Inflation, a cost-of-living crisis, falling consumer confidence and now, according to the Confederation of British Industry (CBI), a very real risk of recession. That will set alarms ringing in treasury departments throughout corporate Britain.
But the prospect of recession should hold no fear for specialists. Crisis is a time when a treasurer can “shine”, according to Yann Umbricht, a treasury adviser and partner at PwC. “If you can unlock cash flow for the organisation, a treasurer really adds value,” he says.
Trying times certainly seem to be on the horizon. The CBI has downgraded its growth forecast for 2022 from 5.1% to 3.7% and for 2023 from 3% to just 1%. A dip of that magnitude would take the UK economy perilously close to recession.
Inflation as measured by the consumer prices index (CPI) has reached 9.1%, the Office for National Statistics states, with commentators warning that it could go higher.
Tony Danker, director-general of the CBI, warns there remained little time to avoid recession: “Inaction this summer would set in stone a stagnant economy in 2023, with recession a very live concern. We need to act now to install confidence. This can wait no longer.”
Treasurers knew full well the impact inflation would have on consumer spending, but also on central bank policies. In June, the Bank of England raised interest rates by 0.25 percentage points, while the Federal Reserve in the US has hiked rates by 0.75 percentage points.
In April, the Corporate Debt and Treasury Report from Herbert Smith Freehills, in partnership with the ACT, said the “positive outlook” of last year had “receded” to be replaced by “inflationary pressures” and other issues “posing challenges” to corporate treasury.
Umbricht, a former president of the ACT, says treasurers will first need to gauge the “risk appetite” of their boards. “Risk appetite is very important because that drives how much you need to do now and if you need to press the panic button yet, or whether you’re already there,” he says.
Before taking any action, information on a company’s financial position, including FX, must be as fresh as possible – up-to-date technology will play a critical role here. Treasurers will need to model the future over one to three years, taking into account what might happen to fluctuations in working capital, revenues, margins and volatility in interest rates.
They should also ensure control over cash leaving the business. “Being able to control the cash going outside the organisation is paramount. If you run out of cash, you’re dead,” Umbricht warns.
And then look at what debt financing may be needed based on “worst-case scenarios”.
Umbricht stressed treasurers would need to consider a “diversity” of financing sources and be prepared for all their documentation needs. Preparedness is necessary in case “markets close”, as they did during the financial crisis of 2008, he adds.
He also stresses close attention to the position of customers. “If your customers go bankrupt, and you've got credit exposure to them, it’s your cash to come that you're not going to receive,” Umbricht said.
But he remains positive about the coming challenges. “It’s an opportunity, I’d say, for a treasurer, more than a threat,” he says. “Group treasurers tend to shine in difficult times.”
Gavin Hinks is a financial writer and editor
