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Risk management strategies 101: Handling treasury risks effectively

2 February, 2022
5 min read
Chris Ortega, Chief Executive Officer, Fresh FP&A
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What you'll learn

  • The relation between risk and cash management in treasury
  • How to handle treasury risks
How are cash management and risk management related?
How to handle treasury risks?
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How are cash management and risk management related?

Treasury risk management is associated with controlling liquidity risks and collaborating with the cash and liquidity management department to guarantee that the company has adequate cash to pay its financial obligations at all times.

Cash management helps monitor and manage working capital, whereas the risk management function is responsible for identifying and managing liquidity concerns. These two functions together help to safeguard the company against cash shortages.

Types of risks faced by treasury

These are three main types of treasury risks:

  1. Business Risks: Business risk refers to a company’s or organization’s exposure to factors that might reduce profitability or cause it to collapse. Business risk is anything that jeopardizes a company’s capacity to meet its financial objectives.
  2. Financial Risks: Financial risk is the possibility of losing money on an investment or business venture.
    1. Financial Market Risks: Financial market risk is the risk that cash flows, profits, and balance sheet values are affected by movements in financial market prices or rates such as those in the interest rate, foreign exchange, or commodities markets.
    2. Liquidity Risks: Liquidity is access to cash, and liquidity risk revolves around fluctuations in the ability to access cash when and where it is needed. It comes in two forms – funding liquidity risk and market liquidity risk.
    3. Credit Risks: Credit risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. It usually refers to the risk that a lender will not obtain the owing principle and interest, resulting in a disruption in cash flow and higher collection expenses.
  3. Operational Risks: Operational risk is a term that describes the risks and uncertainties that a corporation encounters when doing day-to-day business activities in a certain area or industry.
Classification of organization risks

How to handle treasury risks?

The following steps are involved in the risk management process:
Steps in risk management process

  • Identify the risks: It involves the identification and classification of an organization’s treasury risk exposures and their sources. The first step in risk management is to identify the key risks that an organization faces. It is also important to capture emerging risks which are potential risks that the organization may face in the future.
  • Assess the risks: Once treasury risks have been identified, treasury needs to assess the likelihood of each risk occurring and of its potential impact on the organization.
  • Evaluate the risks: The evaluation of a risk requires that the organization’s appetite for that risk should be considered and compared with the current and potential risk exposure. In this phase, risk exposures are compared against the organization’s appetite for risk.
  • Respond to the risks: Once risks have been evaluated, the responses to them can be planned and implemented. The response to a treasury risk includes the following options:
    • Avoid the risk (by adjusting the business strategy, although in practice this may not be possible)
    • Transfer the risk (by insurance)
    • Reduce the risk (by introducing controls or other mitigation)
    • Accept the risk (if the organization actively seeks this type of risk because it has expertise in the area)

    Responding to the risks

  • Report the risks: This phase helps to ensure that risks are being managed as agreed, i.e. that methods and processes are being properly applied and carried out, and to check that the responses are having the desired effect. It is important that risks are reported and reassessed on a regular basis to ensure risk exposures are within the risk appetite of the organization and that internal controls are operating correctly.

Managing treasury risks with cash management software

A cash management software helps to keep track of cash inflows and outflows for your organization regularly. It helps mitigate risks in treasury through automatic reconciliation to detect discrepancies or fraud in transactions or payments. This helps to optimize the usage of cash and prevent avoidable debts. Moreover, treasurers can find better investment portfolios and suggest better financial plans for their organization.

Benefits for treasurers using cash management software:

  • Continuous global cash visibility: Single dashboard view of cash flows across multiple banks, regions, companies, and currencies improves cash utilization.
  • Automated data aggregation: Automated bank statement processing and reconciliation eliminates errors and allows cash managers to focus on value-added tasks.
  • Proactive decision making: Global cash visibility provides users with essential information for making better investment and funding decisions.
Schedule a demo with HighRadius today to implement cash management software for effective risk management in treasury.

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