There are times when corporate treasury is not for the fainthearted. While much of the treasurer’s role is focused on day-to-day activities, every now and then an incident will occur which can test treasurers to the limit and even put the company’s reputation at risk. When disaster strikes, how can treasurers remain calm – and how feasible is it for treasurers to be prepared for every eventuality?
Rising to the challenge
Recent years have brought many challenges, from the collapse of Lehman Brothers a decade ago to more recent concerns about cyberattacks. While not all of these situations will be specific to treasury, often the treasurer will have a role to play in navigating the implications. In some cases, the pressures of a particular business environment can be enough to prompt treasurers and other finance professionals to reconsider their roles. Tesla, for example, has seen a number of high-profile departures in recent months, including the company’s treasurer and vice president of finance.
From a treasury perspective, events which have a direct impact on short-term liquidity and the ability to arrange external funding are the most important
While every company is exposed to its own set of risks, all treasurers need to be prepared for the unexpected. Sander van Tol, Partner at consultancy firm Zanders, points out that companies can be exposed to a wide range of external events which can trigger financial turmoil. “From a treasury perspective, events which have a direct impact on short-term liquidity and the ability to arrange external funding are the most important,” he says. Van Tol notes that these can include incidents such as cyberattacks as well as defaults by large clients or key vendors.
Not all turmoil comes from external developments: treasurers can also face challenges as a result of extreme business events which may also cause the cost of debt to rise or the stock price to crash. “The way treasurers prepare for disruption is to ensure all the other things they have to do are happening normally, whether that’s managing day-to-day cash around the group or having access to financing,” says David Stebbings, director, head of treasury advisory at PwC. “Then you can focus on the effects of the turmoil.”
How can treasurers navigate these issues successfully? Naturally, a key requirement is to have a disaster recovery plan in place which sets out in detail how staff should respond to different situations.
“The impact on the day-to-day activities depends to a large extent on whether corporate treasurers have a contingency plan in place and whether they regularly review and test this plan,” says van Tol. “It is like a kind of treasury fire drill: can we still make payments via alternative channels? Do we have sufficient alternative funding channels in case the debt capital market is ‘closed’? Can we quickly issue new shares? Do we have another cash management bank for incoming payments? Is there sufficient contingency in case the treasury management system (or its database) is inaccessible?”
The impact on the day-to-day activities depends to a large extent on whether corporate treasurers have a contingency plan in place
Stebbings notes that there is a cyclical element to contingency planning. “Once something happens, everyone becomes more focused on that particular issue,” he says. “When I was a treasurer in London in the early 1990s, we had a contingency plan around possibly having the leave the office owing to IRA bomb threats, which we actually had to put into place to enable us to make payments – luckily there was no bomb and we were back in the office five or six hours later. Today, cyber risk is a big focus given recent events and many treasuries have put in place contingency plans in the event of an attack.”
Be flexible and resilient
Also key to navigating choppy waters is building in flexibility and resilience wherever possible. “Organizations are becoming more uniform, and hence are vulnerable to uncertainty,” says van Tol. “Companies should create a culture in which they react very quickly and have resilience, including in treasury.”
Companies should create a culture in which they react very quickly and have resilience, including in treasury
Marianna Polykrati, group treasurer of Greek food company Chipita, says that in the last 10 years, the treasurer’s role has been transformed from being a cash manager and accountant to being a business partner – thus allowing her to be able to have early insight in most parts of the business that could be impacted by external abnormalities. This makes everything much easier, especially as the number of extraordinary pressures facing treasurers on a monthly basis has increased significantly, to the extent that unexpected disruptions are now considered the norm. “We basically try to include ‘what if’ scenarios and assume that there’s going to be an abnormality,” she explains.
What this means in practical terms is that the treasury tries to prepare for different scenarios and considers the impact of these as a standard part of the planning process. As Chipita is active in many different markets with foreign currencies that have shown quite extreme behaviours (i.e. TRY, RUB), this is incorporated into the budgeting process – but it also extends to areas such as in the sourcing of raw materials.
“For example, if we have a raw material to be sourced at a fixed price for 18 months, we will not source all the estimated amount from this contract, but will allow flexibility to source from other suppliers as well,” Polykrati says. “With the wide market changes, it might be to our advantage to source from another supplier – or it might be difficult for the current supplier to meet those terms without going out of business.”
Another consideration is that when turmoil strikes, treasurers may find they lack the resources needed to manage the effects while continuing to fulfil daily treasury activities. This is where external support from experts such as consultancies can play an important role in helping treasurers navigate turmoil successfully. “We have people here who are skilled in crisis management and have plans at the ready which can guide treasurers and companies as a whole through a crisis,” Stebbings explains.
It may be impossible to prepare for every eventuality – but the more detailed a treasurer’s plans, the better positioned they will be to react appropriately to unexpected events and mitigate the impact on the company’s reputation. Van Tol cites the Johari window model, which explains the concepts of known knowns, known unknowns and unknown unknowns. “By preparing for the first two concepts, one might discover new unknown unknowns,” he notes.
That said, there is a limit to how much time treasurers should spend working on contingency plans – so the key is to strike a suitable balance. “Of course, you could spend a lot of time putting in place mitigations and plans for situations that never happen – but that’s the nature of risk management,” Stebbings concludes.