Volatility and the risk of a minor/major/calamity level financial event is a constant threat to CFOs and treasurers. At the risk of sounding a tad clichéd, since 2008 corporates have both become more aware of potential risks to financial assets as well as seeing more risk factors that can affect/obliterate business value.
As we have stated many times (and as our customers tell us often), volatility has become the new normal. As a result of this, treasury teams need to adapt their approach, in order to deliver high-level strategic benefits and value to the organization. The first step in doing so is cash optimization, which allows finance teams to have cash certainty and make effective financial decisions.
The second piece of the puzzle is effectively managing the organization’s risk. The number of risk factors facing finance departments continues to increase. Recent data from the AFP has shown that 59 percent of companies see an increase in risk exposure compared to five years ago1. On top of “traditional” exposures such as counterparty and FX risk, organizations are also susceptible to increasing amounts of internal risk, such as fraud. In fact, 61 percent of organizations have experienced attempted (or actual) payments fraud, and more than a quarter of corporate have had fraud committed by employees2. In response to these internal and external threats, Treasurers must implement sophisticated risk management programs to safeguard assets and deliver against regulatory compliance.
Protect financial assets (or execute risk strategy)
Treasury teams require insight across financial exposures, the ability to measure the potential impact of risk to their financial assets, the opportunity to execute risk programs to protect against those risks, and finally the measurement of the effectiveness of those programs. Hedging programs are a perfect example. Effective FX hedging, for instance, requires insight into cash flows and balance sheet items that could be affected by changes in currency rates and an understanding of the potential changes in cash flows or value of assets/liabilities due to X percent increases or decreases in exchange rates, Armed with this information, treasury teams can make better hedging choices that offer more financial protection – and they can measure the effectiveness of these hedging instruments to further validate the business value that was protected.
Improve financial control
Treasurers need control of financial workflows and business process to minimize accidental mistakes or willful misconduct. As Sarbanes-Oxley taught us, strong financial controls and detailed audit trails are essential for a smooth and secure treasury operation (and a smooth treasury audit!). Standardization of processes and centralization of information is key across a variety of treasury functions. While payments is an obvious example (especially as fraudulent efforts are becoming more sophisticated in its execution)– bank account management, investments, trading, and accounting must also be controlled. This is especially important for organizations that expand into new markets – as people decentralize it is critical for information and process to be controlled centrally.
According to Thomson Reuters, 60 new financial regulations are introduced every day around the globe3. Fortunately, most of these regulations don’t directly impact corporate finance and treasury. However, of those that do (e.g. EMIR, Dodd-Frank, FBAR, SEPA, IFRS 9), there are significant impacts to reporting and workflow that have to be addressed. Organizations must have the processes and systems in place to manage the myriad of reporting and controls that result from each. Partial compliance is not an option. As a result, technology solutions – including treasury management systems – are relied upon to consolidate and summarize information, generate customized reporting, and demonstrate effective controls so that corporates can deliver regulatory compliance.
So, once you are able to optimize your liquidity to make more effective financial decisions and you’re able to protect organizational value by effectively managing your risk – what’s next?
The answer is work your capital. We’ll address that next time.
3. Thompson Reuters