Corporate treasurer serves as financial risk manager

The chief financial officer serves as a financial risk manager to protect the value of the company from the financial risks faced by its business activities. Since these risks can come from multiple sources, this role requires knowledge of many business areas and the ability to communicate with various financial professionals. Once a branch of the accounting department, corporate fund management has evolved into its own corporate department and professional organization.

Manage risk

The treasurer manages several major risks related to changes in interest rates, credit, currency, commodities, and operations. Companies face some or all of these risks to varying degrees. The most common ones include:

Liquidity risk
Perhaps the most important risk that a treasurer must manage is liquidity risk: the company runs out of cash due to insufficient income, excessive expenditure, or inability to obtain funds from banks and other external sources. If creditors sell their assets to pay the company’s debts, the inability to meet the payment obligations due may mark the end of the company.

credit risk
The excess cash can be invested to earn interest, and the treasurer must ensure that the person issuing or insuring the securities is in good financial condition and in good standing. One method is to check the credit rating of the issuer, which provides an independent assessment of the likelihood of a third party paying in full and on time as expected. The treasurer must also be confident that the counterparties of the financial instruments used to manage risk (such as interest rate swaps) will perform as expected.

Currency risk
In addition to credit risk, export companies also face currency transaction risks when converting overseas sales revenue into their national currency. When the value of the assets and liabilities of its foreign subsidiaries fluctuates after being converted into a single national currency, multinational companies also face the conversion risk of financial reports. Investors and analysts may view exchange rate changes that result in a decline in the value and profits of the combined foreign assets as a problem, which may cause the company’s share price to fall.

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When a competing company from another country experiences a more favorable currency conversion, another type of currency risk arises that treasurers may find more difficult to manage. For example, the sales of two exporters from different countries (both selling goods to Japanese importers) will partly depend on the movement of their respective currencies against the yen. Tactical measures to stay competitive, such as relocating manufacturing plants to match the monetary cost base of competitors, can have a significant impact. Under the advice of the financial supervisor, the senior management will implement such measures only after extensive discussions.

Interest Rate Risk
Most companies need to borrow money to fund operations, such as purchasing raw materials, machinery or premises. If market interest rates fall, borrowing at variable interest rates allows the company to pay less, but if interest rates rise, it increases costs. If a company fails to pay interest due to lack of cash, it may fall into a liquidity crisis, which may weaken its future borrowing capacity, or simply raise interest rates at higher interest rates that reflect its higher credit risk to lenders.

Operational risk
The financial risks discussed above are external risks.Operational risk is Internal Financial risk reflects inadequate operational controls that may result in a loss of company value. An example of inadequate control may be that a treasury dealer borrows money under a company loan agreement, apparently for commercial purposes, but since the treasurer is able to conduct transactions and fund transfer activities, it transfers the proceeds to his or her own bank Account. In a well-controlled treasury, such functions will be isolated, and an attempt by the same person to undertake both tasks at the same time will be immediately discovered.

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Risk policy

The treasurer will develop a set of policies approved by the board of directors, defining the methods that allow the management of the aforementioned risks and the discretion of the treasurer and other authorized personnel. These policies vary from company to company. For example, not all companies allow treasurers to use derivatives or do not protect against risks, or they may only allow such practices within prescribed restrictions and terms.

The behavior of the financial department and its compliance with financial policies must be independently and regularly evaluated by the internal audit department and the financial committee composed of senior management personnel, including the treasurer. The committee or the Asset and Liability Committee (ALCO) will also periodically review and discuss the financial risks of the company’s assets and liabilities, and agree on appropriate actions to manage or transfer these assets and liabilities. ALCO usually delegates the task of executing agreed actions to the treasurer and his team.

When there is no single obvious solution to managing financial risks, the treasurer must be able to weigh the pros and cons of a series of actions. Decision-making may involve consulting relevant internal and external experts and conducting data analysis and possible scenario analysis to recommend action plans.

Professional development

Traditionally, many treasurers have received accountant training and regard the activities of the treasurer as a branch of their accounting duties. However, with the development and proliferation of financial instruments and the globalization of financial markets and companies, fund management has become more specialized, complicated and time-consuming. Large multinational companies set up a financial department as an independent risk management unit, and corporate financial management is now recognized as a major different from accounting. Many countries have specialized professional institutions, such as the British Corporate Treasurer Association, and specialized educational programs.

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Experts and generalists
Although treasurers are essentially risk management experts, they can improve performance through practical knowledge of various related company support functions (such as law, taxation, insurance, accounting, economics, and banking). In these areas, corporate treasurers are also generalists.

Since financial risks come from various sources within the company (such as interest rate risk on loans, credit risk on investments, or currency risk on debtors’ invoices), the treasurer must understand the nature and financial dynamics of the company’s various assets and liabilities. Many different departments emphasize the benefits of extensive financial education.

communication ability
In addition to consulting relevant internal colleagues, financial directors usually only perform actions to manage financial risks after consulting external experts such as bankers, lawyers, credit rating agencies, tax and accounting consultants, and auditors. For example, a glance at any tombstone will identify a wide range of experts involved in raising debt or equity. Therefore, strong interpersonal and communication skills are important personal qualities of a treasurer.

Senior Manager
The impact of financial risks on a company’s value and survival can be catastrophic and sudden. The treasurer and a small team that may be composed of financial accountants, cash managers, financial analysts, and dealers are given great responsibilities. Therefore, the treasurer is usually a member of the company’s senior management team, usually reports directly to the chief financial officer, and even has a seat on the board of directors.

Bottom line

Finance executives are increasingly taking on more strategic roles in companies. They have gone beyond managing working capital and are increasingly involved in cooperation with the company’s senior management to manage risks and improve the bottom line.


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