How to deal with treasury risks


Bianca Botes, Corporate Treasury Management,

Peregrine Treasury Solutions

If you are running a reasonable sized business, chances are you will have significant cash flows in and out of the business during the course of a month. This brings with it certain risks which can be controlled and managed to ensure the smooth operating of your organisation.

The cash management role falls within the treasury department which manages the liquidity of a business. All current and projected cash inflows and outflows must be watched and managed to ensure that the business is properly funded and that excess cash is effectively invested. Beyond that, treasury management also encompasses corporate finance and financial risk management.

The treasury function in your business should be seen as its engine: without a fully functioning efficient engine, the whole car is subject to immobility and breakdowns. Treasury management should therefore be a strategic pro-active function rather than reactive one. Attending to liquidity requirements and enhancing income from money and capital market investments can help to mitigate your business’s operational, financial and reputational risk.

There are several key risks that should be addressed:

Forex volatility – this is a key risk within treasuries, especially for importers and exporters as well as cross-border investors. In a globalized world, currencies have become increasingly volatile, placing additional pressure on businesses. Unexpected political events – from a Trump presidency to Brexit to surprise cabinet reshuffles – all reflect in currency moves.

Cash visibility and repatriation – being aware of cash holdings across multiple bank accounts and jurisdictions in real time is essential for effective decision making. Having a mechanism to consolidate the information means that you will be better able to manage the risk associated with cash – whether it is unknown cash or pockets of trapped cash. The repatriation of profit also brings risks in terms of timing, currency and exchange rates, among others.

Financial visibility (confidence in financial forecasts) across the macro operation and financial risk exposures across the entire business – financial risk (the potential to lose money) can take many forms, for example credit or default risk, liquidity risk, interest-rate risk and so on.

Transactional costs – excessive transaction costs can negate the benefits of optimal liquidity management. It is important to seek out the best solution which is also cognizant of cost structures and aims to optimise the cost-benefit relationship. You can look to centralise external payments via a single payment system which can result in increased transparency as well as cost savings through bulking and cross-border payments.

Fraud, data manipulation and human error – risks can arise from deliberate deception to accidental faults, placing a financial strain on the business. Inappropriately qualified staff, poor safeguards, low levels of documentation and a lack of transparency can all feed into a heightened level of fraud, manipulation and human error.

These risks are often caused by any, or a combination, of the following conditions:

Inadequate treasury systems and infrastructure – processes and systems need to be tight with adequate separation of duties, physical and electronic documentation as well as state-of-the-art infrastructure in place. Automated reporting via integrated financial systems can provide real-time actionable insight into the business’s potential risks.

A lack of banking and financial market expertise – inadequately trained employees, especially those who do not have or are unable to acquire skills in new technologies and processes. Ask any CFO today what one of the major challenges they face are and chances are they will say talent acquisition.

A lack of bargaining power – smaller entities will risk higher transactional costs given their inequality of power. This can be overcome through pooling or bulking, which can be effected via a third party.

One way to address these issues would be to invest considerably in upgraded infrastructure and superior personnel. Another option would be to partner with a treasury outsource company focused on addressing these key risks. By managing financial risks through a single solution an entity would have access to the latest technology and quality staff combined with the advantage of increased bargaining power.