact, some saw these emergency discussions as an opportunity to support the CFO and CEO in advance of the next financial reporting period given that investors and analysts are likely to have more specific cash, liquidity and risk management questions than usual.
As a final note, the key expectations of treasury in this time of uncertainty are to:
- Operate at full capacity, even when working from home,
- Have reporting dashboards prepared in advance of urgent questions about cash and liquidity
- Understand the impact of currency movements on cash flows and earnings
- Have great answers to urgent questions around cash
- Be ready for volatility across all financial markets
We have already seen bigger swings in the stock markets than expected; there are many reasons to believe that, should there be more bad news, the same disturbing trends would continue or worsen. While we don’t want to live in a pessimistic cloud, it is critical for treasury to be prepared for every outcome and keep the organization’s financial assets safe.