“As the threat of recession becomes increasingly real, what should treasury prioritise?”

Recession is now pretty much a certainty in many economies. In Europe, the cost of living is hitting home, and this winter will be a stark and serious problem for many people. In the UK, inflation is running at close to 10% and GDP is between 1-2% which implies a very real negative growth – even if GDP is growing it is only because prices are going up given demand is weak. We are at a time where there is very low unemployment; it’s an awful indictment that we are at almost full employment yet so many people are going to struggle to pay their bills.

It is essential that treasury teams are totally on top of their forecasting and planning process at times of such uncertainty, and when it is difficult to plan what might happen over the next 12-18 months. The forecasting process needs to be regular and monthly, covering a rolling 12-month period so that treasury forecasts 12 months from today, then in a month’s time, 12 months from that point. Keep it very concise, focus on getting information in front of management rather than trying to produce a set of accounts. It should be possible to see the forecast on a single sheet of paper, and it also needs to be integrated.

A common failure with forecasting is to only forecast profit and loss, or just forecast cash. Integrated means a forecast of P&L and cash in an integrated fashion. The forecast needs to come off the same base – profit generates cash and the two are linked. There is no need to populate anything like the numbers you’d collect for management accounts.

I would advise against using spreadsheets. Multiple spreadsheets are very time consuming to aggregate up. It’s all about getting the figures in front of management as quickly as possible and it could be out of date within a week or two. It is meaningless if it takes too long to put together.

The process will tell you how your cash is looking, your liquidity levels and headroom. It will flag if things are deteriorating and if treasury is getting close to its committed facilities. By integrating the reporting, treasury will also be able to see where the business model might be coming under strain, where sales are suffering most or costs going up sharpest. Treasury will be able to see if there is a need to adjust their business model or if they can ride it out.

If a corner of the business is struggling, it may need more investment or a change to the pricing strategy. For example, we are seeing many retailers begin to discount as demand drops.

Treasury teams should analyse their accounts receivable function, look down their list of customers to see who is at risk of not paying. If forecasts highlight some customers are taking longer to pay, treasury can set account receivables targets and offer discounts to those customers that settle earlier. Getting some cash is better than getting no cash. Insolvency is also an issue for key suppliers, as well as customers.

This type of forecasting doesn’t require a tech heavy, AI process. The information comes from the business, it is not about extrapolating numbers from the financial department. It involves talking to sales, account receivables and payroll and finding out what is coming in, and what is going out.

While the effects of a challenging global economic environment are being felt differently in Asia compared with western markets, treasurers in Asia will nonetheless need to remain laser-focused on tools that can provide transparency, access to liquidity and real-time forecasting in order to ensure their supply chains are robust enough to ride out economic undulations that seem likely to be felt everywhere this year.

As parts of the world enter recession, the greater concern for Asia remains inflation, which is yet to hit Asia with the same force as the west. Most obviously, western demand is the engine powering many businesses in Asia and as inflation booms, demand in Europe and the US will continue to fall, causing a very real cash flow headache. While demand itself is hard to control, real-time forecasting is one area that treasurers can and should be exerting their efforts. Forecasts will no longer behave in the next six months as they did in the last.

Perhaps less obvious but no less important than customer demand is the rising cost of borrowing in a number of Asian markets. Many businesses in the region with multi-market supply chains deal in various currencies most of which are pegged to the US dollar. As the Federal Reserve Bank continues to fight inflation through interest rate rises, these monetary decisions are reflected in dollar-pegged currencies in Asia. As the cost of borrowed capital and goods increases, understanding your working capital and cash currency arrangements will be critical to having some level of control of the costs of working capital in the coming months.

Linked to this is access to liquidity. Increased cost of capital often causes delays in supplier payment. Early payment financing is a trend that is likely to increase over the coming years and treasurers should not be without this facility heading into an uncertain economy.

Finally, and perhaps most importantly, is access to supply chain data that provides a picture of the total market. Many of today’s economic issues are caused by geopolitical strife, such as war and inflation, that has not been a global trend for decades. In that time, simple linear supply chain arrangements have flourished. That has all changed for the foreseeable future and while the considerations around supply chain arrangements grow more complex, transparent data with as many market touchpoints as possible will be critical to allow agile decision making that may now span many markets and currencies. Supply chains are more like interconnected supply webs, as buyers and suppliers chop and change arrangements as they need. Understanding the fullest picture of this new market dynamic will be the difference between stagnating or shrinking, rather than growing and thriving during market tumult.

Without doubt, Asian businesses are yet to feel the full effects of the global economic upheaval of the past few months. Financial decisions will become increasingly difficult and doors may close on supply corridors at short notice. Asian treasurers must therefore ensure they have the tools in place to control what they can – market data, liquidity facilities and up to date forecasting must be the priority for everyone looking to make this new, uncertain environment work for them.

In many ways, you can apply the same principles to sovereign and corporate health. The regions and economies that will be most impacted by recession are those with the weakest balance sheet and a high dependency on consumer spending. Commodity and energy producing countries – like organisations – are also benefitting from high prices. Sovereign and corporate winners and losers will also depend on the political response.

During the pandemic many organisations were strengthening their balance sheet, creating reserves and improving their capital structure; today these recession-proofing strategies are still in place and many organisations have reduced debt and are holding more cash. The organisations most at risk now are those that are highly geared. They may not be able to access the funding they need and with costs increasing and revenue dropping, they could quickly find themselves unable to service debt.

Access to cash is the most important pillar to treasury strategy. Treasury should ensure they can collect cash quickly by accelerating cash collection processes and nurturing a strong cash culture. In a liquidity squeeze, this is critical. The more cash a company can upstream, the better it can service debt and strengthen the balance sheet. Treasury should also be proactive in approving payments, pre-empting any challenges that might arise in releasing payments. The earlier treasury puts the cash mentality into the business, the stronger the balance sheet becomes.

Treasury will also have a close eye on the credit rating. Non-investment grade organisations will find their access to borrow closes before other corporates.

Board risk appetite also becomes critical. Prioritising the balance sheet means less capacity to invest and boards will decide their risk appetite in terms of the capital structure of the company. Organisations prioritising growth and acquisition will stretch their balance sheet. In a recession, it is a bold decision to settle on this kind of capital structure because this is where a company can run into problems. Treasurers with a high profile within the company can address the board; treasury will have access to what is going on in the rest of the business, and the board support to invest in technology and skills through a recession. Modelling and scenario analysis is also essential. Treasury can leverage AI and data to help predict the future although accessing instant information is challenging.

Treasurers are risk professionals. If a business starts to struggle, it is a chance for treasury to bring value to a company. For example, when cash is cheap, treasury’s credibility in the market is invisible; no-one sees how valuable they are. But during a crisis when banks introduce more credit and acceptance committees around new funding, those bank relationships come to the fore and are more likely to lead to positive outcomes. Treasurers tend to be more forward-looking compared to other financial professionals. Despite the challenges, a fast-changing world also creates opportunities for strong treasury teams.