Quick Guide to Treasury and Risk Management

Operating a successful business means maintaining control of the money and limiting exposure to risk. As the business world gets more complicated and globalised, it becomes increasingly difficult to secure financial stability. Risk is abundant, and money moves at light speed. Successful businesses know this and deploy strong treasury and risk management systems to maintain control. Read on to discover how and why they do this and the benefits they receive.

What is treasury management?

Treasury management includes the control of an organisation’s liquidity and mitigating its risk exposure. Treasurers will use various treasury management systems (TMS) to oversee corporate finance, including collections, disbursements, cash flow, investments, and funding activities. These systems may also manage risk  – protecting the economic value of the business and reducing operational or reputational exposure. Companies with sound TMS will typically weather downturns better than those who don’t – and strong TMS may drive cheaper borrowing, higher supplier discounts, unique investment opportunities and stable expansion planning.

Functions of treasury management

The best treasury management systems will use cloud-based Robotic Process Automation (RPA), Artificial Intelligence (AI), and machine learning to power different control and forecasting functions. These include:

Collections and disbursements – day-to-day cash management, control of outstanding accounts receivable (AR) and accounts payable (AP), and management of interest rates and payments.

Information reporting – data sorting, financial records, cash management vs liquidity management, trade finance, real-time forecasts, and contingencies.

Capital management – control of investments, fixed assets, capital markets, inventory, and corporate treasury cash management, including borrowing, lending and leasing.

Currencies – FX, international AR and AP, international trade finance.

Risk management – limiting exposure to events or procedures that may affect the firm's financial, operational, or reputational health.

Examples of risk management

Risk management focuses on the organisation’s immediate and long-term economic value and stability - casting a protective net across all areas of company activity to limit unnecessary exposure using many of the systems discussed above.

Examples of this shielding include:

Foreign exchange risk

FX risk management is critical for companies that conduct international business. The values of major currencies are continually fluctuating, sometimes quite violently, which can create income uncertainty for organisations involved in cross-border trade. Even minor changes in currency values can result in losses of many thousands or even millions when the trade deal is large. To manage this financial risk, businesses will often lock-in future FX rates – a practice known as ‘hedging’ – to ensure that the amount they are due to pay or receive remains stable regardless of market conditions.

Contract risk

The devil is in the details. Making sure all parties to an agreement honour their side of the bargain, and providing avenues for recourse in the event they don’t, is paramount for every business. Contract risk management concentrates on the fine print and potential understandings of the organisation’s external and internal contracts - including HR. This means finding assurance that agreements are watertight, without loopholes or meanings that may be adversely construed, and that there are adequate routes for compensation if the other party defaults.

Compliance and regulatory risk

Government and industry rules, standards and laws are constantly changing and tightening. Failure to comply, even inadvertently, can be expensive in financial and reputational terms. Measuring compliance and regulatory risk to ensure the organisation operates within the current legal and ethical rules is essential for businesses that value their public profile and wish to avoid economic penalties.

Customer credit risk

Getting paid is the number one priority for all businesses. It trumps all other concerns. Organisations that provide goods or services on credit must minimise the potential for loss from customer default. Sophisticated credit risk management systems will perform due diligence on all credit customers to flag those that carry risk. This will allow the company to adjust the terms it offers to those customers – typically requiring advance payment or collateral to guard against loss.

A win/win situation

Strong treasury and risk management can generate a win/win situation for any type of business - controlling the financial landscape for better cash and liquidity management, richer investment considerations, and stable expansion planning. Reducing risk exposure minimises loss, avoids regulatory issues, and enhances domestic and international trade. Organisations wishing to remain competitive in the future should review their current treasury and risk management protocols. Implement, upgrade, and replace wherever a weakness is evident.

Contact Clear Treasury today to find out more

Stay ahead of the competition. Contact Clear Treasury or become a client today to discover more about our custom treasury and risk management services and the benefits they can bring to your business.