Operational Treasury Risks: Overview, Types and Management Strategies

operational treasury risk

Treasury and risk management are basic aspects of any business—but how much do you know about operational treasury risks? Operational risks are especially significant in the context of treasury, because there are many ways in which losses can happen.

The exact implications vary between industries, but in today’s unpredictable economy and constantly changing market conditions, all companies need to safeguard against these risks to prevent loss. We’ve put together a general overview of the different types of operational risks and how to manage them.

Understanding Operational Risk in the Context of Treasury Management

Operational risk refers to the risk of financial loss and diminished reputation due to failures of people, processes, and day-to-day operations, or due to external events.

Operational risk management mainly focuses on how things are accomplished within the organization. It’s typically associated with active decisions related to how the organization functions and what it prioritizes. If mismanaged, operational risks can have severe consequences in treasury management, which can even lead to permanent closure of the business.

5 Types of Operational Treasury Risks + Mitigation Strategies

1. People Risk

This refers to the risk of loss due to poor management of human capital and resources. Typically, people risk involves the company’s ability to hire, manage, and train employees. Inadequate people risk management can result in simple mistakes or more severe consequences like fraud or unethical behavior.

Best practices for managing people risk:

  • Ensure that you’re attracting the right candidates for every role with detailed and accurate job descriptions for all team members.
  • Thoroughly assess potential candidates, specifically analyzing their fit within your company culture in addition to their background and qualifications.
  • Provide regular training on policies, procedures, risk awareness, fraud, and other relevant subjects.
  • Establish a communication structure for everyday operations as well as fraud reporting.

2. Process Risk

This is the risk that daily internal processes will fail, leading to financial loss or loss of reputation. Process failures can be caused by a malfunction or breakdown of manufacturing equipment, outages within communication channels, human error, or the design of the process itself.

Consider these process risk mitigation strategies:

  1. Review prior incidents to identify risks, including potential bottlenecks and safety issues.
  2. Create a process map to pinpoint any interdependent processes and areas of risk exposure.
  3. Look for opportunities to implement automation, which reduces the risk of human error in manual processes.

3. Systems Risk

Systems risk is defined as the risk of loss due to the failure of internal systems. Internal system failure might involve a loss of power, computer hardware failures, viruses or malware that affect system use, or security breaches.

Try these tips to mitigate systems risk:

  • Brainstorm with your team by asking “what if?” questions to prepare for worst-case scenarios. For example, “In case the power fails, we’ll have a generator on-site.”
  • Protect your company devices with encryption, antivirus software, and other security measures.
  • Provide regular IT security training to staff members.
  • Back up your data daily.
  • Review user access controls at least once a year.

4. Legal & Compliance Risk

This refers to the risk that losses will occur due to non-compliance with regulations and laws. Legal and compliance risk usually relates to tax laws, human resource regulations, OSHA regulations, EPA regulations, and internal codes of conduct or policies.

Reduce legal and compliance risks by:

  • Identifying and assessing risks through consultation with different departments.
  • Designating the ownership and management of specific risks to the departments or individuals who have relevant expertise.
  • Establishing disciplinary procedures for non-compliance with internal policies.
  • Using automation and external advisors to audit and manage compliance.

5. External Events Risk

This is the risk of loss due to external events that are outside the company’s control. External events could include natural disasters, protests/riots, war, disease, supply chain disruptions, cyberattacks, economic volatility, or viral social media content.

Even though the prevention of external events is out of your control, you can mitigate the resulting risks to your business. Here’s how:

  • Study how various external events are affecting other companies. Use this information to come up with mitigation strategies.
  • Implement crisis, emergency management, and business continuity plans to be used in the event of natural disasters, inclement weather, pandemics, or civil disruptions.
  • Make sure you have insurance to cover losses due to external events. For example, a business interruption rider can protect you from income loss if your operations are interrupted due to a fire, burst pipe, or natural disaster.

Manage Operational Treasury Risks with Automation

Operational treasury risks are no small matter, and neglecting to manage them can have catastrophic consequences. Luckily, automated solutions can help you to identify and manage many of the operational risks mentioned above, and give you real-time feedback on the health of your company.

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