5 Challenges to Corporate Treasury & Risk Management

Corporate Treasury & Risk Management

As a corporate treasury or risk management professional, you’ll face all kinds of demanding—and constantly evolving—challenges. With everything from inflation and new types of payment systems, to unprecedented world events disrupting the market, the global business environment is in constant flux.

Treasury risk management aims to protect the company’s financial resources through strategic planning and lowering risk exposure. But constant changes in the economic environment create unique challenges that can impact your ability to meet your company’s cash flow goals. By proactively identifying these challenges and implementing the best treasury risk management strategies, you can prepare for whatever comes next.

1. FX & Interest Rate Volatility

Companies that exchange goods and services internationally are prone to volatility in the exchange of foreign currencies. If you invoice an international client today and payment isn’t due for 30 days, there’s a very high chance that the foreign exchange rate will change in the meantime. The amount you invoice for may be more or less than what you eventually receive.

Interest rate volatility affects a company’s ability to borrow money to finance its operations. Suppose you borrow money for a 10-year project at a low interest rate today. The interest rate could be significantly higher in five years, limiting your ability to borrow additional funds.

To mitigate risks from FX and interest rate volatility, many companies purchase financial instruments called hedges. There are several types of hedges a company can buy, including fair-value hedges and cash-flow hedges. Apart from hedging, companies have little power to mitigate interest rate volatility and must invest more of their own money or find another lender with a better rate.

2. Complexity of Real-Time Payments

Real-time payments (RTP) allow companies to receive or transfer money instantly, 24/7/365. The payment system is similar to that of ACH payments, but considerably faster. Being able to accept deposits immediately provides quicker access to cash, improving the company’s liquidity. RTP can also affect processes like managing payments from subsidiaries. But since this is a relatively new payments system, the risk is high.

The financial industry can’t predict every threat to the security of RTP transactions. Once the process is initiated, the transaction is final and irreversible. This means you have to be sure that you have the correct account information for the receiver and safeguard your own account information from potential fraud. And if you opt for RTP, your bank will likely require you to have sufficient funds in your account to cover the transaction.

3. Liquidity Risk Challenges

Liquidity refers to the speed at which a company can produce cash to cover transactions, such as payroll or short-term notes. Highly liquid companies have cash and cash equivalents that can more than cover their short-term obligations. The risk lies in potential shortages of cash or disruptions of cash flow. Many companies experienced significant disruptions in cash flow during the pandemic, leading to a shortage of liquidity.

Identifying this risk starts with a cash flow forecast. Cash flow forecasts can highlight months or weeks in which incoming cash will fall short of outgoing cash. Negative cash flow can be managed with short-term notes or lines of credit from your bank, the sale of assets, extended payment terms with vendors, or factoring. Factoring is the process of selling invoices to another company to collect the money quickly.

4. Fraud Risks Due to Inadequate Security

It’s estimated that companies lose 5% of revenue to fraud every year, amounting to annual losses of nearly $5 trillion across the global economy. Fraud has many forms and can occur internally, externally, or through collaboration between internal and external parties.

As the way we work has become more digital, so have fraud schemes. Remote work, the switch to real-time payments, the use of business credit cards, and the lack of internal controls are just a few of the many factors contributing to increased fraud risks. Corporate treasury departments must be aware of the potential for fraud and actively defend against it.

To combat fraud, companies should implement both preventive and detective security controls. Preventive controls prevent fraud before it happens and may include employee anti-fraud education, ethics policies, system controls to prevent internal fraud, and account security features like two-factor authentication (2FA).

Detective controls are those that can detect fraud after it’s occurred. These controls may include unusual card activity alerts, unauthorized transaction alerts, and employee account monitoring. Software tools can help you prevent and detect fraud with behavior analysis and transaction monitoring features.

5. Use of Outdated, Error-Prone Systems

Outdated systems with manual processes and tools are time-consuming and vulnerable to human error. These systems fail to provide centralized access to your financial data, limit your ability to see valuable insights, and are unable to quickly generate custom reports and accurate forecasts. Using outdated treasury management systems and other manual tools like Excel can reduce your ability to safeguard against liquidity and fraud risks.

Implementing and integrating tools like automated treasury management systems, AP automation tools, and accounting software has significant benefits. Automation tools save time, reduce costs, and increase efficiency company-wide. You’ll have fewer errors and increased access to data and insights, enabling you to manage risk more effectively.

Embrace Automation to Face Future Challenges

Most of the issues mentioned above can be resolved by implementing automated solutions. Updated AP, accounting, and treasury management systems can mitigate liquidity, fraud, interest rate, and other risks by reducing human error and providing more actionable insights into your finances. Automated systems allow you to simplify cash management, strategic planning, and risk management processes.

To successfully prepare for and adopt new technology, use the 4E model:

  • Embrace change, as it’s inevitable.
  • Evaluate skills regularly to be sure you’re prepared.
  • Empower your team with new skills and tools.
  • Educate your team about new and upcoming technologies.
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