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For corporate treasury professionals working during the 2008 financial crisis, recent events have likely resulted in feelings of deja vu. The important corporate treasury work of protecting and managing a company's cash in volatile or challenging market conditions and keeping it easily accessible is once again front-page news in light of the large, uninsured account balances that were suddenly inaccessible after certain institutions declared voluntary liquidation or became subject to regulatory receivership.
As was the case during the 2008 financial crisis, executive management and boards of directors are focused on the effectiveness of treasury functions, and are asking important questions, including:
Given recent events, now is an opportune time for corporate treasurers to re-evaluate how they are positioned and to take action to strengthen cash management in an uncertain, and volatile macroeconomic environment.
The primary focus of corporate treasury functions, particularly now, should be to protect the assets of the company and ensure adequate liquidity to support the business. To this end, we recommend that treasury functions take the following tactical actions:
Review the number and financial strength of your financial services partners, evaluating counterparty risk, concentration risk, and regulatory risk, and consider whether any changes are warranted to diversify and enhance the structure or nature of the relationships.
Evaluate your current and prospective cash needs and cash investment strategies, with an eye toward achieving the important objectives of preserving principal and meeting short-term funding needs.
Reassess your excess cash investment strategy to evaluate how funds are invested and the related risks (e.g., counterparty credit, interest rate, liquidity). It is possible that this assessment will suggest the need to make changes to current investment strategies to protect liquid assets.
Review short-term cash sources and uses and cash/liquidity forecasts and test them for various scenarios and contingencies to confirm that the company has a clear picture of its sources and uses of cash during, at minimum, rolling 1, 7 and 30-day horizons.
Look at various sources of liquidity (e.g., cash on hand, working capital, lines of credit) and assess their adequacy given various potential financial market, supply chain, vendor or company-specific conditions.
It is possible that actions may be required to secure additional sources of internal or external liquidity to provide a buffer against uncertainty.
Confirm whether credit lines offered by financing partners remain available to draw, or whether access (or terms) are changing.
Understand your contractual arrangements with derivative counterparties. This includes reviewing agreements governed by the International Swaps and Derivatives Association (ISDA), checking derivative positioning, and assessing counterparty credit exposures.
The lessons learned from the ongoing market events will be an important reminder that corporate treasury functions must be vigilant and consistently apply effective risk management and internal control practices to help their companies maintain financial resilience. These actions include:
Re-evaluate your cash investment strategy and, where required, re-establish the importance of preserving principal rather than generating the highest return. Confirm that your investment strategies and practices are aligned with this objective.
Perform due diligence on your investment strategies to confirm that your excess cash reserves are truly protected during volatile markets and extraordinary exogenous events.
Review your cash and liquidity forecasting capabilities, incorporating lessons learned from the recent market events, to ensure that the company has a clear picture of its sources and uses of cash during, at minimum, rolling 1, 7 and 30-day horizons.
In addition to a “base-case” view, identify possible market and company-specific scenarios with the aim of developing a more complete picture of potential outcomes under a range of scenarios.
Confirm there is real-time, intra-day visibility into cash balances and the ability to rapidly re-deploy cash.
Reassess priorities for technology investments with the ongoing market events in mind. Treasury Department investments are often considered a lower priority than customer-facing technology or systems to support financial reporting. Recent events help make clear that treasury infrastructure investments may warrant a higher priority to safeguard critical corporate assets.
PwC’s Corporate Treasury practice is a leading advisor to CFOs and treasurers, helping them achieve sustained outcomes including managing financial and operational risk, driving cash flow improvements and building supporting capabilities including operating model, organizational, process, technology/tool and data elements. We support our clients in a variety of ways including: