5 Ways In Which Treasury Departments Of Top Corporates Manage Risk Effectively

12 May, 2021

The treasury needs to understand how it can complement the business function, i.e., understand its role fits in the bigger scheme. It is essential to understand the firm's ability to take risks and its attitude towards risk. Coordination and seamless flow of information between the treasury and business functions is crucial. It helps in the accurate and timely capturing of underlying exposures. The treasury should play an integral role in the costing/pricing decisions.

• Their Treasuries are found to be more aligned with and more responsive to the business functions: 

        The treasury needs to understand how it can complement the business function, i.e., understand its role fits in the bigger scheme. It is essential to understand the firm's ability to take risks and its attitude towards risk. Coordination and seamless flow of information between the treasury and business functions is crucial. It helps in the accurate and timely capturing of underlying exposures. The treasury should play an integral role in the costing/pricing decisions.

• They work towards Minimizing earnings volatility: 

        The role of treasury is to identify the relevant risk factors and evaluate the sensitivity of a firm's earnings to various risk factors. It is the job of the treasury to ensure that the core operating profits are maintained year on year. Hence they use proper benchmarking tools and option structures (revenue hedging) and protect themselves under any untoward movement in any risk factors.

• They often reduce arbitrariness/randomness in decision making: 

        Treasuries of large companies have a comprehensive Risk Management policy that articulates the risk limits, minimum hedge ratios, permissible instruments for hedging, responsibilities of treasury personnel (Front office, back office, mid office). Such a Risk Management Policy acts as a firewall against losses arising from reckless and impulsive decisions. They also have extensive Investment policies designed to ensure the surplus cash in the balance sheet is invested effectively, ensuring the lowest risk with optimum returns.

• Treasuries of these companies follow an integrated and holistic approach towards risk management: 

        Treasuries of large companies do not look at risk management in silos. They manage FX risk, Interest rate risk, commodity risk, ALM risk all under one roof. They manage their GAP risks (import and import) and cross-currency risks efficiently. The factors driving all asset classes are the same. Therefore, they can realize significant synergies and take an integrated approach that considers correlations and interlinkages between various risk factors.

• They invest in People and Processes:

        Treasury management is a niche field. It requires specific domain knowledge, and therefore large companies look to place specialized people in such roles.It is also essential for the treasury personnel to keep updating their skills to stay abreast with best practices. Large treasuries also focus on streamlining their systems and processes, i.e., automating execution, workflow, and accounting to the extent possible, which reduces human errors. They focus on simple Dashboards and MIS so that the senior management can closely follow key treasury performance parameters and manage risk.