Effective treasury risk management is a critical responsibility for treasurers, as it safeguards an organisation’s continuity and future success. In this article, we explore the main risks faced by treasurers, the role of treasury in risk management, strategies to mitigate risks, and the technology solutions available for treasury risk management.

What is Treasury Risk Management?

Treasury risk management involves mitigating financial risks within an organisation, including liquidity, investment, foreign exchange (FX), interest rate, and payment risks. It entails identifying risks associated with treasury activities and developing proactive response plans to minimise potential negative impacts. This typically includes activities such as cash flow forecasting, structured debt repayment, investment hedging, liquidity planning, and the establishment of treasury policies. Treasury risk management may also involve conducting audits to ensure accurate financial reporting.

The Role of Treasury in Risk Management

Treasurers play a vital role in effective risk management. They assess how the organisation manages its financial resources and provide guidance to other departments on managing financial risks. Treasurers also help mitigate the financial threats associated with market volatility, interest rate fluctuations, liquidity risk, and credit infrastructure. They achieve this by assessing the potential costs of specific scenarios and recommending appropriate actions. The processes established by treasurers ensure informed decision-making while protecting the organisation from unnecessary losses.

Types of Treasury Risk

Treasury departments face various risks that require careful management. The most common types of treasury risk include liquidity risk, market risk, operational risk, and counterparty risk.

  • Liquidity Risk: All companies face liquidity risk, which refers to the risk of insolvency due to an inability to meet financial obligations on time. Treasurers need to continuously monitor cash availability to ensure there is enough liquidity when needed. Liquidity risk varies across organisations depending on their financial health, but regular monitoring is crucial for all companies.
  • Market Risk: Market risk affects all organisations and arises from the volatility of market prices and rates, such as commodity prices, interest rates, and FX rates. Changes in these market factors can significantly impact cash flows and treasury risk levels. Managing market risk requires monitoring and proactive response strategies.
  • Operational Risk: Operational risk encompasses various risks associated with day-to-day treasury activities, including processes, personnel, legal and compliance matters, treasury frameworks, payments, and IT systems. Issues in any of these areas can have a severe impact on cash flows and business continuity, making operational risk management essential.
  • Counterparty Risk: Counterparty risk refers to the risk of financial loss resulting from the failure of a bank or company where funds are invested or deposited. It can also occur when customers fail to fulfill contractual payment obligations, impacting cash inflows and leaving the organisation vulnerable. Mitigating counterparty risk involves thorough due diligence and knowing the parties involved in business transactions.

Strategies to Reduce Treasury Risk

Treasurers employ various strategies to reduce treasury risk, focusing on liquidity risk, market risk, operational risk, and counterparty risk. Here are some key strategies:

  • Get a Treasury Management System (TMS): A TMS is an invaluable tool for treasury risk management, particularly for larger organisations with multiple banks and technologies. TMS automates manual tasks, centralizes data, and enhances analysis capabilities, enabling treasurers to effectively manage risks.
  • Risk Management Frameworks and Processes: Establishing comprehensive risk management frameworks and processes is crucial to mitigate risks effectively. These frameworks should include steps such as risk identification, risk assessment, risk evaluation, risk response, and risk reporting. Continuous improvement and updating of these processes ensure risks are managed and reported accurately in cash flow data.
  • Enhance Cash Visibility: Improving cash visibility minimises treasury management risk. Tools that consolidate data from multiple systems, including banks and ERP systems, provide quick insights into company-wide cash positions. Enhanced cash visibility enables treasurers to respond promptly to risks and make informed decisions.
  • Implement FX Exposure Strategies: Organisations can adopt strategies to mitigate FX risk, such as transacting in preferred currencies, adding contractual clauses to cover significant exchange rate deviations, and structuring the organisation based on counterparties’ locations. Hedging through forward exchange contracts or currency options also helps protect against currency fluctuations.
  • Run Frequent Cash Flow Forecasts: Staying on top of cash flow projections helps mitigate treasury risk by identifying potential cash shortages and surpluses. Advanced cash flow forecasting tools incorporate market risk factors, industry trends, and seasonality indicators, providing a solid foundation for risk management.
  • Regularly Check Liquidity Positions: Regular liquidity position checks provide insights into a company’s financial health and help mitigate risks associated with poor liquidity. Centralising liquidity management with automated systems enables quick analysis of liquidity risk exposure and identifies areas requiring attention.
  • Work on Preventing Fraud: Fraud, particularly payment fraud, poses significant risks to organisations. Implementing robust processes and utilising payment hubs helps mitigate risks. Training staff to be aware of fraudulent techniques and employing sanctions screening can prevent fraudulent payments. Regular auditing of payment processes detects improvement points and anomalies.
  • Familiarise Yourself with Market Risks: Staying informed about market developments and potential impacts on FX, commodity prices, and interest rates is crucial. Utilising strategic risk techniques like derivatives, FX hedging, and interest rate risk management helps reduce market risk exposure.
  • Have External Auditors or Consultants Check Financials: Engaging external auditors or consultants provides an independent assessment of treasury risk and identifies potential risks that may have been overlooked. They can also assist in ensuring compliance with regulations.

Effectively managing treasury risk is crucial for the long-term success and continuity of organisations. By implementing appropriate strategies and utilising technology solutions such as treasury management systems, organisations can proactively manage treasury risk and navigate the dynamic financial landscape.

Treasury risk management technology providers 

Managing treasury risk often starts by selecting the right technologies to help. We have listed the 3 solutions that TreasuryONE implement and supports in South Africa:

  • IT2: IT2 is a treasury solution that gives teams the tools they need to define the organisation they envision. Integrated process maps, workbenches and dashboards help teams manage workflows for cash and liquidity, funding and assets, exposures, and accounting. IT2 is ideal for businesses that run or want to run a centralised treasury model to save costs and improve risk management. IT2 can be hosted or delivered as an on-premise solution
  • Kyriba: Kyriba is a treasury management technology provider headquartered in the United States. Their enterprise liquidity solution includes treasury risk, working capital management, cash flow forecasting, payments, and connectivity. Kyriba mainly serves larger companies. Kyriba is a pure SaaS solution.
  • TreasuryXpress: As a leading, digital, on-demand treasury management solution (TMS), Bottomline TreasuryXpress makes it possible for companies of all sizes to manage cash, improve liquidity utilisation, streamline electronic payment processes, and increase treasury controls and efficiencies. TreasuryXpress is ideally suited for businesses focusing on cash and payment optimisation.