Treasury Insights

Navigate Disruption With A Treasury Resiliency Strategy

In times of crisis, adequate liquidity is critical to maintaining business continuity. Here are four key focus areas for treasurers to navigate operational disruption.



Liquidity, liquidity, liquidity

Ensuring sufficient liquidity is critical during black swan events where revenues may be compromised but expenses still need to be paid. In such scenarios, treasurers should consider three key areas: analyze key liquidity drivers, build liquidity stress scenarios and have a dynamic action plan in place.

Liquidity drivers differ according to a company’s business models, working capital requirements, external funding capacity, growth plans and commitment to shareholders.

The best way to analyze this is to go back to your cash flow statement and look at every line or sub-line item for opportunities to release or generate cash.

It is not yet known how long the COVID-19 pandemic will last and is therefore prudent for treasurers to draw up multiple stress scenarios as they plan their liquidity needs over an extended period of time. This will help them create a more dynamic action plan.

We are advising clients to keep five action points in mind as they work through their liquidity plans: reduce, release, secure, defer and identify:

  • Reduce discretionary spend like travel or entertainment at all times, while identifying fixed-cost optimization opportunities like moving to cloud infrastructure. 
  • Release internal cash trapped in supply chains or sitting idle in different parts of the business; trade finance solutions and techniques to centralize liquidity like cash pooling can help companies access and mobilize internal cash more effectively.
  • Treasurers may want to secure access to liquidity from external sources like banks and capital markets whenever available.
  • Finally, look to defer capital spending, share buybacks or dividend distributions, or align them with liquidity positions, as well as identify non-core assets that can be liquidated to generate emergency funding.
     

Execution is key

Strong operational discipline and coordination between the treasury’s front, middle and back office teams are essential to effective execution, and this is even more critical in the current environment when people are working remotely and exception management is dominating day-to-day activities.

Traders should not wait too long to achieve a specific pricing in the market at the cost of losing liquidity in these critical times. For example, if you need to swap local currencies to U.S. dollars to repay maturing debt and the FX spreads are very wide due of market volatility, you should not sit on this position for too long and risk debt default.

Keeping an ongoing dialogue with businesses will be key for middle office teams to ensure the submission of accurate cash forecasts and revisions at all times. Cash managers may also consider reducing investment and swap durations to build more flexibility into liquidity plans.

Rigorously testing backup banking infrastructure for both payments and balance reporting capabilities is important for back-office teams. They should consider preparing facility drawdown paperwork in advance as much as possible and ensure the signatory lists are updated with all key bank relationships to avoid last minute surprises.

Finally, cybersecurity is becoming a key priority now more than ever, with threat actors looking for weaknesses in systems with large numbers of staff accessing their work systems from home. The number of cyberattacks in relation to COVID-19 has increased over the last two months and it’s paramount that companies increase their risk monitoring against cyber threats.
 

Dealing with losses

Governments around the world have responded to the COVID-19 pandemic with a variety of policies restricting movement, including country-wide lockdowns in some cases. Depending on the extent of the measures, treasurers need to be prepared for the prospect of the loss of site, loss of staff or loss of systems.

In the event of a loss of site, treasury needs to be ready with a clear communications plan for key stakeholders on its recovery strategy to either resume operations remotely or from alternate work locations.

In cases where treasury is set up across the region, key operational processes should be distributed across markets to ensure continuity. Common work flows like single enterprise resource planning (ERP) or treasury management systems (TMS) are of immense value in times like these, as they provide visibility to global liquidity, funding and FX positions, and are helpful for regional treasuries to hand over the book to each other seamlessly.

Loss of staff refers to situations where staff within the treasury function are unable to perform their roles due to medical, infrastructure or social distancing measures.

It might be worth identifying staff that are able to cover other functions should the need arise. For example, the banking administration team can cover trade confirmations and settlements in middle offices where feasible.
 

Remember to communicate

Timely communications is critical in dealing with any crisis, and it is no different for treasuries in the current environment.

The treasury should keep the company’s board and management fully informed of the company’s liquidity status and its action plans at all times. This also provides an opportunity to influence critical decisions.

Constant stakeholder dialogue and collaboration

To manage actions by rating agencies, it is important for treasurers to keep them informed of company plans around dealing with the crisis. Finally, close communication and coordination with banking partners is a must for treasuries to ensure sufficient funding and transaction support.

While COVID-19 has caused widespread disruption to businesses in short term, it has highlighted the need for greater treasury digitization and centralization within organizations. J.P. Morgan continues to invest heavily in this area and we are seeing an increased adoption of digital banking solutions by a large number of clients.

  

In these uncertain times, we thank you again for your continued trust in J.P. Morgan. Please contact your J.P. Morgan representative for further information.

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Treasurer’s Guide to COVID-19

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