Cash & Liquidity ManagementCash ManagementWATCH: Managing risk with more sophisticated end-to-end workflows

WATCH: Managing risk with more sophisticated end-to-end workflows

As the complexities of novel data and reporting mandates intensify, it's imperative to leverage cutting-edge technological solutions

Effective risk management is essential for senior treasury leaders. While the increasing demands of new data and reporting requirements have made it more challenging, technology can help treasury teams manage risk more effectively.

In The Global Treasurer’s latest instalment of the Future in Focus series, Agilent Technology’s Nita Baindur and Standard Chartered’s Anand Natarajan outline some of the major challenges impacting how treasury teams effectively manage risk.

To read the full discussion, please read the Q&A below:

How are treasury teams managing risk?

Nita: Treasury management involves managing a variety of risks, including foreign exchange risk, credit risk, interest rate risks, liquidity risk, and business operations risks.

To manage FX risk, Agilent Technology’s treasury department has three hedging programs in place: balance sheet hedging, cash flow hedging, and net investment hedging. Agilent manages interest rate risk d by using treasury locks or interest rate swaps.

To manage operational risk, Agilent takes out insurance coverages; this includes Cyber, Errors and Omissions, Directors’ & Officers liability, and Property & Business Interruption cover.

What tools can treasurers use to mitigate currency risk and gain better insight into their operations?

Anand: Treasurers’ use of technology is being driven by the availability of a combination of solutions/products in relation to the market scenario they are currently exposed to. For example, emerging markets concerned with counterparty risks are utilising escrow accounts. In terms of FX risks, a lot of banks and other businesses are connecting with fintech firms to develop new APIs and FX tools, especially for e-commerce transactions.

Nita: At Agilent, the treasury team has several tools integrated within its TMS to help manage FX risk; this includes a tool that helps Agilent decide what amount to hedge and whether it is buying or selling that specific currency. Agilent’s country controllers and business unit controllers have access to this tool which allows them to enter their exposure forecasts and allows Treasury to net exposures so that the cost of hedging is reduced through the reduction in the number of trades.

Anand: Interest optimisation structures are also becoming more common; these allow businesses to take advantage of surplus cash positions and get a larger yield from a centralised location. In addition, treasurers are looking more closely at data localisation to ensure compliance with regulations if they are working in serval different markets. New forms of data storage as well as alternative payment methods have helped treasurers manage this form of risk.

How has Agilent worked through any recent risk-related issues?

Nita: Over the past 18-24 months, Agilent has managed to mitigate the effects of the appreciating US dollar through its cash flow hedging program. However, the treasury team are revisiting its process for forecasting exposures to maximise the application of hedge accounting under ASC 815 to help increase the hedge ratio. Agilent’s treasury team is also looking at how it can net exposures in the same currency across entities with automation.

How important is it for treasury teams to have both a short- and long-term risk management strategy in place?

Anand: The long-term strategy, in the current macroeconomic environment, becomes especially important. Companies with exposures to countries in emerging markets – those which have experienced credit rating downgrades and depleting FX reserves – are having to manage the new restrictions to repatriate cash. This has exacerbated the need for treasurers to diversify across currencies, countries, and counterparties.

Nita: Long-term strategies are especially important for currency hedging. Several companies that did not have a cash flow hedging program in place over the last 2 years have watched their bottom line decrease as the US dollar appreciated. Agilent had a well-defined cash flow hedging program in place and managed to achieve gains which offset the profit & loss (P&L) currency impact. The purpose of these programs, however, must be communicated to senior management – they are there to reduce FX volatility and not to make profits.

What is the importance of end-to-end workflows regarding cash management?

Nita: Agilent has end-to-end workflows which not only increase productivity but also ensure better controls. For example, it has a virtual approval process for treasury payment requests which enables Agilent to automate that treasury payment request and upload it to the TMS seamlessly.

Agilent also invests excess funds in money market funds via a portal. This portal helps ensure that the money market funds meet Agilent’s investment policy requirements, whether it’s a percentage of its total holdings or as a percentage of assets under management. This portal also interfaces with Agilent’s TMS, and this in turn facilitates the accounting at the back end, whether it’s accounting for income or capital gains/losses, redemptions or additional investments.

Agilent also has an in-house bank for cash pooling which is managed by its Singapore entity. Many of Agilent’s global entities deposit their excess funds in the Singapore Cash Pool and withdraw as needed. Another cash pool has been created for Chinese entities. The cash pool transactions are tracked by the TMS

Anand: Cash pooling has become a lot more sophisticated over the past couple of years. There’s been a significant shift in this space towards the usage of bank-developed solutions, but also partnering with third parties and fintech. As a result, the ability to get cash from a bank sitting in a remote part of the world has become easier.

Has Agilent implemented any new technology recently to improve workflow management?

Nita: Agilent recently upgraded its TMS and as part of that upgrade, all its interfaces with additional tools and ERP had to be reconfigured. The new TMS gives the treasury function good visibility to both exposures as well as its bank balances. We also worked closely with our Accounts Payable team to implement Same Day ACH and International ACH to replace wires, resulting in reduced bank fees.

Anand: TMS integration with other systems is likely to be a trend which continues over the next 12 months, according to Standard Chartered. This will ensure that whenever there is an FX transaction or cross-border payment to be done, the data flow between the banks’ backend systems through the TMS to the ERP is as seamless and consistent as possible.

How important is it to have streamlined and efficient workflow management in place to support treasury operations?

Nita: There are several benefits to having a streamlined workflow management system in place to support operations. One of the biggest benefits is getting visibility to funding needs for a business’s various entities, and then also managing foreign exchange exposures.

Gathering this information through emails or spreadsheets can make getting a consolidated picture difficult; using tools and making sure that the right teams have access to these tools – whether it’s to provide forecast input or explain deviation from forecast – allows treasurers to get a consolidated view in a timely manner.

Streamlining the workflow also provides better controls. Agilent has an audit trail across its systems: who executed the trades, who confirmed the trades, and how the FX gains and losses get allocated back to the entities. Automation also reduces the chance of manual error, something that can be costly. It also increases productivity by eliminating many of the manual repetitive tasks: it frees up time for more value-add work, such as hedging strategy, or debt management.

 

 

 

 

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