Case Studies

Risk Management Policy

Financial risk management is state of the art quantitative and qualitative analysis, combined with some of the oldest tools in business – experience, judgment and common sense.

IFA Global’s Risk Advisory team provides expert advice on the mitigation & management of financial risks and other Treasury related challenges to listed and private companies on a continuous basis. Companies run large amounts of financial risks, ranging from foreign exchange and interest rate risk to liquidity risk. Treasurers are instrumental in identifying and managing these risks, and creating shareholder value by lowering treasury related costs. Effective treasury management can be a catalyst to support growth of a business and unforeseen risks can be dealt in a more calculative manner

As companies grow, financial risks evolve. So transformational changes can give rise to their own treasury risks that must be managed & policies and processes should be updated to match the dynamic scenario.

I take this opportunity to share a real time case study which encompasses the kind of savings we could affect for one of our clients on Interest Rate Negotiation for Long term & Working Capital Loans:

Client: XYZ (Name not disclosed as per confidentiality clause) was a mid-sized Textile company into the Import & Export business of Stationery with a portfolio of $ 15 million. The company was a net exporter.

Problem In Hand: The Company was facing issues related hedging of its exposure (both Imports & Exports) because of extreme volatility in the market. The existing restrictive policy of the company was forbidding the team from taking quick decision in this market. So the company was bearing the brunt of FX losses.

Areas of Concern observed by IFA Global:
Major pain points identified by us were:

  • Inefficient systems being used for managing FX exposures (Lack of Instruments & Process)
  • No risk management policy being established by the company which should be dynamic as per the market scenario
  • Decisions taken only by the top management; which increased the decision making time
  • Relation with the banks not effective thereby prohibiting XYZ from hedging more effectively
  • Lack of Instrument knowledge which could help in hedging more effectively
  • Lack of usage of various Trade finance products which can help in setting up the entire Hedging Strategy

Engagement Parameters: IFA Global made it clear to XYZ that it would need to understand the complete business cycle, risk appetite, costing levels, industry competitiveness, banking relation, current hedging instrument usage, price & order risk etc to frame a sound and effective risk mitigation policy

Process: A Risk Management Policy was framed after studying the company’s entire business cycle and cash flow process. The policy focused on streamlining the cash flow process by using the right kind of funding tools and by implementing an effective hedging strategy for reducing currency risk.

  • The company was advised to inculcate the practice of Natural hedging to the extent possible (Import –Export Set off)
  • The company was briefed and advised upon various funding alternatives available for reducing its cost
  • The company was asked to try shortening the credit period extended to its customers. This would impart higher liquidity to the company and reduce its requirement for credit for shorter period
  • The company was asked to calculate the hedging cost and advised to quote the price of its products taking hedging costs into consideration (keeping the mind industry competitiveness)
  • For net exports the company was offered a comprehensive strategy so as to reap the benefits of market volatility
  • The roles and responsibility in terms of Treasury was also advocated to the client for proper action on a timely basis
  • The policy further asked the company to maintain a certain hedge ratio, which could be increased or decreased only during quarterly reviews, and that too systematically

Outcome: The Company could manage its exposure more effectively with a well informed & well directed action. As the policy stated out the hedging process without any ambiguity, so the speculative nature of mind had taken a back seat. The proper infusion of credit structure also helped in reducing the interest cost. Thereby the company was able to reduce its Forex losses and further add 2%-3% profitability to its bottom-line and could also create a modus operandi for the organization.