Recessions are transient drops in economic activity across time frames of six months to several years.
From 1854 to the most recent recession in 2020, the United States has experienced 34 recessions, according to the NBER. There have been five such instances of negative economic growth since 1980 that were defined as recessions.
Most nations have experienced economic growth as their long-term macroeconomic trend since the Industrial Revolution. However, there have also been short-term fluctuations along with this long-term expansion, where important macroeconomic indicators have displayed slowdowns or even outright negative performance across time frames of six months to several years before resuming their long-term growth tendency.
Many economic theories try to explain why and how the economy might deviate from its long-term growth pattern and experience a sudden recession.
According to some economists, actual developments and structural changes in the sectors best explain why and when economic recessions occur. For instance, a sudden geopolitical crisis-related, sustained rise in oil prices would simultaneously increase costs across many businesses, or a revolutionary new technology might quickly render entire industries obsolete, which would result in a widespread recession.
The term yield curve refers to the relationship between the short-term and long-term interest rates of fixed-income securities issued by the U.S. Treasury.
The yield curve usually is not inverted since longer-term debt often carries higher interest rates than short-term debt. The yield curve is inverted when short-term interest rates are higher than long-term interest rates. An inversion in the yield curve is considered a reliable predictor of a recession.
The economy is significantly affected by this yield curve. For instance, a bank can make money by borrowing money at short-term rates and lending it out at longer-term rates. When that gap is wide, they make more profit. An inverted yield curve complicates that by enlarging the gap. As a consequence, banks make lending difficult to obtain, reducing the chance of growth opportunities for companies.
Treasury risk during a recession includes the following:
There is no single way to predict how and when a recession will occur. According to many economists, There are two widely recognized indicators:
Scenario planning helps decision-makers anticipate possible outcomes and implications, assess actions, and manage multiple scenarios. Businesses overborrow at the last moment with high interest because of poor scenario planning with spreadsheets or sup-par technology. This may lead them into huge debts that eventually cause penalties for repaying the loans late. Automated cash forecasting helps predict customer-specific payment dates accurately by incorporating multiple customer and invoice-level variables. External factors such as raw material fluctuations can also be considered to capture trends for generating a cash flow forecast.
Having automated cash forecasting software is key to identifying the degrees of impact and mitigating the risks in advance. Accurate cash forecasts allow treasurers to anticipate cash needs, improve capital allocation, understand movements in interest rates and commodity prices, manage credit and counterparty risks and control FX risks through confident hedging and repatriation decisions.
Regular forecasting refers to creating accurate and updated forecasts with all the historic and current information. It enables the treasury department to make decisions based on what’s going on in the business right now, rather than on a possible budget set months in advance. Businesses will be able to predict future cash gaps and avoid missed payments if they perform cash forecasting regularly.
A real-time cash flow forecast gives businesses the clear vision they need to implement corrective actions such as fine-tuning payment and collection strategies, liquidating assets, or approaching lenders. It supports performing variance analysis over multiple durations across multiple regions, entities, and cash category levels. Additionally, it supports functionality to drill down into variance drivers for exercising better control over cash flows.
Treasury management best practices include the following:
Here are some benefits provided by AI treasury solutions:
The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.