Barden Uncovered: Treasury Careers #3 The Role of Treasury in Risk Management

Barden Uncovered Treasury Careers #3 The Role of Treasury in Risk Management (1)

In our 3rd part of our ‘Treasury Careers’ blog series, we continue by looking at the role of treasury in finance and delve a bit deeper into risk management.

What is risk management when it comes to treasury?

Risk management is a very broad term but has become a very important part of the treasury function.  The treasury function is one of the areas in an organisation most exposed to risk and as a result corporate treasures have a key role to play in managing and mitigating risk.

Treasury departments themselves are usually regarded as a high-risk environment. This is due to three reasons:

  1. First of all treasuries are normally operating in a different market than that of the rest of the organisation, namely the financial markets;
  2. Secondly, risks are very visible in treasury departments due to the large amount of funds involved: losses on foreign currency exposures or from poor funding decisions are very high profile and quantifiable;
  3. Finally, treasury functions are usually in control of bank accounts, and bank accounts are the window through which funds leave the company after a fraudulent event.

Let’s take a closer look at some of the risks and role of the treasury team.

Financial Risks 

The role of the treasury function is to identify the business’s specific exposures, whether these be currency, liquidity, credit, interest rate, commodity or markets.  The treasurer needs to understand the business’s appetite for risks and once defined, the treasury function can decide and execute a hedging strategy.

Ultimately, the degree to which a business participates in hedging activities is determined by the company’s tolerance for risk and earnings volatility.

Consistency and effective communication are key to engaging all stakeholders and acquiring buy-in from different business units, senior management and the board.

Cash Risks

Cash risks relate to the operational, cash and liquidity risks. Trapped cash, in particular, is a major concern for most corporate treasuries that do business in the emerging markets, especially in a region like Asia with highly diverse currency and regulatory regimes.

Sovereign risk, particularly in markets where there are constant changes in regulations and political climate, can also adversely impact business and treasury operations, especially in the areas of cash pooling and taxation.

Technology plays an important role in managing and mitigating treasury operational risk. The adoption of a more sophisticated and centralised treasury model is an effective way to mitigate the cash family of risks. Centralising treasury into a shared service model involves moving high volume, low value activities to a reasonably accessible, lower cost location with local talent. For larger, more complex organisations, this could be extended into an “in-house bank” model, enabling group entities to transact directly with the in-house bank for financial needs such as FX, deposits and funding.

Off-the-shelf Treasury Management Solutions (TMS) can also contribute to risk mitigation as they provide a central repository for deals and enable greater interconnectivity to other business units, counterparties and banks. By giving treasuries a consolidated view of exposures, TMS allow treasuries to make better strategic decisions.  Some also help reduce human intervention and error, enabling better straight through processing.

Conclusion

It’s easy to see now that treasury is not just about managing cash!  How complex and technical treasury is will depend of course on the size, scale and complexity of a business but also on an organisations appetite to risk and awareness of treasury issues in the first instance.

One thing is for sure, a career in treasury, whilst it may not be a traditional role in business finance, is an exciting, rewarding and varied career and a profession in demand in Ireland and internationally.

Get in Touch With Us

Barden is where recently Treasury Professionals go for career advice before they start looking for a job.

Your future is too important to leave to chance. Take control, get informed and plan your professional future with Barden. Drop Kate Flanagan (at kate.flanagan@barden.ie) or Aoibhín Byrne (aoibhín.byrne@barden.ie) an email they’ll take it from there.

At Barden we invest our resources to bring you the very best insights on all things to do with your professional future. Got a topic you would like us to research? Got an insight you would like us to share with our audience? Drop us a note to hello@barden.dev.perpetualdigital.ie and we will take it from there. Easy.

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