Treasury and Risk Management

Top Financial Risks and Tools to Manage Them

February 2013
Ankita Tyagi
 February 2013
Treasury and Risk Management: Top
Financial Risks and Tools to Manage Them Analyst Insight
In February 2012, Aberdeen conducted a study on Treasury and Payments, Aberdeens Insights provide the
Putting Your Cash to Work: Reducing Risk and Maximizing Returns with Treasury analyst's perspective on the
and Payments Management, which shed light on the impact of treasury and research as drawn from an
payment strategies in financial operations. That study focused, primarily, on aggregated view of research
Accounts Payables (AP) and Accounts Receivables (AR). This study, on the surveys, interviews, and
other hand, explores the classic corporate treasury and risk management data analysis
function and its role in financing business operations as well as in shaping
company strategy. Aberdeen reached out to C-Level executives, Treasurers,
and other business leaders across different financial functions, from
November 2012 through January 2013, to identify top market pressures as
well as gain an insight into the critical market risks and responding
companies' level of exposure to those risks. This study uncovers those
market drivers, strategies, and capabilities which companies have in place to
manage financial risk. It concludes with a discussion of top technologies "[Information from] balance
which are in play today and offers recommendations for building a robust sheets, credit assessment from
treasury and risk management function. ratings partners, and close
monitoring of amount of
exposure due to customer
Key Market Drivers: Risks at Large and Exposure Level supply chain risks [are some of
The last few years have seen a spike in regulatory reforms, with the majority tools used by our organization
directed at financial functions, particularly towards reporting and risk for risk management]."
management. Further, the 2008 housing crisis, and the ensuing euro crisis, ~ Manager, Procurement,
have led to a new normal where organizations and financial institutions Financial Services
operate in a highly constrained (particularly in terms of liquidity) economic
environment. Evidently, 50% of respondents to Aberdeen's recent survey
cite this greater regulatory and compliance oversight as one of the key
market drivers for undertaking treasury and risk management initiatives
(Figure 1).

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and
represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc.
and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.
Treasury and Risk Management: Top Financial Risks and Tools to Manage
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Figure 1: Top Market Drivers Regulatory Oversight - Recent

Directives
Some of the directives
Increased financial risk 58.8% particularly issued for financial
Greater regulatory and services and / or financial
compliance oversight 50.0% operations, in recent years are
as follows:
Inability to accurately
26.5%
forecast cash flows eXtensible Business Reporting
Language (XBRL)
Low interest rate - difficult to 20.6%
find areas to invest The Basel Accord
All Respondents
Inability to keep up 14.7% Dodd-Frank Reform with a
with market volatility complimentary Volcker Rule
0.0% 13.0% 26.0% 39.0% 52.0% 65.0%
Generally Accepted
Percentage of Respondents, n = 36 Accounting Principles
(GAAP) to International
Source: Aberdeen Group, January 2013 Financial Reporting
Standards (IFRS)
Other key attributes which set 2008 and beyond apart from the prior years
include an economic environment marred by heightened financial risks, low
interest rates, precarious global financial conditions, and fluctuating
commodity prices (case in point: crude oil). This has led to an overall low
liquidity environment, making it difficult for companies to steer their
business through these economic buoys. Despite these substantial
challenges, there are no concessions for companies today. If anything, the
crisis in 2008 only exposed hollow lines of credit and shook up
stakeholders' trust. In fact, stakeholders are now demanding greater
financial transparency and prudent investment practices, particularly
responsible risk management. So it is no surprise that the biggest market
pressure, as cited by 58.8% of the respondents, is the increase in financial
risks (Figure 1). Financial risk, however, is a broad term, inclusive of several
types of risks. As such, for the purposes of this study, financial risk includes
the following seven types of risks:
Commodity risk
Counterparty risk
Credit risk / liquidity risk: Credit and liquidity risks are two
distinct types of risks. But, many times, companies use these two
terms interchangeably and for the purpose of this study, we do not
distinguish between them.
Foreign exchange risk
Interest rate risk
Sovereign risk
Reputational risk
Other risks

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According to the survey, respondents cite a 0.47% increase in exposure to

total financial risk over the past year. While a sub 1% figure may appear
insignificant at first glance, it can be quite impactful when one takes into
account millions and billions of dollars that a company may invest and which
may now be at risk. The following section Risky Business explores
risk prioritization, visibility, and the exposure level of these seven different
types of risks.

Risky Business: Relevance, Visibility, and Exposure

We asked respondents to prioritize different financial risks, on a scale of 1
to 5, with one (1) being least important and five (5) being most important,
based on the risk's potential impact on business operations and continuity.
The findings are summarized in Table 1.

