Insight & Analysis

Risk dominant theme into 2019; no more resources available for treasury

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Strategic and financial risks, along with cyber-security, will continue to dominate the risk landscape for the next 18-36 months.

The 2019 AFP Risk Survey: The Evolving Treasury Ecosystem produced in co-operation with international insurance broker and risk management solution provider, Marsh, highlights the challenges facing treasurers in a period of intense disruption across all economic sectors.

Responses from 391 professionals form the basis of this report which examines how the treasury departments are supporting the broader organisation. As companies’ scope of operations widens, their risk profiles will become more complex.

The majority of respondents (60%) ranks strategic risks (which include competitor and industry disruptions) as the top risks impacting their organisations. This percentage is slightly lower than the 62% that reported the same in last year’s 2018 AFP Risk Survey. Just over half (51%) report that cyber-security risks need to be watched closely, a result similar to the 52% last year. Ranked third is financial risks, cited by 39% of respondents, followed by political risks and regulatory uncertainty in the US (34%). In last year’s survey, political risks and regulatory uncertainty was ranked third followed by financial risks.

Risk remains

The survey reports that strategic, cyber-security and financial risks will remain the top areas of concern for the next three years. Based on this, it says treasury departments can expect their partnerships across their organisations to expand. As risks evolve, efficiency in treasury technology will be necessary to be effective in managing strategic and cybersecurity risks. Doing more with less is now a constant theme within treasury.

A smaller percentage of treasury professionals report their organisations as being exposed to greater uncertainty compared to three years ago (37% vs. 49%). However, half of respondents report no change in the level of uncertainty, a larger share than last year’s 40%.

“More uncertainty might be on the horizon as trade negotiations with China continue, Brexit plays out and LIBOR moves to its final resting place,” says the author. Uncertainties from structurally oriented events such as these, as well as European elections, cut across various risks and could result in an “amplified confluence of risks” such as the strategic, financial and geopolitical. Looking ahead, 87% expect earnings uncertainty to be the same or higher compared to three years ago.

Forecasting pressure

A majority of treasury professionals (55%) cite cash management and forecasting as the greatest focus for organisations’ treasury operations over the next three years. This is particularly so for organisations with annual revenue less than US$1bn and for the privately held. Financing and capital allocation are the second most-often cited areas of focus (41%). Treasury services technologies ranks third at 36%.

The report suggests that effective forecasting requires treasury and finance to become partners across the organisation. Technology can be an enabler for this, but it is internal relationships that treasury and finance will need to develop in order to be efficient in the process. This, says the report, is also a factor in forecasting business needs going forward and ensuring there is a capital structure in place that fulfils an organisation’s underlying goals.

Forecasting and effective working capital management will be key to these directives. “At the time of this report, corporate debt levels are at all-time highs – perhaps signifying a call to action by regulators for companies to trim back leverage or possibly use repatriated earnings to pay down debt. Regardless, highly leveraged companies will have a stronger need for forecasting going forward in a rising interest-rate environment.”

No new staff

In meeting the growing needs of the business, treasury is coming under greater pressure to perform. Organisations with annual revenue of at least US$1bn, and publicly owned companies, have on average 18.61 and 18.88 full-time employees (FTEs), respectively. Those with annual revenue less than US$1bn have on average 6.76 FTEs on the teams. Respondents from privately held organisations report an average of 9.52 FTEs. Despite increased concerns of risks treasury departments are expected to maintain the same level of FTEs or see only a modest increase in the next three years.

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