A century ago, John D. Rockefeller earned the title of America’s first billionaire. The Standard Oil Company titan passed along more than his enormous wealth; he imparted principles on how to minimize risk while growing a business. Thus, treasury risk management is a time-tested method of optimizing cash flow.
The world operates in a different dimension since Rockefeller perfected his cash flow systems. Like all other financial aspects of an enterprise, the treasury risk management realm has gone digital. Innovative technology empowers those who are tasked with keeping track of money – the fuel that drives the company’s engine – to ensure it complies with regulatory obligations.
Treasury risk management may be best defined as overseeing a company’s working capital, which includes making strategic plans on the best ways to keep the enterprise solvent. This involves monitoring funds to maintain liquidity and lowering the organization’s financial and operational risks.
As your company’s treasurer, you have a herculean task: to ensure your organization has an appropriate amount of cash to operate seamlessly. Acting as an entrusted steward, you add immense value by managing risk, as well as the collection and disbursement of funds. When all financial functions are operating in sync, any potential risks are mitigated.
Avoid Hidden Fault Lines When Implementing Your Treasury Risk Management Strategy
It is imperative that your treasury risk management strategy takes into account the following elements, as one miscalculation can leave your business exposed to potential risks:
- FX Management – To mitigate FX risk, many businesses utilize hedging methods, whether it’s leveraging forward exchange contracts or currency options.
- Legal – Risk in the business world is difficult to measure, as it can branch out into various categories. The most common is litigation risk, especially involving product liability and accidents. Additionally, there are contract risks, which could stem from a procurement issue or breach of contract with an employee or vendor. It’s critically important to have a plan to manage these legal risks when they arise.
- Tax Compliance – The business environment is fluid, especially with the steady stream of IRS releases on compliance and regulations. Add to that liability risks that can occur from day-to-day activities, and it becomes incredibly important to stay up-to-date on any evolving task codes and ensure your treasury management strategy is aligned with regulatory requirements.
- Fraud – In your role as treasurer, you can take proactive steps to identify areas of high risk. While each enterprise differs, most will have two common denominators that are prime targets: purchasing and payroll. By conducting regular risk assessments in each segment of your business, you can more readily localize areas that are prone to fraud and implement protective steps.
- Liquidity – If you don’t have an effective liquidity management strategy, it will be difficult to maintain quick access to cash to pay for things like short-term investments, debts, and surprise expenses. Any great risk management strategy should include scheduled stress tests to address any liquidity shortfalls and a contingency plan that lays out how to overcome these shortfalls in an emergency situation.
Five Critical Best Practices to Consider when Reducing Your Organization’s Treasury Risk
- Improve Cash Visibility Across Your Organization– Financial transparency is crucial for monitoring internal control systems and assessing the financial health of your organization. Operating without the ability to see the entire scope of financials will leave your company vulnerable to unexpected and potentially catastrophic issues.
- Implement a Liquidity Plan – Developing a robust liquidity plan can help you preserve and control your cash. Keeping enough cash on reserve will ensure you are able to meet the company’s financial obligations. Stockpiling too much cash will prevent you from putting capital to work. Having too little funds can hamper the company’s ability to make an acquisition or can lead to a liquidity shortage or insolvency.
- Establish Regulation and Compliance Guidelines – As organizations expand their reach nationally or globally, the non-compliance risk grows exponentially. Creating a well-articulated policy in the initial stages of business – and that you update and refine regularly – can help you protect your brand. For example, one role of the U.S. Securities and Exchange Commission (SEC) is to keep businesses honest. As a watchdog, they seek to ensure that investors receive truthful information. A business that fails to disclose a cyber breach can be fined millions. Guidelines are like guideposts, that will point you in the right direction.
- Fraud Prevention – Hackers and identity thieves never sleep. Cybercriminals scour every layer of data, looking for a weak spot to intrude and wreak havoc. Organizations can remain vigilant 24/7 by fortifying their data fortresses with digital solutions. Instead of managing a financial crisis post-fraud, take action steps before it happens to safeguard your digital vault.
- Install Multiple Layers of Legal Protection – It’s not only hard assets that are at stake; cash losses can be devastating. Remember to consider intangible losses. When conducting a theft risk assessment, broaden your perspective to include intellectual property, trademarks, patents, and copyrights.
In today’s increasingly volatile financial environment, treasury risk management is more critical than it was even a decade ago. Leveraging technology can help treasurers pinpoint high risk areas and quickly devise corrective actions.
Download our Square Case Study to discover how Trovata, our open banking platform, can empower your team to improve your cash management capabilities and prepare an effective, organized response for whatever potential risks lay ahead.