Table 1: Risk Priority, Tracking, and Exposure Level

Change in risk
Visibility exposure over
Priority the past year
1- Least 1 - No
Important Visibility (%)
Risk Type
5- Most 5- Excellent '+' indicates an
Important increase
Visibility '-' indicates a
decrease

Interest rate risk 3.64 3.10 +1.22%

Counterparty risk 3.61 3.03 -1.97%

Sovereign risk 3.35 2.63 +1.83%

Credit risk /
3.19 3.69 +5.23%
Liquidity risk

Commodity risk 3.19 2.83 -5.03%

Foreign-exchange
3.00 2.77 +1.26%
risk

Reputational risk 3.00 3.30 -1.48%

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Change in risk
Visibility exposure over
Priority the past year
1- Least 1 - No
Important Visibility (%)
Risk Type
5- Most 5- Excellent '+' indicates an
Important increase
Visibility '-' indicates a
decrease

Other 0.74 1.89 -0.59%

Source: Aberdeen Group, January 2013

Interest rate risk was rated as the top priority (3.64 out of 5.00) by
respondents. Fluctuating interest rates have left organizations with few
viable options. Interest on federal funds, known for their "default-free"
characteristic, are offering historically low returns as of January 18, 2013,
and as per the Federal Reserve's announcement, will continue to remain low
until 2015. However, many small businesses often dont qualify for loans
from banks and many financial institutions still follow a strict lending policy.
Therefore many small businesses aren't exactly benefiting from these low
rates. Companies which are in need of a steady and reliable stream of
sizable cash may not be able to meet their needs through treasury bonds
alone due to their low yields. Other options are even less viable as the risk
associated with private investments can be fairly substantial. Without any
federal guarantee on private investments, companies are forced to leave
large amounts of cash idle on their books, adding to liquidity issues.
Counterparty risk (3.61out of 5.00) follows closely on the heels of
interest rate risk as one of the top areas of concern for organizations today.
Structured financial products, such as a derivative, derive their value from
other financial assets and may involve multiple parties. Often times, these
instruments, based on complex mathematical models, involve multiple
trading partners. This makes it hard to identify the source of the capital, the
exact number of stakeholders involved in the transaction, and their level of
exposure to price fluctuations of the security. Hence, it is not surprising to
find counterparty risk as one of the top concerns for any organization
today.

Risk Visibility
In addition to the prioritization of different risks, we also asked respondents
to rate their organization's visibility into different types of risks. A rating of
one (1) denotes no visibility and a rating of five (5) denotes excellent
visibility (Table 1).
As expected, respondents reported maximum visibility into their
organization's credit risk position (3.69 out of 5.00), followed by
reputational risk (3.30 out of 5.00). It is not uncommon for organizations to

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track and maintain the credit histories of their clients. This is particularly
true for any organization which offers a supply chain financing solution. In
addition, the post-2008 economic crisis has brought poor credit issues to
the forefront, compelling many financial institutions and organizations to
take a critical look at their line of credit and establish processes and systems
to aid credit-risk monitoring. Hence, it is of little surprise that organizations
report a high visibility across this risk metric.
Reputational risk is another interesting risk type. The intent of most
organizations is to maximize their stakeholder's interest and one way of
ensuring that is by retaining existing customers and attracting new ones. In
other words, establishing a brand, which in turn is a function of business
reputation. According to the March 2012 report, B2B Social Media
Marketing: Are We There Yet?, leading companies reported a 186% greater
increase in year-over-year social buzz (positive social mentions) and 230%
more market leads from social media channels compared with all other
companies. Therefore in effect, any endeavor that an organization takes has
an impact on reputational risk. With this premise in mind, organizations,
particularly in the age of social media, are more likely to track and monitor
their brand than in the past. Additionally, the last few years have seen a
spike in the number of incidents where an organization's confidential data
was compromised. This has brought focus to IT Governance, Risk, and
Compliance (GRC) and is evident by the increase in the number of solution
providers which now focus on this aspect. With this information on hand
and additional resources, more companies now track reputational risk
compared to other risk types.

Risk Exposure
Finally, we asked respondent to rate the change in their organization's level
of exposure to these risks. Respondents reported a 5.23% increase in
credit / liquidity risk exposure level since 2011. Surprisingly, commodity
risk reported a decline in exposure level of 5.03%. At first glance this
appears contrary to current media reports, since the prices of many raw
materials have fluctuated widely. For instance, crude oil, which is used in
several production processes, has been a topic of great controversy for this
very reason since 2011. However, it is also important to note that the
manufacturing industry is still on its path to recovery and many plants are
not operating at their optimal capacity yet. As plant production and housing
construction picks up, prices of many raw materials are likely to rise,
possibly exposing companies to a higher commodity risk.

