Managing financial risk in times of crisis is quickly becoming the new norm following the financial crisis, Brexit, the pandemic, and recent events in the banking industry. FX rates and commodity prices continue to be highly volatile, and interest rates have been increasing over recent times. As a result, the important work that the corporate treasury function performs in protecting, managing and ensuring access to the company’s cash is high on the boardroom agenda.
So, this is an ideal time to revisit how you are managing financial risk. I would recommend looking at the following areas now:
Understand the exposure: be very clear on what your exposures are and how they affect the business, such as the impact on financial statements, cashflows and covenants. Businesses are rapidly changing and, as a result, so are the financial risks. Exposures need to be constantly assessed and not a ‘one point in time’ assessment – assumptions made in the past could be out of date.
Identify your risk appetite: as a business, a certain amount of volatility will be acceptable, but is everyone clear on that? Identify what those thresholds are for all of the risks you manage and make sure they are approved at the highest level.
Have a clear risk strategy: protecting the business through volatile times and uncertainty requires clearly articulated strategies and frameworks. These include foreign exchange, interest rate and commodity price risks. Never forget about the liquidity and counterparty risks, but, increasingly, you need to also consider wider impacts and priorities, such as environmental, social and governance or geopolitical considerations. Strategies may need to evolve to identify and tackle new risks and opportunities.
Report on the exposure: real-time reporting on each exposure is heightened during times of crisis. The technology needs to be there to perform this and be flexible enough that different views can be assessed and reported to key internal and external stakeholders for rapid decision-making.
In the immediate future, I would recommend taking the following actions:
Counterparty risk: review the number and financial strength of your financial institution partners; evaluate counterparty risk, concentration risk, and regulatory risk, and consider whether changes are required.
Protect your cash: evaluate your current and prospective cash needs and cash investment strategies, with an eye towards achieving the important objectives of preserving principal, and meeting short-term funding needs.
Ensure access to liquidity: look at sources of liquidity, such as cash on hand, working capital and lines of credit, and assess their adequacy given various potential financial market, supply chain, vendor or company-specific conditions.
Manage financial risk: confirm if credit lines offered by financing partners remain available to draw or whether access (or terms) are changing.
It is important not to do this in isolation. You should liaise with the business – for example, local finance teams, procurement, finance committees and the board – to get their perspective. Above all, this needs to be a collaborative approach.
Robert Waddington is a partner in PwC’s UK Corporate Treasury and Commodity Group