Why Managing Cash and Risk Holistically Matters

Mitigating treasury risks requires a holistic view of exposures across cash, debt, and investments.

The five-year anniversary of the global financial crisis is the perfect time to evaluate what has changed in finance since the fall of Lehman Brothers. One thing is certain: Every crisis that has followed has served as a stark reminder of the interconnected nature of our global financial system. For that reason, regulators around the world have begun implementing measures to improve transparency and risk mitigation, which are critical cornerstones of a new, modernized global financial system.

Smart treasury organizations are following suit, putting in place processes and tools they need to gain a holistic view of their risks across cash, debt, and investments. Risk is everywhere in treasury, and it is at the heart of why we are seeing a fundamental, transformative change in the treasury function. Over half (58.8 percent) of respondents in the Aberdeen Group’s 2013 report Treasury and Risk Management: Top Financial Risks and Tools to Manage Them cited financial risks as the greatest market pressure they face today.

In the survey, Aberdeen defined “financial risks” broadly, including in the category commodity risk, counterparty risk, credit/liquidity risk, foreign exchange (FX) risk, cash location risk, cash forecast risk, operational risk, payment risk, settlement risk, sovereign risk, and reputational risk, among others. The breadth of risks within the remit of treasury is now so wide that the organization can no longer function properly if it maintains a singular focus on either cash-related or risk-related activities. Instead, treasury needs to develop a holistic perspective on risk across the enterprise. According to the Aberdeen survey, 30 percent of global companies are doing just that: They’re developing the capabilities for integrated treasury and risk management.


Core Components of a Holistic Process

Gaining a holistic view of exposures begins with understanding that there is a cause-and-effect relationship between cash management and risk management activities. Any gaps or disconnects in workflow can create blind spots in how different groups within a company gather, analyze, manage, and report on information. Consider just some of the areas in which cash and risk are interconnected:


FX exposures. Given the volatility of FX rates, unhedged FX positions can lead to massive swings in a company’s P&L, so FX risk management is a cornerstone of effective cash management. An organization needs to combine data on its global cash positions, international cash pools, intercompany multi-currency positions, cash forecasts, balance sheet positions, forecasts of FX exposures, and input and insights from its subsidiaries in order to achieve a holistic view of its global FX exposures. Once aggregated, an organization’s holistic view of FX exposures can be analyzed and synthesized in order to derive net FX hedge positions. Investing the effort required to consolidate and net this data can significantly reduce volatility in a company’s P&L, help lower transaction fees by optimizing FX trades, and strengthen compliance with FX risk management policies.


Cash forecasting. Inaccurate cash forecasts can have widespread impacts on a company’s hedging, liquidity management, capital structure, and strategic decision-making processes. Cash forecasts that don’t take into account the company’s FX exposures, liquidity positions, and credit rating indicators are unlikely to be actionable (e.g., for borrowing, investing, hedging) because they are missing key predictors of the company’s future cash position.


Liquidity and credit risk. Lack of visibility into the company’s liquidity and credit position, and ineffective management of its liquidity and credit, could result in a situation in which the company requires reactive and expensive measures to secure working capital. For example, a company may have to pay a premium to secure short-term funding for a project when better management of its liquidity and credit position would have enabled it to borrow at better rates and terms. By combining data on the organization’s current and forecasted cash positions with information on its available credit limits, a company can proactively plan for any potential liquidity shortfalls. This enables it to lower its borrowing costs, transaction fees, and borrowing penalties at the same time that it may increase the overall credibility of the treasury function.


Counterparty risk. This encompasses the risks associated with improper assessment and mitigation of a company’s exposure to its major counterparties, such as financial institutions, trading partners, and key suppliers. To gain a holistic view of its counterparty risk, a company needs to consolidate data on its exposure to each entity across multiple asset classes. Doing so can build the foundation for effective decision-making, lower the impact of any financial loss, and save on staff time and resources.Torgler_PQ2_v2


Commodity risk. Hedging commodity price risk is becoming more commonplace. It’s an activity that generally falls under the joint responsibility of treasury and procurement. By introducing commodity risk management practices into the treasury function, and improving collaboration between procurement and treasury, a company improves its ability to assess and measure commodity risk and implement best practices for hedging and reducing price risk. In addition, commodity hedgers may have FX components to their physical settlements. They can analyze these components using risk assessment tools such as CFaR (Cash Flow at Risk) to define which exposures can be hedged and to prioritize hedge targets.


Transforming Treasury

Companies that are involved in transformative treasury initiatives optimize their treasury organizations with the goal of developing a more holistic approach to treasury and risk management. In one poll conducted by Reval, 56 percent of respondents said they are integrating treasury and risk as a strategic action. Industry-leading treasury operations are developing a real-time, accurate global risk profile, incorporating risk management techniques that gauge counterparty exposures, hedge-coverage ratios, liquidity positions, short-term investments, and credit line usage and availability within their cash forecasting and cash management practices.

Building a transparent and timely view of cash and risk enables a treasury team to get one picture that tells all the important stories for the treasurer, CFO, and board of directors. This capability is critical, as 63 percent of treasurers are facing greater executive review and reporting in response to emerging risk, according to a 2013 Risk Survey conducted by the Association for Financial Professionals (AFP). It is not surprising, then, that 84 percent of respondents in a Reval poll conducted earlier this year indicated that dashboards, risk visualization tools, and software-as-a-service (SaaS) capabilities are important technological advancements that companies need in order to deliver and explain the complete treasury and risk story.

Five years after the global financial crisis, it is clear that corporate treasuries are hard at work, laying the foundation for a more integrated function and ready to deliver the intelligence necessary for strategic decision-making.



Torgler_headshotJason Torgler is the vice president of strategy for Reval. He has deep experience in treasury and a strong understanding of the power of SaaS-delivered solutions deployed across domestic and international markets.

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