Albert Einstein, the renowned theoretical physicist, is quoted to have said, “If I had an hour to solve a problem and my life depended on the solution, I would spend the first 55 minutes determining the proper question to ask, for once I know the proper question, I could solve the problem in less than five minutes.”
Einstein’s point underscores the importance of corporations and their treasury departments asking the right questions. This serves as a strong foundation for informed decision-making in uncertain economic times, marked by ongoing interest rate hikes, market volatility, inflationary pressures, rising cybersecurity threats, geopolitical complexities, environmental and climate-related risks and various other challenges.
Recognizing corporate treasury’s role as the steward of financial risk management, it is imperative for them to pose the right queries. This practice fosters a more comprehensive approach to risk management, positioning them to navigate the uncertain business landscape with greater thought and resilience and thrive in the face of challenges.
Here are 10 important questions that treasury professionals should ask of themselves to lead their organizations toward effective risk management, strategic alignment and financial resilience:
As a treasury professional:
Have you identified the various types of risks that could impact your treasury department, such as currency, credit, interest rate, liquidity, cyber, supply chain, enterprise, country/geopolitical, environmental, commodity or market risks?
Do you understand the interconnectedness of these individual risk components? For example, do you recognize how geopolitical conflict could impact currency markets, and are you aware of how supply chain disruptions might affect liquidity and cash flow?
Are you prepared for and monitoring unusual or unexpected risks?
Have you defined and quantified your risk capacity?
Have you developed a robust risk appetite framework supported by independent oversight and good governance?
Do you know the difference between risk appetite and risk tolerance?
Have you tested risk appetite and limits under stress scenarios (scenario analysis, stress and reverse stress testing)?
Have you formalized the risk management process?
Are your risk management and hedging efforts purpose-driven and aligned with your organization’s strategic objectives?
- Can you leverage risk intelligence to gain a competitive advantage?
The questions outlined above will play a pivotal role in enhancing risk management within corporate treasury. These questions will lead to insightful answers to strengthen the foundation on which risk management strategies and tactics are built in your treasury department.
Each question will help guide treasury executives toward a more proactive and effective approach to identifying, evaluating, managing, mitigating and monitoring expected and unexpected risks, as well as seizing opportunities for growth.
In addition to asking the right questions, you can also benefit from reviewing the leading practices for prudent risk management here: https://ctmfile.com/story/leading-practices-part-7-risk-management. This will help you bolster the risk management function adeptly, particularly in uncertain times.
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