Jennifer Pearson is the founder of TreasuryEdge, a specialist treasury consultancy firm. She has worked across many sectors over the last 10 years and is now using her expert knowledge to help CFOs and Founders to address their treasury risks. Jen is a qualified ACCA, ACT consultant who has worked in big manufacturing, professional services, financial services, and fintech before starting her firm in 2023. She specialises in treasury risk management, specifically cash forecasting and management, foreign exchange, and long and short-term liquidity.
Surviving businesses have proven their resilience in their response to the huge market and geopolitical changes in the last few years. Only the very best firms thrived in the tough environment of 2023 which saw rising inflation, two raging wars and two bank collapses. It was a testing time for business owners. 2024 looks set to be even more challenging with 40 national elections, it is impossible to predict how this year could end and how these changes could impact policies and business.
Effective treasury management, which involves stepping back to look at the financial risks facing the business, and developing a plan to respond to those risks, could be the difference between a prospering business, and one that is lost due to a lack of financial planning. This article delves into the basics of treasury management and how it can contribute to a successful business.
Maintaining liquidity is the name of the game.
This is the main task of a treasurer, to make sure there is enough cash in the business to pay suppliers, employees, or whatever is needed to keep the business running. Although this sounds like a simple task, maintaining liquidity can have many facets. In a cash-rich company, holding as much money in deposit accounts as possible to earn interest is the most effective way to contribute to the bottom line of the company’s P&L. In a struggling business, or one that is nearing the end of its cash runway, preservation and conservation is the aim. Making the money go as far as possible.
The crystal ball of scenario analysis.
Finally, directors have realised the power of the cash flow forecast and it’s no longer an underused spreadsheet saved in a folder somewhere. The focus on scenario analysis is the crystal ball you need to navigate the unpredictable twists and turns in the market. This means creating different forecasts considering different factors. Scenarios to consider are economic recession, meaning less demand for a product and unforeseen disruption in the supply chain or a rise in the cost base. Relying on a single forecast is akin to steering blindfolded into a storm. Scenario analysis will give the decision-makers the information they need to plan for the “what ifs” that could take them down. A quality cash flow forecast is not just about predicting the future; it’s also about being ready for whatever it might throw your way.
Don’t be caught in the crossfire without your bulletproof vest.
Risk management involves taking a bird’s eye look at the business and identifying, assessing, and mitigating financial risks. This usually includes currency risk, interest rate risk, credit risk, market risk, and operational risk. Utilising hedging strategies and other tools to shield the business from adverse market movements. Nowadays, finance teams are looking beyond their banks to new players in the market to help with their risk management. In the FX space for example there are lots of accessible platforms which allow you to hedge your exposures with ease.
Turn your money into more.
Whether the risk appetite for the board is low or high, everyone has the ability to make good interest income on their cash. From vanilla bank deposits to bonds or more risky investments, the opportunity to earn extra income for the business is greater than it has been for over a decade. Be prudent and do some research to make sure the interest rate you get is competitive or if there are better options elsewhere in the market. Don’t let misplaced loyalty to your bank stop you from making the move.
Staying in touch with compliance and regulation is a necessary evil of being in treasury. The good news is that there are lots of publications and websites which publish great content to keep you in the loop in a digestible and informative way. Knowing what’s on the horizon in terms of new reporting requirements can help you prepare and give you time to seek any advice you might need.
After reading this article hopefully, you can see the power a well-oiled treasury team can have on a business. Knowing you are proactively thinking about what is going on in the world and taking action to insulate the business, will not only give you peace of mind but could help your company to prosper even in these uncertain times.