“With the impact of the COVID-19 pandemic likely to be felt for some time, how should companies be examining the effectiveness of their treasury policies and approach to financial risk?”

When considering this topic, the mind tends immediately to leap to questions directly related to funding: for example adequacy of backup lines, resilience of lenders. However, I intend to swerve these immediate issues in favour of looking at some areas that are maybe less considered, and which may in some cases have yet to impact the corporate.

Cash forecasting. Whilst obviously important in itself, the point to be considered relates to the scenarios we use. We may have generated a “10% down” revenue scenario, but have we ever considered a downside case of 40%/50% or more reduction? I suspect if we had presented that to (pre-COVID) management we would have been laughed out of the boardroom or CFO’s office.

Business continuity planning. We may be comfortable with our own response to closed offices and working from home, but how have our banks, suppliers and customers weathered the storm? In the case of banks particularly, have we tended to take their BCP (and associated testing) for granted? We may want to question them more closely about their planning scenarios and investment. Particular attention should be paid to those institutions which rely on the physical proximity of their staff to each other for efficient resolution of customer issues.

Credit control. We all know that our cash collection is critically dependent on extraneous factors such as billing and credit control. So how has our credit control function performed, and perhaps more importantly, how does management propose to modify the approach post-COVID? Is that gold-standard customer, with an immaculate payment record over decades, still worthy of the “undoubted” status and large credit limit?

Supply chain impacts. A supply chain financing programme can be a valuable tool in channelling much needed financing to suppliers. If you have such a programme, there are questions to be asked about whether it has risen to the COVID challenge under a stress for which it was not designed; and in particular whether the demand for supplier financing has peaked and strained the capacity of the programme.

Receivables financing. As a follow-on from the credit control points above, we need to consider corporates funding themselves with factoring, invoice discounting, or receivables securitisation programmes. The respective finance companies, rating agencies and investors will be reviewing the quality of current and projected asset pools. Some programmes may prove to be non-viable going forward, others may attract changes in terms and/or pricing. Are we prepared with the necessary data, arguments and in the worst case, alternatives?

Pensions. Finally, a UK-specific point about defined benefit (DB) pension schemes. Those of you attempting to manage a DB scheme deficit will understand the emphasis that the pensions regulator places on the strength of the employer covenant which underlies the recovery plan. The trustees of such a scheme are mandated to monitor the covenant closely and to take action where it has significantly weakened. It is highly likely that over the course of the next year there will be a series of pension-related impacts. These may include: revisiting agreed recovery plans; requesting that contingency arrangements may be triggered; taking security formally over contingent assets; increasing deficit repair contributions. Any one of these, or a combination, may have significant impacts on a UK company’s short-, medium- and long-term cash projections.

It is now clear on each continent that the COVID-19 pandemic has created unparalleled disruption around the world. As a business owner, large or small, our immediate concerns are for our staff safety and to ensure that our cash flow is sound. What are the priority actions we might consider?

Managing and reviewing cash flow and cash flow forecasts is an ongoing exercise that must be monitored on a daily basis. For every treasurer, it is key to do so during challenging times, making sure they are profiling accurate figures. Forecasting and assessing in this period is indeed critical for any businesses survival, and this approach should be clearly documented in the company’s treasury and risk policies. For any business too, a robust treasury policy should be a basic management requirement. A correctly designed policy sets out details of the causes and potential risks around treasury department exposures and the appropriate risk responses for each of them.

In my position as an interim-manager and consultant in treasury, reviewing all aspects of my client businesses includes a close examination of existing policies and procedures, but also assessing whether major changes may be required during these turbulent times. For too many companies a treasury policy is a ‘frozen’ document instead of considering this as an evolutionary exercise.

In the life of a business, the opening of new subsidiaries, approaching new banks, M&A deals, the opening or closing of bank accounts, additional procedures, and also new risk appetite standards agreed by the board of directors, might affect staff behaviour, integrating new risks in the company. The critique approach in reviewing policies must ensure this document is comprehensive and easy to understand. I very often make use of staff feedback in this dedicated process.

Often the encountered risks particularly affect those with a decentralised organisational structure. For these companies, the COVID-19 crisis can be seen as an opportunity to boost their appetite for structural review, and to reconsider centralisation needs. We see many treasuries having achieved a high level of centralisation but, having also considered standardisation and automation, have found it much easier to adapt quickly to new business practices – and be able to feel more secure during the COVID-19 pandemic.

Today it seems highly likely that all these efforts will continue, becoming firmly embedded into organisational working culture. Thanks also to the growing role of technology and innovation, which is equipping treasurers in many business decision-making, greater value is delivered into the organisation, decreasing risks in the meantime. I also often see that companies that have onboarded strong guidelines and policies have seen their treasurers become more responsive, giving them more time to focus on their strategic role and on the needs expressed by the business.

As a conclusion, since the treasury function has risen in prominence, a closer focus on policies will need to become more prevalent, with more frequent updating of these documents.

It’s an irony but also a ‘silver lining’ of the pandemic, that pivotal events can provide companies with the ideal opportunity for a thorough and intelligent review of their risk policies; or to create policies if they don’t already have them (and if you don’t, there are no more excuses!). Without going into a full policy checklist, I think any review should encompass three main areas:

Policy construction

Recent events have reminded us yet again that funding and liquidity are fundamental in the treasury hierarchy of needs. But we should also now ask tough questions about the breadth and depth of treasury policy:

• Emphasis – do key policies still fairly represent the risks which have proven to be the most crucial to your organisation?
• Content – how is that view reflected in the actual detail? Did the content turn out to be sufficient, appropriate and accurate enough to protect you?
• Scope – what turned out to be missing? And does the treasurer need to have greater input in any other areas, eg credit/concentration risk, operational risk, or even HR planning?
• Review – is the frequency and/or quality of your policy review process adequate?

Resilience and fit

This is about the ongoing process of ‘proving’ policies so they support meaningful decisions, via data and/or practical experience; there should be a plentiful supply of both at the moment.

• Metrics/KPIs – have these held up under pressure? Are data points still the right ones, set at the appropriate level for monitoring? How accessible and accurate is supporting data; could that guide future IT investment? Many treasuries use a KPI dashboard or similar; now is an ideal time to create and/or rethink those.
• Forecasting – modelling and scenario planning will be taking on new significance – the past few weeks will provide hugely valuable backtesting, and insight into which elements of your forecast were not realistic.
• Stress testing – unfortunate as these times are, the pandemic is the best example of a genuine stress test that many treasurers have experienced; and yet could still be worse. Use that information productively.
• Contingency planning – incorporate all the above! Where should trigger thresholds be set, and what constitutes materiality for your company?

Use test

Finally, it’s important that policies are not simply viewed as a box-ticking exercise, or a piece of paper. ‘Use test’ is about a company’s ability to show genuine understanding, buy-in, and active use of its risk policies at all levels. UK financial regulators rightly place a great deal of value on this.

• Decision-making – is the company really ‘living’ its policies during this crisis by using them to guide decisions? What evidence is there for and against this?
• Action – do decisions translate readily into an action plan that everyone can follow, or are more specific crisis plans needed?
• Communication – is the policy framework well understood, credible and well communicated?