Corporate TreasuryFinancial Supply ChainNavigating volatility: a proactive approach

Navigating volatility: a proactive approach

Kerstin Braun, President of Stenn International discusses why now, more than ever, it is critical for corporate treasurers to take smart, substantive, and sustainable actions to navigate volatile trade environments and protect their businesses.

We are currently experiencing one of the most tumultuous geopolitical periods in recent memory.  Seismic changes to the status quo are percolating on almost every continent: Brexit, the U.S.-China trade war, the tensions at the U.S.-Mexico border, the crisis in Venezuela, and the list goes on. This upheaval creates significant volatility in the supply chain. Now more than ever, it is critical for corporate treasurers to take smart, substantive, and sustainable actions to navigate volatile trade environments and protect their businesses.

Brexit is a case in point. The UK is locked in a period of crippling uncertainty, with Parliament unable to agree, and analysts and experts endlessly debating and agonizing over potential outcomes.

Reacting to this uncertainty, some businesses are desperately stockpiling goods to protect their operations in the short term. But this solution is costly and likely unsustainable: it results in wasted working capital and is, unfortunately, only a short-term fix to a long-term problem.

Develop flexibility with trade finance

Instead of making rash decisions, treasurers should take a more thoughtful, deliberate, and proactive approach to safeguard their businesses. Quick remedial measures (such as stockpiling inventory) are short-term, Band-Aid solutions that can backfire.

When businesses are under financial pressure resulting from a geopolitical crisis – or otherwise – the ones with more financing options and greater long-term financial flexibility have the greatest odds of success. And the crux of this flexibility lies in strengthening the financial supply chain. Treasurers may need to consider implementing a comprehensive trade finance program that streamlines payment and unlocks working capital.

Diversify funding sources

Just as investment portfolios should be diversified to hedge against underperforming positions, businesses should leverage multiple finance sources to complement each other and add layers of protection. Companies are increasingly using both traditional banks and alternative non-banks as sources of financing and credit.

The benefit of diversifying one’s finance sources is particularly evident during periods of volatility, when heightened regulation can suddenly impact and disrupt a company’s financing and when, more than ever, companies need extra protection and security from supply chain disruption.

For example, recent research expects Singapore banks to face many challenges this year due to worsening macroeconomic conditions. The research projects a deterioration in asset quality, an increase in credit costs and stifled loan growth. This indicates that corporate lines of credit may take a hit or become more expensive. In a precarious economic situation such as this, global credit insurers may accordingly shy away from covering accounts receivable portfolios, which, in turn, could impact exporters as well as funders that cover their accounts receivable purchases with credit insurance. And smaller, domestic factors may be forced to step away from the business due to high internal risk management costs.

Simply put, organizations relying on traditional banks for accounts receivable financing may be suddenly stripped of their funding source. Who, then, comes out on top? Answer: the organizations that had already diversified their funding sources and were able to continue running their businesses without a hiccup in financing.

If one funding source is cut off, treasurers need to have a plan that allows them to pivot to an alternative source. Having a mix of financing providers allows for more comprehensive – and effective – protection.

Line up backup suppliers (and buyers)

Just as with financing, it is equally critical that organizations diversify their portfolios of suppliers and buyers. While some may view this as a procurement task rather than a treasury one, treasurers still need to provide oversight and ensure the right strategic approach is being implemented to maximize working capital and flexibility.

Returning to Brexit as an example – as they wait for the chips to fall, EU and UK companies may not be able nor willing to continue to do business across certain borders, and may therefore be cut off from their standard suppliers (and, in some cases, from their buyers.) To prepare for that scenario, organizations will need to examine their supply chain network and address whether changes, or “backup” partners, on both sides of the supply chain, are needed.

Prudent companies will source and qualify multiple suppliers across a broad range of geographic locations. This will eliminate or minimize any downtime should a disruption occur. Building in additional options within a supply chain also allows treasurers to optimize production and shipping costs.

This type of contingency planning and ready access to backup partners can make all the difference, especially during an unexpected geopolitical crisis or shift. It also ensures a comprehensive approach that anticipates potential gaps on both the buyer and supplier side: looking downstream and upstream will ensure you cover all bases before the supply chain collapses.

Bottom line: think ahead

Time and again, we see companies falling victim to rushed decisions when they are under financial pressure. When an upheaval occurs in a local market or global trade relationship, the immediate impulse is to be reactive. This results in near-term, Band-Aid solutions, but it often does little in terms of lasting, long-term protection.

We believe that there are meaningful steps that companies can take to prepare for future volatility, including diversifying financing sources and lining up “backup” partners to fill gaps in the supply chain.

Companies that act early and think long-term – as opposed to simply cost-cutting in times of decline – are proven to have a competitive advantage over others. According to a Harvard Business Review study, 14% of companies accelerated growth and increased profitability in an economic downturn, thanks to their strategic efforts.

Importantly, in order to be prepared, treasurers need to monitor for a wide array of risks and should be on the look-out for early signals of trouble – or key risk indicators – to ensure there is time to plan/act strategically and avoid making decisions in a panic.

Key risk indicators can include specific, quantitative metrics and broader situations:

  • Value at Risk (VaR)
  • Current ratio
  • Foreign exchange risk
  • Wavering growth rates
  • Political instability, or rumors of political upheaval in local markets
  • Rumors of growing antagonism between countries engaged in key trade partnerships

Working capital is the lifeblood of a company and needs to be protected – especially in volatile times. Multiple funding sources, a healthy network of suppliers and buyers, and an understanding of exposure risks can help departments maximize liquidity and successfully navigate the supply chain – no matter what.

Key risk indicator definitions:

  • Value at Risk (VaR): reflects an organization’s exposure to potential losses and can help it determine how much cash it needs on hand to cover them
  • Current ratio: measures the liquidity of an organization at-a-glance, based on its total current liquid and illiquid assets to liabilities
  • Foreign exchange risk: refers to the potential losses from exposure to fluctuations in foreign exchange rates
  • Wavering growth rates: indicate a decrease in GDP and often followed by times of heightened unemployment, a lack of credit availability and contraction in business earnings
  • Political instability, or rumors of political upheaval in local markets
  • Rumors of growing antagonism between countries engaged in key trade partnerships

About the author:

Kerstin Braun, President of Stenn International – a non-bank trade finance provider – specializes in trade finance and focuses on smoothing out financial frictions in the supply chain, with over a decade of experience in the financial risk industry.

Whitepapers & Resources

Transaction Banking Survey 2019

Transaction Banking Survey 2019

TIS Sanction Screening Survey Report

Payments TIS Sanction Screening Survey Report

Enhancing your strategic position: Digitalization in Treasury

Payments Enhancing your strategic position: Digitalization in Treasury

Netting: An Immersive Guide to Global Reconciliation

Netting: An Immersive Guide to Global Reconciliation