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 for minimizing risk while growing a business. Thus, treasury risk management is a time-tested method of optimizing cash flow.
The world has operated 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 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.
Today, treasury teams must be as vigilant as ever to safeguard their liquidity against potential risks. For example, we learned from the SVB collapse the importance of diversifying deposits in multiple banks and accounts.
As your company’s treasurer, you have a herculean task: to ensure your organization has an appropriate amount of cash to operate seamlessly.
In this article, we’ll cover the different risks that treasuries may face and six ways to proactively avoid them.
Avoid Hidden Fault Lines When Implementing Your Treasury Risk Management Strategy
Your treasury risk management strategy must take 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, leveraging forward exchange contracts or currency options.
- Legal – Risk in the business world is challenging 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 imperative to stay up-to-date on any evolving task codes. You’ll need to 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 business segment, you can more readily localize areas 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 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.
- Banking Institution Insolvency – Banks can become insolvent when they cannot repay their depositors, because their liabilities are greater than their assets. If a bank becomes insolvent, it might have different effects for your business, depending on the availability of deposit insurance.
Six 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. Consider a cash flow management platform to help gain total visibility into cash.
- Implement a Liquidity Plan – Developing a robust liquidity plan can help preserve and control your cash. Keeping enough cash on reserve will ensure you can meet the company’s financial obligations. Stockpiling too much cash will prevent you from putting capital to work. Having too few 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.
- Prevent Fraud – 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 – Not only are hard assets at stake, but cash losses can also be devastating. Remember to consider intangible losses. When conducting a theft risk assessment, broaden your perspective to include intellectual property, trademarks, patents, and copyrights.
- Open Multiple Bank Accounts – As we saw in the collapse of Silicon Valley Bank, anything can happen overnight. If a bank is in trouble, events may occur that result in your organization being cut off from its liquidity. To mitigate the risk of a bank failure on your treasury, open accounts at multiple banks and never put more than $250,000 in any one account, as that is the amount that is insured by the FDIC. Above that, you could lose your money if the bank goes under.
Treasury Management is Increasingly Critical in Today’s Age of Complexity
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 the Essential Treasury Reporting and Forecasting Guide to learn how Trovata can help you strengthen your liquidity strategy.