This is the thirteenth topic and fourteenth article in a series on leading practices in corporate treasury.
A key component of liquidity management is having an accurate and comprehensive view of your assets and capital at all times.
Preparing for liquidity challenges that can arise out of an unexpected, improbable or disruptive event is a critical responsibility that the treasurer is entrusted with. The failure of treasury to manage organizational liquidity carefully and effectively during turbulent times would represent a dereliction of duties.
Bracing for unexpected events is, in its essence, a strategic organizational exercise. The treasurer must protect the organization’s cash and liquidity with continued vigilance and analytical foresight to anticipate and better prepare for unforeseen developments.
Preparation can be at different levels and may differ depending upon the location, size and complexity of a corporation’s operations. It may even vary greatly, given their net borrowing or investing position, exposures and current structure.
Here are our recommendations on the preparation and the monitoring required by treasurers to gear up for uncertain or unfortunate events.
Being well-organized and allowing for comprehensive visibility is vital
Preparing for an unexpected event is easier when treasury is well-organized. Better organized is better prepared for the unanticipated and for making sound and rapid decisions, particularly when difficult financial times arise.
As sudden or worrisome market, geopolitical or government events unfold or pose a threat to the corporation’s liquidity, the more organized treasury group will be able to reassess or react promptly according to plan.
“Being well-organized helps prepare for the moment when the unfavourable event strikes. Being able to see your company’s cash, investments, debt, and other related items efficiently and in a timely manner is the critical first step in preparing for an unexpected event or development,” said Craig Jeffery, managing partner at Strategic Treasurer, a leading treasury consulting firm. ⃰
All of the preparations the treasurer makes to allow for daily and real-time visibility into the organization’s liquidity enable it to move quickly when disagreeable events arise.
“Timeliness matters. It is important to note that visibility to liquidity components that comes too late or at an inappropriate level is almost useless,” observed Jeffery.
It is necessary for treasurers to view their entire domestic and international account balances and transactional activity on a daily basis. Similarly, the importance of tracking and reporting debt, investment and hedge data for exposure and against compliance levels must not be underestimated. Monitoring counterparties’ ratings and systematically reporting direct and indirect counterparty exposures is recommended.
Assess threats and impacts to the corporation’s liquidity
Astute and strategic treasurers perform a regular review to identify and measure organizational liquidity and the various factors that impact liquidity in a negative direction.
Regular assessment of the challenges and risks to liquidity is extremely important in anticipation of new, emerging and disruptive events. “This is a time when treasurers earn their keep,” Jeffery further added.
The magnitude and consequences of various events can be significant and may be felt both directly and indirectly. Preparatory work will allow for faster analysis and response.
It is recommended that policies should be kept current, reflecting changes to various instruments and counterparties. Be watchful for potential downgrades or increased concerns about other parties. Ensure the resiliency of the company to withstand multiple hits from a variety of sources by adopting prudent risk management activities, including diversification.
Establishing an early warning system for volatile and abnormal activity by monitoring reports, data, news, industry and market dialogue is advised. During times of stability, there may be a greater pressure on treasury not to spend time or the resources for events that seem highly improbable. The belief that what happened in the past will not occur in the future is inappropriate.
“While exact situations and triggering events are unlikely to mirror history, the treasurer must ensure that the organization will be ready for similar events that may come about or be exacerbated by other actions or regulations,” remarked Jeffery.
Although it may be possible to predict some of these anomalous events, it may be impossible to prevent them. However, treasurers can ensure that their group is prepared to address such events as they unfold by leveraging business intelligence and data analytics that will help them feel more confident than would otherwise be the case.
Communication is paramount
Even in stable times, ongoing communication with senior management and the board is always appropriate. Apprising the management and the board of issues and actions pertaining to liquidity management and how treasury is mitigating risks should be a priority.
In Chapter 17 of his book The Strategic Treasurer: A Partnership for Corporate Growth, Jeffery cautions, “In volatile times, recognize that the board must stay current on news and will have questions. The board should be kept informed on a proactive basis by the Treasurer; don’t wait to be asked first.”
During a fast-moving, challenging or unexpected event, it is important for treasurers to communicate with their key constituencies, early and frequently. It is equally important to get sagacious inputs from various sources – internal and external.
Holding internal discussions with members of the treasury and finance teams, tapping into the power of their collective knowledge and experience, and being open to suggestions on how to take effective action are all crucial in responding to changing events and developments. In addition, seeking external inputs or advice from bankers, other treasurers, finance thought leaders or treasury consultants will help corporate treasurers effectively deal with unexpected events and situations.
There are many factors that can threaten liquidity, and the treasurer must ensure that the risks that can arise from the elements of surprise that accompany sudden or unexpected events are anticipated, assessed and mitigated. Preparation and monitoring are the keys to acting and responding efficiently to unusual or turbulent events and successfully protecting the organization.
Rare or unfortunate events have wide-ranging and significant consequences. With the treasurer’s role becoming increasingly strategic, expecting the unexpected or seeing the risks before they happen can be daunting. Thankfully, our recommendations will help you navigate a number of different possible events and remain alert to potential new sources of risk.
Remember, never rule out any possibility so that you can respond effectively even when an event occurs for which a specific action plan does not exist or is not well-matched. This approach or mindset should enable your corporation to deal with unanticipated events, as well as those that can be anticipated.
⃰⃰ Disclosure: Strategic Treasurer owns CTMfile.
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