During times of crisis, treasury and finance are often called upon to answer strategic questions from the CEO, CFO and board, and to ultimately calm the storm within the organisation. As they look to balance policy changes while assessing news and data in uncertain times, it is up to treasury to focus on business continuity, activating liquidity and minimising the disruption to the global supply chain.
CEOs and CFOs need quick answers to questions they get from the board and investors about the company’s financial state. Do we have enough liquidity for the next week? The next month? Can I trust my liquidity forecast? Are we suffering fraud losses? How can we sustain supply chain disruptions?
What CEOs, CFOs and Boards Expect from Finance
In a crisis, the emphasis is obviously first put on people – focusing on employee safety and ensuring customers have what they need. After these concerns have been addressed, executives turn their focus to the business, asking whether or not they have access to the right data, making sure there is enough cash, and figuring out what key person risks they have and how they can support that.
Ultimately there are eight main risks CEOs and CFOS are focused on having answers to, and it’s up to treasury and finance to be able to address and mitigate these risks:
- Human resources
- Internal processes and tools
- Liquidity instability
- FX and interest rates
- Debt and counterparty
- Revenue volatility
- Supply chain disruption
The Eight Key Risks in Times of Crisis & How to Address Them
A major concern to CEOs, CFOs and the board when it comes to treasury and finance is key man risk and competency reduction. Boards and investors are asking what will happen if a portion of the finance and treasury function is unwell, hospitalised or taking care of loved ones? What happens if there are layoffs? Are employees able to perform all of their day-to-day duties from home?
Now, more than ever, there is increased importance of embracing automation and technology. Working with SaaS-based solutions ensures employees can access the data they need and carry out everyday tasks no matter where they are, and automating manual processes not only mitigates some key man risks but also reduces errors.
Gaps in Internal Processes and Tools
As companies adjust to new processes and mandates, business continuity issues are sure to arise. And business continuity plans (BCP) that weren’t made to be long-lasting will, over time, show gaps in processes and systems that can become increasingly dangerous to the business, especially if an organisation is reliant on manual processes and spreadsheets.
Increased reliance on business continuity can exacerbate the areas where there are gaps, but investing in systems that support automation, business continuity and expansive connectivity with other systems can help identify and fill those gaps, as well as facilitate disaster recovery and enhance visibility into cash, liquidity and financial exposures.
In times of economic crisis, companies often have to deal with delayed cash collection and uncertain revenue. Customers may pay late or renegotiate payment terms to buffer cash reserves and stay solvent, or they may defer purchasing decisions until conditions stabilise.
So how can companies stabilise their liquidity? By forecasting liquidity and setting limits. Forecasting liquidity with scenarios and internationally helps companies better understand their liquidity needs. Additionally, undergoing stress testing to determine what happens if customers pay late, don’t pay at all or if expected revenues don’t materialise, and automating limit managements for counterparties can help mitigate liquidity instability.
When normal processes are disrupted due to a crisis, there is often an increased risk of fraud, especially if approval processes are being bypassed in order to continue operations. In fact, there was a 667 percent increase in the number of phishing emails reported from February to March of this year as fraudsters looked to exploit the global disruption resulting from the COVID-19 pandemic. Disruption to business as usual (BAU) processes presents ideal conditions for fraudsters, and if a company is reliant on spreadsheets, there is an increased risk of financial fraud, not just to treasury but to the entire organisation.
The simplest way to improve controls and combat fraud and cybercrime is to digitise payment workflows and automate fraud protection and detection. Doing so standardises payment controls to comply with internal payment policies, approval procedures and limits so that only authorised payments are executed. And real-time fraud detection screens payments against government sanction lists, corporate payment policies and historical data patterns to automatically quarantine suspicious and non-compliant payments for threat assessment.
Foreign Exchange and Interest Rates
Fiscal strength of individual countries and their recovery timelines can greatly affect currency rates. Hedges may be skewed/incompliant and fluctuations in currency valuations can cause unforeseen losses. Additionally, forecast inaccuracy can shift the hedging focus away from cash flows and toward balance sheet protection.
The best way to manage foreign exchange risk is to have insight into all company currency exposures, from which the exposures can then be mitigated via hedging or internal exposure elimination. And having insight into how currencies are impacting financial results at all times is imperative to cost-effectively managing FX exposure and risk and avoiding unnecessary impacts to the company’s bottom line.
Debt and Counterparty Risk
An increase in debt and counterparty risk is common when business as usual is interrupted. Debt may be increased or managed differently, potentially increasing unplanned costs. In regard to counterparty risk, some banks in certain regions may have an increased risk of insolvency, creating concern among the c-suite and board.
To decrease debt and counterparty risk, it is necessary to manage debt and counterparty limits. Companies need to demonstrate their capacity to responsibly increase leverage, refinance debt where appropriate, reaffirm covenant compliance and automatically manage board compliance limits for all counterparties.
Revenue volatility can irreparably impact a fixed cost structure. But adapting to the cost structure can save a business.
Reducing costs is the key to managing revenue volatility. This can be done by reducing bank fees, and companies can save up to 80 percent on bank connectivity, allowing them to repurpose headcount for better uses. Additionally, forecasting of cash enables companies to align to revenue and associated AR, and ensures shortfalls are covered and surpluses are concentrated to earn some yield on excess cash.
Supply Chain Risk
Supply chain bottlenecks and supplier bankruptcy are common concerns, especially in a time of crisis. And in order to stay afloat, suppliers may request early payment to buffer cash reserves and stay solvent.
In cases like this, treasury needs to explore supply chain alternatives and working capital solutions. By implementing working capital optimisation programmes like supply chain finance and dynamic discounting, companies can reduce the cash conversion cycle/supply cash flow, provide financial support for suppliers with internal or external funding, gain preferred buyer status, and support alternate supply chain sourcing and diversification.
One Technology Provider, Four Solutions
While the current crisis will hopefully end as quickly as it began, treasury teams can improve their preparedness for temporary and longer-lasting scenarios by practising business continuity plans, implementing an active liquidity strategy and pre-emptively managing the aforementioned risks. Treasurers who excel in each of these areas will not only support their management teams but also emerge as valued strategic advisors, creating further opportunities to influence and drive success.
Kyriba, known for its SaaS-based Active Liquidity Network, supports treasury and finance with rapidly-deployed solutions for cash management, risk management, payments and working capital, ensuring CEOs and CFOs can answer the board and analysts confidently when it comes to the amount of cash the company holds, what their FX exposure is, how they can sustain supply chain disruptions, how they are preventing fraud and more.
By delivering automation to mitigate human competency risk and decrease costs, a unique control and risk offering for crisis management, best-in-class business intelligence and guaranteed business continuity, treasury and finance will always be armed with the tools they need to weather any crisis.