Treasury Risk management - Ultimate Guide to Handling Risks (2024)

17 April, 2023

5 min

As businesses grow and evolve, it’s important to have a robust risk management strategy in place to effectively handle treasury risks. One key aspect of this strategy is evaluating the relationship between cash management and risk management.

By analyzing the various cash touchpoints, handling procedures, and controls within your organization, you can identify any gaps that may leave you vulnerable to theft, inefficiencies, and other cash management challenges. This evaluation can help you enhance your protocols and ensure that your cash management processes are optimized to prevent any potential risks.

Implementing effective cash management practices can also help to streamline your operations, improve visibility into your cash flow, and ultimately increase your bottom line. By taking a proactive approach to treasury risk management, you can set your business up for success and ensure that you’re able to weather any challenges that come your way.

Treasury risk management is the process of identifying, assessing, and managing risks associated with a company’s cash, investments, and financial instruments. This involves analyzing the potential impact of interest rate changes, currency fluctuations, credit risk, liquidity risk, and other financial market factors on the company’s financial position.

By implementing a robust treasury risk management framework, companies can better protect their financial position and ensure the long-term stability of their operations. This is especially important in today’s fast-paced and volatile financial markets, where even small fluctuations can have a significant impact on a company’s bottom line.

When it comes to managing corporate finances, it’s important to be aware of the different types of risks that can impact your treasury. Here are the main types of risks faced by treasury:

• Business Risks – Factors that might reduce profitability or cause a company to collapse. Anything that jeopardizes a company’s capacity to meet its financial objectives.
• Financial Risks – The possibility of losing money on an investment or business venture. This can include market fluctuations, unexpected events, or other unforeseen circ*mstances.
• Financial Market Risks – When cash flows, profits, and balance sheet values are affected by movements in financial market prices or rates such as those in the interest rate, foreign exchange, or commodities markets.
• Liquidity Risks – Access to cash is essential for any business, and liquidity risk revolves around fluctuations in the ability to access cash when and where it is needed. This comes in two forms – funding liquidity risk and market liquidity risk.
• Credit Risks – The possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. This usually refers to the risk that a lender will not obtain the owing principle and interest, resulting in a disruption in cash flow and higher collection expenses.
• Operational Risks – Risks and uncertainties that a corporation encounters when doing day-to-day business activities in a certain area or industry.

Treasury risks can arise from a variety of sources, including market volatility, foreign exchange fluctuations, and operational challenges. The following steps are involved in the risk management in treasury:

• Identify the risks: It involves identifying and classifying an organization’s treasury risk exposures and their sources. The first risk management step is identifying an organization’s key risks. It is also important to capture emerging risks which are potential risks that the organization may face in the future.
• Assess the risks: Once the top treasury risks have been identified, they need to assess the likelihood of each risk occurring and its potential impact on the organization.
• Evaluate the risks: The evaluation of a risk requires that the organization’s appetite for that risk should be considered and compared with the current and potential risk exposure. In this phase, risk exposures are compared against the organization’s appetite for risk.
• Respond to the risks: Once risks have been evaluated, their responses can be planned and implemented. The response to a treasury risk includes the following options:
• Avoid the risk (by adjusting the business strategy, although, in practice, this may not be possible)
• Transfer the risk (by insurance)
• Reduce the risk (by introducing controls or other mitigation)
• Accept the risk (if the organization actively seeks this type of risk because it has expertise in the area)

Report the risks: This phase helps to ensure that risks are being managed as agreed, i.e., that methods and processes are being properly applied and carried out, and to check that the responses have the desired effect. It is important that risks are reported and reassessed regularly to ensure risk exposures are within the organization’s risk appetite and that internal controls are operating correctly.

Cash management software helps to keep track of cash inflows and outflows for your organization regularly. It helps mitigate risks in treasury through automatic reconciliation to detect discrepancies or fraud in transactions or payments. This helps to optimize the usage of cash and prevent avoidable debts. Moreover, treasurers can find better investment portfolios and suggest better financial plans for their organization.

Benefits for treasurers using cash management software:

• Continuous global cash visibility: Single dashboard view of cash flows across multiple banks, regions, companies, and currencies improves cash utilization.
• Automated data aggregation: Automated bank statement processing and reconciliation eliminates errors and allows cash managers to focus on value-added tasks.
• Proactive decision-making: Global cash visibility provides users with essential information for making better investment and funding decisions.

HighRadius' Autonomous Treasury powered by Rivana artificial intelligence platform is an excellent solution for managing treasury risks with cash management software. This product leverages automation to manage daily cash operations, providing continuous global cash visibility through automated bank integrations. With easy tracking of intercompany transactions, notional pools, and more, HighRadius' Autonomous Treasury enables treasurers to make informed decisions based on accurate and real-time data.

One of the standout features of this product is its automated reconciliation of cash balances to prior day cash activity, which eliminates errors and saves treasurers time that they can devote to value-added tasks. The global data repository for cash transactions provides a centralized location for all cash-related information, streamlining processes and improving efficiency.

HighRadius' Autonomous Treasury also offers easy bank account signatory administration, which simplifies the management of multiple bank accounts. By providing a real-time view of global cash positions, treasurers can make proactive decisions to optimize cash usage and improve short-term returns on the cash flow.

What are the examples of treasury risks?

Examples of treasury risks include interest rate risk, currency risk, credit risk, liquidity risk, and operational risk. These risks can cause financial losses or negative impacts when managing an organization’s cash and financial assets.

What is corporate treasury risk management?

Corporate treasury risk management involves identifying, assessing, and mitigating financial risks associated with an organization’s cash and financial assets to protect its financial health and stability while maximizing returns.

What is the importance of treasury risk management?

Treasury risk management is crucial for maintaining financial stability, protecting against uncertainty, and driving long-term success for an organization by identifying and mitigating financial risks, ensuring compliance, and facilitating informed decision-making.