You need all hands on deck to manage risk: Managing risk holistically keeps businesses afloat

Sep 5, 2024 9:29:06 AM

"Do you have structured policies in place to guide you around responding to the changing interest rate environment? That’s the job of your Treasury function."

Woman sitting at a desk looking at multiple computer screens

By Carlos Martins, Advisory and Compliance at Change Financial Solutions

When operating an import or export business in South Africa, you could be forgiven for assuming that volatile currency movements are the sum of “risk” that your organisation might face in financial markets. The reality is that if you don’t have a Treasury and Risk Management matrix in place, this will have a knock-on impact to all parts of your business.

If one researches the word “risk”, they will discover that it has its origins in the 1660’s and derives itself from the French word “risqué” which refers to “hazard, danger, peril, exposure to mischance or harm”. It appears in English in the early 1700’s and refers to the “hazard of the loss of a ship, goods, or other properties” – the word is perfectly aligned with the challenges of import and export operations.

Every ship needs a captain and a bosun. It is the bosun’s task to guarantee the operation of the ship and crew so that the captain may guide it. The key benefit of your Treasury function is to act as the bosun who will provide you as the entrepreneur or finance arm of a business with a clear overview of all the financial risks across your business and help you make informed decisions to maximise profit and reduce risks.

Irrespective of your industry and structure, all businesses have 3 core parts that are exposed to a degree of financial risk:

Front-Office
Middle-Office
Back-Office

An integrated Treasury function will not only ensure risk is managed holistically – but will assist Financial Management teams to stay focused on long term strategy. Empowering a Treasury function allows for quick decision making that is aligned with long term strategy but focused on short-term liquidity and financial risk.

Too often, financial risk is viewed as a “Back-office” or finance function only – but in truth, risk should inform financial decision making across all three parts of the organisation and this is why:

Front-Office

This is typically your client-facing function charged with generating revenue. Are you able to correctly price your products and services – not just today but at a specific point in the future? Are you tracking a true real-time profit and loss and locking in foreign exchange, interest rate and cost of capital at specific points in time?

Too often, this function in the business is focused on chasing revenue and sales targets but does so blindly – without having sight of fluctuations in input costs, commodity prices and foreign exchange movements.

Without understanding these risks and inputs, sales teams cannot adequately price their products or services as well as target appropriate sales volumes, often leading to internal conflicts between sales and procurement coupled with disappointed clients when salespeople renege on deals or attempt to renegotiate prices to accommodate for fluctuations. Failure to manage risk in the Front-Office can result in reputational damage for your business.

Middle-Office

Depending on the industry you operate in, this is where your policies, technology and compliance risks effectively sit.

A robust Middle-Office is where you conduct scenario analysis and determine the overall risks in your organisation. A perfect example of this could be your exposure to interest rate volatility which is very topical right now.

As an entrepreneur, you have just navigated through the COVID-19 pandemic, started to rebuild your balance sheet, and perhaps taken on some debt to fund growth and expansion. Did you do any scenario analysis which mapped out a 300-basis point increase in the local interest rate environment? Do you have structured policies in place to guide you around responding to the changing interest rate environment? That’s the job of your Treasury function.

Back-Office

This is effectively the engine room of your business and will be the team responsible for managing payments, settlements, SWIFT transfers – in many ways, they are your final check-and-balance.

A business is only as strong as its financial function and if this is purely viewed as administrative work, your risk profile will invariably be higher. Supporting this function with strong policies and skills by incorporating a Treasury function will turn it into a key player in your strategy execution.

Risk is not something which should simply be viewed as a financial function or a compliance department. To effectively manage risk, you need all hands on deck in your Front – Middle and Back-Offices. Working with the right Treasury and Advisory partners will help you make better decisions which should ultimately drive profitability with less exposure to variables which are out of your control.

Carlos is a co-founder and director of Change Financial Solutions, a licensed FSP, where he is responsible for Advisory Services, Compliance and Financial Management. Carlos has over 30 years of financial markets experience. His treasury management skills were gained and honed over his 24 years spent in large South African corporates, various treasury service companies and the South African banking sector. His practical exposure to both the corporate and the banking financial risk management philosophies and processes enables him to devise risk management strategies which are best suited to corporate South Africa.

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