Chapter Thirty Two

Managing Treasury in Uncertain Times

THIS CHAPTER, A LATER ADDITION to the Handbook, comes in response to requests from readers who visited the book’s website (www.wiley.com/go/treasuryhandbook) as the book progressed and from participants in my training programmes and clients whom I advised during the periods of uncertainty following the events of 2008. No comprehensive checklist can cover every single element that needs to be looked at and no prescription solves all uncertainties.

Rather, this chapter, and the checklist in the Toolkit on the Web site, contains simple guidelines based on common sense and experience that will guide Treasury teams through various bouts of uncertainty.

UNCERTAINTY AND ITS IMPACT ON TREASURY MANAGEMENT

Uncertainties in the Treasurer’s world can exist in many forms, can be created by various factors, and can have varying consequences—and sometimes none at all. A typical sequence of events is given in Figure 32.1.

FIGURE 32.1 Uncertainty and Sequence of Events

An uncertainty can be defined loosely as a condition in the market or environment that increases the unpredictability of market and environment behavior, usually based around a series of events that could be political, economic, financial, or natural. Specifically for the firm, a trigger event or set of events cause a certain change in the market and environment that could have a direct impact on the functioning of the company, its access to resources and the continuity of its supply chain. These are what we term challenges, uncertainties that directly impact the organisation. Finally, these challenges, if not addressed, could lead to undesirable consequences for the firm that could be reputational and finally financial.

While many of these aspects are covered in Part Four on risk management, and indeed the solutions discussed in the Toolkit checklist do overlap largely with the solutions in Part Four, managing a contingency or uncertainty requires a specialist project approach, not a business-as-usual way to manage the Treasury function.

Various uncertainties are depicted in Figure 32.2. For simplicity, we classify them in two stages, the first of which usually occurs before the second. At some point, based on triggers, the uncertainties could morph into a challenge that impacts the firm directly. As long as it has not happened, the particular event or environment remains as an uncertainty. Its occurrence and subsequent change to the company makes it a challenge to manage.

FIGURE 32.2 Various Uncertainties

The various uncertainties are briefly described next.

Stage 1 Uncertainties

The first type of uncertainties, called stage 1 uncertainties, could be legal, regulatory, or market-related in nature. These are expanded below.

• Legal uncertainty. Caused by a change in law or a legal event. These are usually triggered politically, such as the legality of euro transactions with a country should that country exit the European Union.
• Regulatory uncertainty. A result of change in regulations undertaken by a government, central bank, or other regulator, typically as a defense mechanism against some economic harm expected to the country or as a reaction to some event.
• Market event–related uncertainty. Caused by a one-off or concentrated set of events, such as the collapse of a fund, a credit default, or a spike in commodity prices, that could have a more long-term impact or cause other related events in other markets and environments.

Stage 2 Uncertainties

The next stage of uncertainties are given below.

• Liquidity uncertainty. The nonavailability of liquidity in the immediate term, either through the banking channel, public and private markets, or internally. A liquidity challenge is one of the most critical challenges for a Treasurer to face. It creates liquidity risk for the enterprise.
• Credit uncertainty. Events could cause counterparties that the firm is linked to either directly or indirectly to face a crunch and hence not be able to make payments necessary—this could include banks with whom deposits have been placed, entities and partners in the supply chain, and so on. Managing this would mean managing the credit risk for the enterprise.
• Market uncertainty. Market factors across relevant asset classes move unpredictably causing market-related risk for the enterprise.
• Transaction uncertainty. Events in the financial system and political system occur that create potential blocks in the flow of money and transactions in the normal course of business.
• Supply chain uncertainty. More a consequence of the other stage 2 uncertainties, players along the financial supply chain are impacted because of an inability to fund or run their business normally, thereby increasing chances of a disruption in the supply chain of the organisation.

TRIGGERS AND EVENTS

Various kinds of triggers can happen across each area of uncertainty (see Table 32.1). Some of these triggers can be used as early warnings (see Figure 32.3), and some can be used as triggers to take contingency action.

TABLE 32.1 Triggers and Events

FIGURE 32.3 Simple Method of Managing Treasury During Times of Uncertainty

SIMPLE METHOD TO MANAGE TREASURY DURING TIMES OF UNCERTAINTY

Figure 32.3 provides a simple step-by-step process for managing Treasury in uncertain times. Responsibility for managing Treasury typically lies with the Treasurer him- or herself—and the Treasurer appoints a set of people to work with. The various entities also need to support the Treasurer and provide inputs.

Internal Entities

• Procurement
• Sales
• Manufacturing
• Country Management
• Compliance
• Tax

External Entities

• Auditors
• Bankers
• Regulators
• Lawyers

The first step is to have local and global triggers that would set the ball rolling for any action to be taken. These triggers can be set with the help of country management and the chief financial officer. These triggers can be set off by any employee on the business or Treasury function in consultation with the country chief executive or management.

The triggering would result in the assessment of the situation (identifying the situation using IMAGE© methodology). A list of potential triggers based on the situation would be arrived at, and the impact of potential market moves and other events based on these triggers would be assessed. If the stress testing does not produce a satisfactory end result, the contingency plans would have to be invoked for each aspect.

It is better to have generically defined contingency plans for each risk element in the chain; this makes the job of planning before any specific market contingency even easier.

SUMMARY

Managing during prolonged periods of uncertainty requires dexterity, patience, and a huge amount of positivity. While different companies have different approaches to managing their contingencies, the approach and aspects mentioned here and the checklist provided in the Toolkit section of the Web site can serve as a reminder that the company can add to the process of honing and getting its planning to a steady state.

No test of a contingency plan is better than an actual situation. If markets and fate conspire to have you face a dire situation, what you learn from an actual case would be very strong inputs when revisiting the plan and subsequently incorporating the real-life learnings to augment the existing plan and make it more robust.

And of course our wishes are with you. We hope you never need to execute your contingency plans in real life.

Happy Treasurying!