Three steps to risk management confidence

Just a handful of changes to everyday processes can help a treasury department contain risk more effectively, writes Paul Bramwell

Anyone who attended one of the autumn’s treasury conferences would have been inundated with entreaties to look at new products and the latest versions of numerous treasury technology solutions.

The ubiquity of such management solutions – whether standalone, or integral to a treasury management system (TMS) – would seem to conflict with the key finding of a recent study from FIS: that more than half (54%) of treasurers lack the confidence that their current approach to managing risk is effective.

For many organisations, the difficulty is knowing where to start in designing and implementing an effective risk-management policy. By taking a systematic approach, though, treasurers and risk managers can increase the value they add to the business – and build confidence across the team, all the way up to board level.

Are spreadsheets really the problem?

A major reason that respondents to the study gave for lacking confidence in their risk management approach was the prevalence of outmoded, manual methods for identifying, monitoring and containing risk.

For example, 54% of respondents use spreadsheets, posing major obstacles to producing reliable information and therefore impacting upon the strength of subsequent decisions.

However, it is important to note that, by itself, migrating from spreadsheets to a more sophisticated risk-management infrastructure will not necessarily make treasurers more effective at the task. While it is a step in the right direction, more holistic measures are required…

Step 1: define a risk policy

The first step is to establish a formal risk policy.

That will outline the treasury’s risk management objectives, and the responsibilities that will be required to achieve them. It also defines how the treasury’s activities should be measured and reported.

A framework for any further steps that will need to be taken will then be in place, acting as a ready reckoner for issues such as:

  • which instruments should be used;
  • how risk limits should be defined and monitored;
  • which types of risk analysis and reporting are required;
  • processes and controls that will determine treasury’s day-to-day operations; and
  • the roles of individuals and teams.

Without a formal policy of that nature, treasury would be effectively rudderless, and would find it impossible to monitor and assess decisions in a constructive fashion.

Step 2: focus on forecasting

The second step is to improve forecasting accuracy in order to understand and manage exposures with greater confidence.

This is more difficult in some industries than others – and treasurers frequently face obstacles such as:

  1. Data originating from fragmented systems;
  2. Lack of motivation at business-unit level; and
  3. Difficulties in collating information in a consistent format.

Some 39% of respondents to the study use spreadsheets for cash-flow forecasting, which makes it particularly difficult to overcome those obstacles. Conversely, specialist treasury-management technology enables data to be collected, collated and presented in a consistent format with sophisticated capabilities to refine forecasts based upon historic trends, seasonality and comparisons of actual versus forecast.

While 27% of our respondents had achieved less than 70% short-term forecasting accuracy, those who use specialist, treasury technology reported better performance – and, therefore, greater confidence in the underlying cash flow and risk data on which decisions are made.

Step 3: channel the team’s skills into value-added activities

Many treasury teams are highly skilled – but those skills are not necessarily being channelled in the most profitable ways.

Freeing up treasury and risk professionals to focus on the strategic, rather than the mundane, is a major driver for deploying technology solutions – preferably integrated within a fully fledged TMS.

Treasury is responsible for a number of different types of risk – for example, market, credit and operational. While it is feasible to define a control framework to prevent error or fraud based upon manual – typically spreadsheet-based – processes, enforcing those controls, identifying attempted breaches and alerting exceptions is almost impossible.

In addition, people skilled at risk management spend much of their time on producing and maintaining analysis and reporting, which is a poor use of their time and abilities, compromising treasury’s ability to focus on its risk objectives.

From constraints to confidence

The study revealed many examples of how treasury departments are currently constrained from doing the jobs for which they are responsible.

Some 12% do not monitor counterparty risk, while 25% do not actively monitor counterparty limits before dealing. Those functions, though, are very difficult to accomplish when using spreadsheets or standalone tools that cannot be accessed and updated simultaneously by multiple dealers or locations – especially when complex counterparty and credit-risk models are taken into account.

By contrast, implementing tools that provide for dynamic limit monitoring will enable treasurers to manage counterparty risk proactively.

Similar challenges and limitations are apparent in the field of market-related risk management. Many companies that participated in the study are eager to use time-honoured risk management techniques – from basic marking their portfolios to market and applying sensitivity analysis, up to using cash-flow-at-risk and value-at-risk models.

However, treasury professionals who have been most successful in doing so – including those who have used variance/co-variance and Monte Carlo simulations that give more meaningful results – are those who have specialist, risk management solutions in place at their firms.


The past decade has been characterised by volatility and unpredictability. Treasurers need to be confident in their ability to reduce the impact of those factors on their businesses.

As we look ahead, it is clear that not only will those trends continue, but that the complexity of the treasurer’s role will be exacerbated by the impact of regulatory developments.

By implementing a three-step approach – built upon specialist, treasury and risk management solutions – treasurers can measure, manage and monitor risk with confidence and accuracy, enabling them to provide real, strategic value to the business.

About the author

Paul Bramwell is senior vice president, treasury solutions, at FIS (formerly SunGard)

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