However, one area apparently struggling to attract much attention is that of corporate treasury. Lacking in glamour, seemingly unloved and consigned to the back office; yet its time may be about to come. Thrust to the forefront of the battle to remain solvent and uniquely positioned to address the thorny issue of counterparty risk, treasury teams could be about to step into the limelight — and receive the attention and investment they need. Frank Wendt of KPMG’s Advisory practice explains.
In this time of crisis, you should not under-estimate the potential importance of your treasury function; that’s my message to business. For too long now, treasury has labored away in the back office, kept busy by routine tasks, firmly rooted in the operational side of the business.
Treasury teams have well-established procedures for monitoring counterparty risk where it concerns a company’s banks and customers. Ask yourself though whether the crisis might have played out any differently had treasury’s counterparty risk focus also extended to suppliers, if their procedures had been rather more rapid and rigorous and if their voice had been heard at the more strategic decision-making level within their organization.
I maintain that things could have been somewhat different. I’m not saying the crisis would have been averted but I think it’s a fair bet that Boards across the world are now seeing the issue of counterparty risk racing up their agenda — and asking what they could do about it.
Day by day, the extent of the risks faced by suppliers, customers, banks and other business partners is becoming much clearer to many corporates. Yet one of the ways companies can better manage counterparty risk in future is, I believe, right under their nose. Those who realize this may also quickly come to understand that — unpalatable as the thought is in these cost-constrained times — a rapid injection of investment into the treasury function now may pay off handsomely in the years to come. After all, we are not finished with this crisis yet.
Thankfully, the basic methods of checking and assessing counterparty risk are technically similar, whether the entity in question is a supplier or a customer. However, even the established customer risk assessment processes could become more agile and proactive. Supplier risk management is far more complex as problems with one supplier can reverberate throughout the whole supply chain. Risk management around financial institution business partners is equally important as it now requires a review of the credit risk methodologies which had served so many practitioners well — or so they thought — up until the crisis hit.
All of this adds up to a need for investment in the risk methodologies and the people who operate them; as well as in new systems and processes which can help lighten the department’s existing transaction-based workload, freeing up time to work on the more value-added activities.
Strengthening a corporate treasury department in this manner can also strengthen a company’s ability to manage its own cash flow. Treasury teams are in the vanguard of the battle to remain solvent, to generate cash and to implement cash control and liquidity risk concepts. Is there a single business out there right now which isn’t utterly focused on day-to-day cash concerns? Cash is the common denominator in which all treasury teams deal; so their importance in this battle cannot be under-played.
Treasury teams should seek to break out of their back-office mindset though, developing a broader understanding of the operations side of their business in terms of cash flow and risk. Again, I would suggest this is another opportunity for training-based investment.
Something else which should be addressed in any review of a treasury function will be the likelihood — in my opinion — of managing financial risks (such as commodity and foreign exchange risks) far too dogmatically in the near future. Driven by overdue conservatism, this is an understandable reaction to the circumstances in which we find ourselves but I fear it may be an over-reaction, leading to some companies missing out on the possible benefits of a more flexible and dynamic approach.
The desire to see treasury take more of a front-line role is mirrored across numerous other departments within a company’s risk management and finance management functions. However, treasury is well placed to assist on cash management and the ongoing issue of counterparty risk. That point alone could well make it a prime candidate for much-needed investment, both in terms of methodologies and systems as well as staff training, if Boards can see their way clear to freeing up what cash remains. It’s just a shame that it took the credit crisis to make this clear.
Frank Wendt is a Director in KPMG’s Global Solutions Centre, based in the U.S. firm’s Montvale office
www.kpmg.com
In this time of crisis, you should not under-estimate the potential importance of your treasury function; that’s my message to business. For too long now, treasury has labored away in the back office, kept busy by routine tasks, firmly rooted in the operational side of the business.
Treasury teams have well-established procedures for monitoring counterparty risk where it concerns a company’s banks and customers. Ask yourself though whether the crisis might have played out any differently had treasury’s counterparty risk focus also extended to suppliers, if their procedures had been rather more rapid and rigorous and if their voice had been heard at the more strategic decision-making level within their organization.
I maintain that things could have been somewhat different. I’m not saying the crisis would have been averted but I think it’s a fair bet that Boards across the world are now seeing the issue of counterparty risk racing up their agenda — and asking what they could do about it.
Day by day, the extent of the risks faced by suppliers, customers, banks and other business partners is becoming much clearer to many corporates. Yet one of the ways companies can better manage counterparty risk in future is, I believe, right under their nose. Those who realize this may also quickly come to understand that — unpalatable as the thought is in these cost-constrained times — a rapid injection of investment into the treasury function now may pay off handsomely in the years to come. After all, we are not finished with this crisis yet.
Thankfully, the basic methods of checking and assessing counterparty risk are technically similar, whether the entity in question is a supplier or a customer. However, even the established customer risk assessment processes could become more agile and proactive. Supplier risk management is far more complex as problems with one supplier can reverberate throughout the whole supply chain. Risk management around financial institution business partners is equally important as it now requires a review of the credit risk methodologies which had served so many practitioners well — or so they thought — up until the crisis hit.
All of this adds up to a need for investment in the risk methodologies and the people who operate them; as well as in new systems and processes which can help lighten the department’s existing transaction-based workload, freeing up time to work on the more value-added activities.
Strengthening a corporate treasury department in this manner can also strengthen a company’s ability to manage its own cash flow. Treasury teams are in the vanguard of the battle to remain solvent, to generate cash and to implement cash control and liquidity risk concepts. Is there a single business out there right now which isn’t utterly focused on day-to-day cash concerns? Cash is the common denominator in which all treasury teams deal; so their importance in this battle cannot be under-played.
Treasury teams should seek to break out of their back-office mindset though, developing a broader understanding of the operations side of their business in terms of cash flow and risk. Again, I would suggest this is another opportunity for training-based investment.
Something else which should be addressed in any review of a treasury function will be the likelihood — in my opinion — of managing financial risks (such as commodity and foreign exchange risks) far too dogmatically in the near future. Driven by overdue conservatism, this is an understandable reaction to the circumstances in which we find ourselves but I fear it may be an over-reaction, leading to some companies missing out on the possible benefits of a more flexible and dynamic approach.
The desire to see treasury take more of a front-line role is mirrored across numerous other departments within a company’s risk management and finance management functions. However, treasury is well placed to assist on cash management and the ongoing issue of counterparty risk. That point alone could well make it a prime candidate for much-needed investment, both in terms of methodologies and systems as well as staff training, if Boards can see their way clear to freeing up what cash remains. It’s just a shame that it took the credit crisis to make this clear.
Frank Wendt is a Director in KPMG’s Global Solutions Centre, based in the U.S. firm’s Montvale office
www.kpmg.com