Risk Tracking and Benchmarking

It is important to note that organizations cannot assess their risk position
unless they regularly track and measure their exposure. According to the
survey, 58.3% of the respondents regularly benchmark and track credit risk
while less than half of that (22.2%) regularly benchmark and track
commodity risk. Unfortunately, ignorance is not bliss when it comes to risk
and investment management. According to the April 2012 report, Financial

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Planning, Budgeting, and Forecasting: Leveraging Risk-Adjusted Strategies to Enable

Accuracy (FPBF), leading companies are almost two times as likely as All
Others (44% vs. 23%) to systematically monitor key risk indicators.

Figure 2: Risk Benchmarking and Tracking Rate

65.0% 58.3%
50.0%
52.0%
41.7%
39.0%
27.8% 27.8%
26.0% 22.2%
16.7%
13.0%
0.0%
0.0%

Percentage of Respondents, n = 36

Source: Aberdeen Group, January 2013

Strategies and Capabilities of Today and Tomorrow

While the identification of key market drivers, risk types, and exposure level
is a critical component of any treasury and risk management function, it is
only one part of the equation. The second part, which is just as critical if not
more so, often focuses on strategies and capabilities to mitigate and manage
those risks.
The majority of survey respondents (63.6%) cite improvement in cash flow
forecasting capabilities as one of the top strategic action used to account for
risk (Figure 3). Improved financial forecasting can make it possible for
organizations to anticipate the next big expense and plan their investments
and / or schedule payments to their stakeholders in a timely manner,
alleviating liquidity issues and ensuring business continuity.

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Figure 3: Top Strategic Actions

Improve cash flow forecasting 63.6%

Provide real-time access
to financial data 54.5%

Invest in a treasury and risk

21.2%
management platform
Integrate treasury with 18.2%
risk management
All Respondents
Seek Board of Directors buy-in 12.1%

0.0% 13.0% 26.0% 39.0% 52.0% 65.0%

Percentage of Respondents, n = 36

Source: Aberdeen Group, January 2013

On a similar note, real-time financial reporting capabilities can offer

organizations accurate and timely insight into the cash position as and when
transactions occur rather than waiting until the reporting period. Such
visibility can improve cash flow management and is in fact a key strategic
action, as cited by 54.5% of respondents. "We use balance sheets and
cash flow [statements] to
It is important to mention organizations' focus on integrating treasury and determine near term risks.
risk management functions (18.2%). For many organizations, these are still Lack of financial risk
two separate functions, where visibility in one doesnt necessarily warrant management can severely
visibility into the other. According to the survey, only 29.6% of respondents impact the profit margin across
each product."
have an integrated treasury and risk management solution in place (Table 2).
Integration reduces the time lost due to switching between applications, ~ Stacy Cordier, Vice
paving way for more efficient and seamless operations. According to the President, Treasury, Retail
2012 ERP Benchmark survey, leading companies are almost two times as
likely (76% vs. 41%) as their Laggard counterparts to integrate business
applications.

Capabilities to Realize Strategies: Today and Tomorrow

Most of the capabilities listed in Table 2, below, support the strategic
actions of Figure 3. Forecasting, real-time reporting capabilities, and
integrated treasury and risk management systems and processes highlight
the importance of reporting accuracy and visibility into current operations
to gauge an organization's financial health. Not only do these three
capabilities have a high current implementation rate (35.7%, 29.6%, and
35.7% respectively) but many respondents, 50% for forecasting and real-time
reporting each and 40.7% for integrated treasury and risk management
capabilities, expressed interest in embracing these capabilities in the next 12
months.

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There is also an overarching emphasis on formalization and standardization

of processes as indicated by the percentage of respondents who are either
currently implementing or planning to implement a formalized process for
cash flow forecasting (35.7%) and risk management (34.5%).
At the same token, 43.3% of respondents cite implementation of enterprise-
wide standardized treasury and risk management processes as a key
capability while an additional 23.3% are planning to undertake such initiatives
in the next 12 months.
Standardization ensures uniformity and consistency while reducing
information clutter. Considering the massive information overload and
interest in "big data" since 2011, this is of great significance today as
standardization can help companies distinguish critical financial data
indicators from all other data.
For instance, when we asked respondents to select the top three key
performance indicators from a limited list of 20, there was little consensus
on the top three. Days Sales Outstanding (DSO) and total annual banking
fee were the most favored metrics cited by 34.8% of the respondents, which
is still less than the half of the total sample size.

