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How treasury copes at the sharp end

Criminals use phishing excercises to target treasury

Criminals use phishing excercises to target treasury

The financial challenges that the ‘great recession’ imposed on many organisations pushed treasury teams to the front and centre of corporate enterprise risk management (ERM) initiatives. BOB STARK of Kyriba looks at their aftermath tasks.

While the biggest mandate for treasury post-2008 has been to deliver strategic value for the organisation as a whole, the need to establish controls and mitigate risk across the enterprise is also paramount.

When it comes to ERM, it is best for treasurers to begin with risks that are within their team’s immediate responsibilities, starting with effective management of cash and liquidity.

Liquidity risk

Managing cash and liquidity is a great place to start, simply because it is so often a limiting factor for an organisation’s growth. Treasurers must know expected funding requirements with some certainty, so that cash deployment is optimised. Risking an overdraft is clearly unacceptable, yet having excess cash sitting in bank accounts is no longer accepted as good treasury practice either. It’s a difficult balancing act that necessitates cash forecasts must be accurate.

Accurate cash forecasts depend on three variables:

  1. Collaborating with internal stakeholders: it is vital to know who owns and understands the information necessary for forecasting
  2. Consolidating data sources: this will entail automation, interfacing with enterprise resource planning (ERP) and implementing modelling to confirm historic and future data patterns
  3. Measurement: implementing a feedback loop that analyses, measures and communicates forecast variances will offer opportunities to improve weak forecast inputs. A forecast without detailed measurement is a waste of time.

Financial risk

While treasurers are often tasked with both interest rate and currency management, it is foreign exchange (FX) that now presents them with a bigger issue. Cash forecasting can improve exposure management by identifying – with more confidence – expected cash exposures in a basket of currencies. Similar exercises can be done to identify balance sheet exposures. Both areas allow treasurers confidently to improve hedge performance, by taking positions that cover a greater percentage of exposures and also allow hedges to be put in place over longer durations.

While shareholders may forgive a bad quarter due to FX losses, they are unlikely to offer their sympathies for back-to-back occurrences. Similarly, while gains from FX might appear positive on the surface, investors and analysts clearly know that an unhedged gain could very easily have been a loss, so goodwill won’t have been built because treasury gambled successfully with shareholders’ money.

Operational risk

Operational risk used to be an afterthought for many organisations, which recognised implementing proactive monitoring, multi-layered controls and corporate governance was a good idea but not necessarily top of their priority list.

Fraud and cybercrime have changed this thinking, as criminal gangs implement well-researched and perfectly-executed spear phishing schemes targeting treasury and finance teams at specific organisations.

Although the actual amounts defrauded may not bankrupt a global multinational, the knock-on impact from the loss of shareholder and customer confidence, combined with the possibility of fines and lawsuits are making chief financial officers (CFOs) and treasurers take notice. While internal fraud is not always as likely to make headlines, it can be just as financially damaging, as these schemes can often go undetected for a long time (the average being 18 months), with millions being skimmed through illegal payments.

Where treasury can have a major benefit on fraud reduction is by implementing security processes (for example, multi-factor authentication, internet protocol (IP) filtering, digital signatures) and improved workflows, so that it isn’t possible to make transfers through unauthorised processes and channels.

Treasury should also work with the chief risk or security officer to establish and enforce standardised policies globally – especially regarding payments – to eliminate the exceptions that fraudsters are eagerly hoping to uncover.

In addition to fraud prevention techniques, detection of unauthorised activities through proactive monitoring of data (such as bank balances or payment acknowledgements) and workflow changes (such as a new bank account signatory) is an absolute must.

15The value chain

An organisation’s suppliers and customers aren’t always the people that treasurers play an active role with. Yet managing risk within the value chain can have a significant impact on a firm’s financial performance. Treasurers play a critical role in ensuring the wheels of the business continue to go round, in the following ways:

Supply chain finance

With large organisations focused on working capital improvement, many CFOs look to extend payables to realise immediate impact (for example, spirits group Diageo announced in early 2015 that it would extend its standard payment terms from 60 to 90 days). While days payable outstanding (DPO) improvement benefits the buying organisation, the risk of supply chain disruption due to a supplier’s consequent liquidity challenges is a very real concern.

Research from the Kauffman Foundation found the number of small businesses that cited late payments as their largest challenge rose seven-fold from 2008 to 2010. This has driven political influence in the UK and the US, most recently with President Obama’s SupplierPay initiative, where larger firms have been told that they have a responsibility to help, rather than hurt, the liquidity of smaller suppliers.

Treasurers, who manage both the firm’s cashflow as well as banking relationships, can achieve win-win scenarios, where either supplier discounts can be secured by paying early (dynamic discounting) or banks and/or financing partners can pay suppliers early while also offering buying organisations the opportunity to pay later (supply chain finance).

Neither programme happens without treasury’s experience and expertise steering the ship. Yet, in collaboration with supplier and payables stakeholders, these initiatives can eliminate risk in the supply chain as well as potentially growing suppliers into strategic relationships, delivering further dividends.

Customer financing

Customer financing schemes can be thought of as supply chain finance in reverse. Treasurers can either offer financing using their own balance sheet or leverage their creditworthiness to partner with financers who wish to offer reasonable terms to the firm’s customers. Treasurers thus have an immediate effect on sales performance, as existing customers may spend more and new customers may be introduced.

From an ERM perspective, the revenue chain is better protected from potential sales losses from customers unable to justify significant upfront cash outlays. This type of programme – like its supply chain finance cousin – is most effective in emerging markets (EMs) such as China, India, and Brazil that feature high inflation and, consequently, higher interest rates than a European or American firm can offer directly or through partnership.

In many verticals, including heavy manufacturing, customer financing is closely tied to treasury or, in fact, reports directly to the treasurer.

Counterparty risk

While many treasurers consider diversifying banking and trading activities across multiple financial institutions as the extent of their counterparty risk responsibilities, treasurers have more to offer.

Business intelligence – analysing “big data” – can not only identify business exposures to suppliers and customers but also quantify the total risk based on a marriage of external data (such as credit ratings and credit default swap spreads) and internal cashflow forecasts by counterparty.

This can establish a counterparty control centre that delivers analysis in a visual dashboard, offering important insight in an easily digestible format for treasurers, CFOs and chief executive officers to deliberate.

ERM presents many challenges for organisations, yet also offers opportunities for treasurers to become more strategic. ERM is a corporate-wide responsibility, yet in many ways it is a chance for treasurers to contribute proactively.

Effective use of technology and visual dashboarding can enable treasurers to seize the opportunity afforded them and truly make a difference.

This article was originally published by gtnews (

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