Given the complexity and scope of modern treasury operations, disruptions in day-to-day activities—from personnel management to payment procedures—can have far-reaching effects on cash flows and business continuity. Operational risk, therefore, remains a key challenge faced by treasury teams.
Understanding operational risk
Operational risk is broadly defined as the risk of loss due to failed internal processes, people, systems, or external events. For treasurers, this includes risks associated with settlement errors, IT system failures, compliance breaches, and human error. Failure in any of these areas can significantly impair cash flows, impact reputations and threaten the continuity of business operations.
These risks are not isolated but often interconnected, requiring a holistic approach to risk management whilst the diverse nature of these risks makes them challenging to predict and manage, but with the right strategies in place, treasurers can mitigate potential disruptions.
Key operational challenges
Operational risk is intertwined with the day-to-day treasury activities. Whether it’s handling cash flows, managing counterparty relationships, or ensuring smooth transaction processing, the need to balance operational efficiency with risk mitigation is critical.
Facing operational risk across multiple areas, disruptions in any of these can severely impact cash flows and business continuity. Let’s take a closer look at some of the key areas of concern:
1. Personnel: People-related risks include everything from human error to inadequate training. The treasury function requires highly skilled personnel capable of navigating complex processes. Regular training and well-defined roles help mitigate the risk of errors, fraud, or unethical behaviour. A clear segregation of duties is vital, ensuring that no single employee has control over an entire transaction process. For example, implementing dual authorisation for high-value transactions is a common control.Human error remains a major source of operational risk. Staff turnover, insufficient training, or reliance on key individuals for certain processes can expose an organisation to significant risk. For instance, the loss of institutional knowledge when a key team member departs could disrupt the continuity of processes, leading to missed deadlines or faulty decision-making.
2. Technology and Systems: In today’s digital treasury environment, IT systems are critical enablers of treasury operations and as treasury functions become more automated, the risk of technical failures or cyber disruptions grows. These systems play a critical role in everything from cash flow visibility to foreign exchange trading platforms. However, this reliance also creates exposure to operational risk in the form of cyberattacks, system outages, or software bugs. A prolonged IT disruption can halt treasury operations, delaying payments, disrupting reporting, and in the worst case, triggering liquidity crises. Effective collaboration with IT departments to ensure robust cybersecurity and systems resilience is therefore essential.
3. Treasury Processes: Treasury functions often involve complex workflows such as cash forecasting, liquidity management, and financial reporting. A breakdown in these processes—whether due to manual error or inefficiencies—can cause delays in accessing critical funds or lead to inaccurate data being reported. For example, a failure in cash forecasting could result in liquidity shortages, which may harm the company’s ability to meet short-term obligations.
4. Payment Procedures: Payment processes are integral to many treasury functions, and any disruption can have immediate consequences. Delays or errors in payment authorisations, reconciliations, or settlements can delay payments to suppliers, employees, or lenders. Such disruptions can lead to penalties, damaged relationships, and operational gridlock. For instance, if payment systems are not properly monitored, fraudulent transactions could slip through, causing financial and reputational damage. Real-time payments (RTP), while efficient, also introduce complexities. The finality of RTP transactions means any error—such as incorrect account details—can be hard to reverse. Implementing real-time monitoring and fraud detection measures can help minimise risks in this area.
5. IT Systems: With treasury operations increasingly reliant on technology, system failures or cyberattacks can cripple business operations. Robust cybersecurity measures, frequent system audits, and data backup protocols are essential to mitigate IT-related risks. Additionally, reviewing system access controls periodically, regular training and investing in disaster recovery plans can protect treasury operations from IT disruptions.
Best practices for managing operational risk
Effective operational risk management starts with a strong risk culture within the treasury team. Encouraging open communication about potential risks and creating a culture where risk awareness is ingrained in daily operations can significantly reduce the likelihood of issues arising.
Here are some best practices that UK treasurers can adopt:
1. Automate with care: While automation brings efficiency, it’s essential to regularly review and test systems to ensure they continue to function as intended. Disaster recovery and business continuity plans should be in place to address any potential system failures or cyber incidents.
2. Strengthen internal controls: Establishing comprehensive internal controls is vital for identifying and mitigating operational risks. Regular audits, segregation of duties, and a robust approval process can help detect anomalies before they lead to losses. Additionally, reviewing system access controls periodically and investing in disaster recovery plans can protect treasury operations from disruptions.
3. Ongoing training and development: Human error remains one of the most common sources of operational risk. Continuous training ensures that treasury staff are equipped to handle complex processes, understand compliance requirements, and remain vigilant against potential risks.
4. Collaborate with IT and risk teams: As treasury systems become increasingly integrated with broader enterprise systems, collaboration with IT and risk management teams is essential. This ensures that the treasury's specific operational risks are understood and addressed within the wider business context. It is also an opportunity for treasury teams to support the wider business.
5. Automation and technology integration: Automating treasury operations—such as reconciliation, cash flow forecasting, and compliance monitoring—reduces manual errors and improves data visibility. Modern treasury management systems (TMS) integrate real-time data from banks, ERP systems, and other departments, enhancing decision-making and reducing process risk.
6. Strengthen fraud prevention protocols: Treasury departments are prime targets for fraud, whether internally or externally. Implementing strong fraud detection and prevention protocols, including two-factor authentication, transaction monitoring, and dual approval for high-value payments, can significantly mitigate fraud risks.
7. Routine audits and regular reassessments: Regular audits of treasury operations help identify inefficiencies, compliance gaps, and potential fraud risks. These should be complemented by ongoing risk assessments to address emerging risks, particularly those tied to external events or changing regulatory requirements.
Looking ahead
Operational risk management is not a static process. As the financial landscape changes and treasury operations evolve, so too must the approaches to managing operational risks. Treasurers are facing a future where technology will continue to play a central role. Adopting a proactive and dynamic approach to risk management will be key to staying ahead.
In a world where treasury becomes responsible for managing an increasing array of risks, it’s essential to strike a balance between ensuring robust operations whilst also being able to be responsive to change. Being responsive and forward looking enhances its ability to adapt to evolving risks in an agile way, supporting business resilience.
The treasury function is no longer just about managing cash and liquidity—it’s about managing risk holistically. By embedding a culture of operational risk management, treasurers can safeguard their operations and ensure they continue to support the strategic goals of their organisations.
The future of treasury management will continue to be shaped by technological advancements, regulatory changes, and economic volatility. Treasurers must adopt a dynamic, forward-looking approach to operational risk management, leveraging automation and strong internal controls to safeguard operations. Proactively identifying risks and integrating them into the strategic planning process is key to maintaining financial resilience and ensuring business continuity.
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This blog was written by a member of the Future Leaders in Treasury working group. To find out more about the group please visit the Future Leaders in Treasury webpage.
To read the other blogs in the Future Leader perspectives series visit the Future Leader perspectives risk management blog page