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Treasury Risk Management

Treasury Risk Management Strategies For Your Business

July 21, 2023

Nothing is more important to the success of a business than proper financial management. Indeed, how a company manages its cash flow, working capital, and debt will determine if it can expand or even meet its basic financial obligations. However, growing a business is often about more than just selling more products or streamlining business operations: Sometimes, it is about managing risk. Developing a treasury risk management strategy is critical to the success of a business, as it can ensure a person can operate their business, irrespective of the various risks and pressures placed on it.

What Is Corporate Treasury Risk Management?

Corporate treasury risk management refers to protecting a business from potential risks. Specifically, this means protecting cash flow, minimizing debt levels, and maintaining appropriate cash reserves.

In the best circumstances, a treasury risk management strategy means minimizing expenses and tracking how much money is spent. It also means planning for emergencies. However, it is important to note that no business can remove all types of risk. Even the best planning can only prepare a company for some eventuality. That’s why every business must have a series of steps they can take to minimize financial risks and enable them to continue to operate in any set of circumstances.

What Are The Types of Treasury Risks?

There are many types of risks to a business’s treasury. Below are the main types of risks companies face:

Technology Risk

Technology is critical to the success or failure of any business today. Managing technology risk means backing up data, having appropriate security measures in place, and ensuring a business appropriately manages any third-party relationships if those third parties have access to data. Furthermore, technology risk means ensuring that multiple parties with access to the same data can appropriately reconcile it, lest a business has two different data sets with contradictory values.

Liquidity Risk

Every business needs access to enough working capital to pay its bills and manage cash emergencies. This capital can come in many forms, including cash, savings, and credit. Furthermore, a business must manage interest rate risk, meaning it will still be able to see gains on its investments, even if interest rates rise or fall.

Operational Risk

Operational risk means ensuring a business pays proper attention to basic business management principles. For example, a business should ensure that it collects and deposits the money owed while paying its bills on time.

People Risk

People risk means ensuring a business can operate without a key employee during a crisis. It also means ensuring that one staffer’s loss will not prove fatal. Finally, people risk also refers to securing the appropriate management of any staff in a business and that all management techniques are conducted in line with best practices and any relevant laws.

Third-Party Risk

All businesses use third parties to manage some area of their business or provide goods and services. However, a heavy reliance on one third-party vendor can cause significant problems if something happens to that vendor or fails to provide the products or services a business requires appropriately.

Each specific risk requires separate consideration and mitigation measures.

What Can A Business Do To Mitigate Corporate Treasury Risk Management?

The multitude of different risks may seem overwhelming to certain businesses, who may wonder how the proper management of this risk is possible. Fortunately, many of these types of risk are interrelated, and a business can similarly incorporate many risk management strategies.

Such techniques include:

  • Investing in appropriate technology and software to automate many financial management aspects. These financial management tools should be overseen by a trained professional with time and understanding of how a business should operate.
  • Ensuring regular oversight of all aspects of a business, including finances, human resources, strategy, and more.
  • Developing appropriate backup, privacy, and contingency plans for all protected data and software.
  • Diversifying all financial instruments so that there is no single point of failure across various accounts.
  • Engaging in appropriate background checks and research or any third-party vendor. Doing so ensures third-party vendors have the time, expertise, and working capital to weather a potential economic storm and provide a business with the needed services. The more critical a third-party vendor is to a company, the more important it is to develop appropriate controls and background checks.
  • Adhering to best practices regarding hiring, firing, and managing employees. A company should make these procedures available in an employee manual. Furthermore, companies should create emergency procedures that will explain how responsibilities will be managed in the event of the key departure of a critical staff member.
  • Consulting with experts who can develop an appropriate risk management strategy.

Final Thoughts

Every business will face numerous treasury risks that can endanger or close their business. Mitigating these risks requires proper planning and appropriate dedication of time and resources. It also means working with experts to help a company develop a proper corporate treasury risk management strategy.

First Western Trust has years of experience in helping businesses manage various commercial banking services, including assisting companies in developing an appropriate corporate treasury risk management strategy. If you want to know more about corporate treasury risk management and how your business can develop such a strategy, connect with First Western Trust today.

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