8 Treasury Risk Management Strategies to Optimize Financial Efficiency

Treasury Risk Management Strategies to Optimize Financial Efficiency

Financial efficiency is vital for any business and it’s directly affected by treasury and risk management challenges. There are various types of risks to consider, including business, operational, and financial risks. The latter includes credit, market, and liquidity risks, which can interfere with your ability to manage working capital and plan strategically for the short and long term.

Constant changes in the global financial environment make juggling these responsibilities even more challenging. Here are a few key strategies to help you optimize your company’s financial efficiency through strategic finance and treasury risk management.

1. Implement Internal Controls to Verify Data Accuracy

Internal treasury controls can ensure the accuracy of your data and prevent errors that could lead to significant losses. These controls can involve automation or consist of policies and procedures that employees must follow. Laxity in internal controls can have a huge impact on your business (just ask FTX).

Automated controls are the most efficient and effective type of internal controls because they don’t rely on human behavior. These controls might include notifications or alerts concerning changes to data records, duplicated data, or unusual transactions. You might also want to consider other controls, such as daily account reconciliations, approvals for transactions over a pre-determined amount, and frequent system access controls.

2. Establish a Logical Segregation of Duties

The treasury function should divide the cash management responsibilities so that no individual is responsible for an entire transaction from beginning to end. This may be difficult in smaller companies with only one person in the treasury department. In this case, it might be necessary to involve a board member or the business owner/shareholder in the approval and/or review processes.

To properly segregate treasury responsibilities, there should be one individual to initiate transactions and a different individual to approve them. Another important control often included within the segregation of duties is mandatory vacation. Requiring employees to take leave allows transactions to clear and irregularities to be identified in their absence.

3. Improve Organizational Cash Visibility

Without full financial transparency, the treasury function can’t measure the company’s financial health, forecast cash flows, or appropriately lower risk exposure. Limited communication between departments or locations, slow reporting of information, and the volume of financial relationships can all reduce cash visibility.

Modern treasury management systems (TMS) offer a centralized location to view financial data that’s automatically imported from banks, ERPs, or other sources. The treasury function should work closely with the sales, procurement, and accounting departments to understand how those operations may impact cash flow needs. The TMS can also analyze data from other departments to offer valuable insights and increased cash visibility.

4. Strengthen Fraud Prevention Protocols

Fraud prevention is a continuous process, largely because the forms and methods of fraud are always evolving. Effective fraud prevention protocols are essential to avoid significant financial losses. And the treasury management function is at an especially high risk because of its ability to access company funds.

The first step in improving your fraud prevention protocols is to perform a fraud risk assessment. The results of this assessment will identify any areas that need special attention. You can also require double signatures or approvals for transactions over a pre-determined amount and set daily transaction limits for treasury employees. Creating a list of allowed and blocked beneficiaries can prevent fraudulent payments from being processed without approval.

5. Implement a Liquidity Plan

Treasury departments should implement a liquidity plan to properly manage cash flow and ensure business continuity. A liquidity plan considers cash flow needs for the medium- to long-term and includes investment, borrowing, and hedging strategies.

Frequent re-forecasting and re-planning are central parts of the liquidity planning process. Financial objectives and targets should be set at the top and communicated to the bottom. At the same time, plans should also be developed at the bottom and communicated to the top. The differences can then be negotiated to define collective goals that will be used to form the liquidity plan.

6. Establish Regulatory Compliance Guidelines

Regulations are always changing, so staying compliant is a challenge—and it increases the workload for the treasury function. Compliance guidelines should be developed and communicated throughout the company, beginning with a code of ethics and conduct to set a tone for appropriate behavior.

Regular training should be provided to employees and management to communicate regulatory changes and new company policies, and to reinforce disciplinary actions for violations. Your guidelines should inform your team about the methods you’ve established for anonymous reporting, such as a whistleblower hotline.

You can also leverage automation to assist with some of the compliance workload. Treasury management systems have evolved to include monitoring tools that ensure all transactions comply with current treasury regulations.

7. Install Multiple Layers of Legal Protection

Legal risk is just one of the many risks your treasury function has to manage. It’s the risk that you’ll fail to comply with the applicable laws or contractual obligations your company has accepted. To defend your company from losses, you should implement multiple layers of legal protection in the form of controls, policies, and procedures.

Most companies apply three layers of legal protection in risk management, where different team members are responsible for reviewing the controls in place to identify and prevent risks. The first line of defense should be the department(s) responsible for daily operations. They should maintain controls and ensure that policies and procedures are followed in their day-to-day work.

The second line of defense is your risk management team, who should develop and monitor the effectiveness of risk management policies. Internal auditors are the third line of defense; they evaluate the design and performance of risk management policies as well as the effectiveness of the previous lines of defense.

8. Conduct Routine Treasury Audits

Regularly conducting audits can help you identify any data inaccuracies, ineffective internal control procedures, or potential fraud. Your internal auditor—someone outside the treasury function—should conduct a review of the policies, procedures, and controls for the treasury department.

An internal treasury audit should follow the same process as any other internal audit. The audit scope should include access and approval controls, data accuracy, data security, compliance with company policies (i.e., regular account reconciliations, liquidity, and funding plans), and regulatory compliance. Reports should be compiled and communicated to management, and auditors should return to review implemented changes.

Use Automation to Avoid Risks

The success of your business depends in part on how you manage risk—and whether you do it in a way that leads to financial efficiency. Thanks to new and constantly evolving challenges, the treasury function faces an ever-increasing workload. However, accounting automation tools can help. Automated solutions can eliminate time-consuming tasks, improve data accuracy and security, reduce fraud, and assist with internal controls to help you effectively manage risk.

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