Table 2: Top Capabilities: Present and Future Trends

Current
Capability Implementation Plan to Implement
Rate

Aging analysis for

62.1% 24.1%
receivables

Formalized process for

35.7 % 50.0 %
cash flow forecasting

Credit evaluation
35.7 % 32.1 %
capability

Formalized process for

financial risk 34.5% 41.4%
management
Real-time visibility and
control into all cash 35.7% 50.0 %
account balances
Integrated treasury and
risk management 29.6% 40.7%
solutions
Source: Aberdeen Group, January 2013

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Technologies in Play and Future Trends

In addition to capabilities, organizations are also deploying technology
solutions in support of their strategic objectives. This section sheds light on
some of the highly leveraged technology solutions.
Fifty percent (50%) of respondents currently have a bank-hosted treasury
workstation (Figure 4) and 13.6% plan to follow suit in the next 12 months.
A treasury workstation is often considered a nucleus of corporate cash
management, as it provides access to all financial data at a single location.
Financial data often includes account balances, transaction history, forecasts,
and investment portfolio information, among other critical data.
A treasury workstation offers the benefit of consolidating all critical data in
one location, reducing time spent on gathering data from different sources
and time to decision-making. That said, while a bank-hosted treasury
workstation relieves the pain of hosting and solution maintenance for the
organization, it also leaves the organization at the mercy of their bank in
term of functionality offerings.

Figure 4: Technologies Current and Future Trends

Currently Use Plan to Implement within 12 Months

Bank-hosted Treasury workstation 50.0% 13.6%

Accounts Receivables solution (AR) 50.0% 8.3%
Enterprise Resource Planning 48.0% 8.0%
(ERP) Treasury module
46.2% 11.5%
Accounts Payable (AP) solution
Cash Management solution 41.7% 20.8%
Risk Management solution 34.8% 13.0%
Treasury Management system 32.1% 7.1%
Financial Analytics tool 25.0% 41.7%

0.0% 14.0% 28.0% 42.0% 56.0% 70.0%

Percentage of Respondents, n = 36

Source: Aberdeen Group, January 2013

In spite of the ubiquity of Accounts Payable (AP) and Accounts Receivables

(AR) solutions, the current implementation rates are fairly low. These
solutions have been around for a while yet many companies still rely on
paper-based invoices. According to the February 2012 study, Common
Concerns and Shared Strategies: AP and AR Lessons from the Best-in-Class, 43%
of invoices are still paper-based. However, 67% and 35% of respondents are
considering automation of AP and AR processes, respectively, as a critical
strategy to reduce costs and achieve operational efficiency.
Similar to AP and AR solutions, in spite of the ubiquity and abundance of
options for cash and risk management solutions, current deployment rates
are fairly low at 41.7% for cash management and 34.8% for risk management

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solutions. With regards to cash management, many organizations still rely

on the "look at the cash flow statement" approach to manage cash rather
than an automated system.
Even though many organizations understand the role and impact of effective
risk management in ensuring business continuity, many organizations still
view it as a tier-two function. Still there are a few organizations which tend
to address operational disruption after the occurrence of an adverse
incident rather than taking a proactive approach to prevent it in the first
place. According to the October 2011 study, Enterprise GRC Management for
Financial Executives: Best Practices for ROI Evaluation, 15% of the respondents
cite relying on the "only know something is wrong after it occurs" approach
to manage risk. Additionally, according to the December 2010 study,
Effective GRC Management: Positioning Your Company for Growth, only 25% of
companies have tools in place to enable management access to the
company's current risk status. Additionally, as Figure 4 indicates, only 25%
of respondents are leveraging financial analytics today but 41.7 % plan to
implement these solutions in the next 12 month. Financial analytics is used
to collect and analyze data from different financial units and systems,
thereby reducing time to decision making and enabling faster access to
critical information. According to the FPBF study, companies using business
analytics are able to reduce their time-to-decision making by 13% compared
to 10% for companies which dont have a business analytics solution in
place. Also, organizations which have business analytics in place were able to
provide 74% of their stakeholders with access to financial performance data,
compared to 62% of stakeholders in companies without business analytics
tools.
On a complimentary note, 8.7% of organizations currently leverage
predictive analytics for treasury and risk management and an additional
21.7% plan to do so in the next 12 months. Predictive analytics, as the name
implies, allows organizations to analyze data to detect trends and enhance
the forecasting process.

Treasury and Risk Management Report Card

We've discussed market pressures, strategies to alleviate them, and systems
and processes to support the treasury and risk management functions. But
how are companies performing in today's economic environment and how
does it compare to previous years? Table 3 presents companies
performance across some of these treasury and risk management indicators.

Table 3: Treasury and Risk Management Report Card

Key Performance Indicator Result
Average return on short-term (less than 3 months) capital
1.74%
investments

Average cost of short-term (less than 3 months)

2.30%
borrowed capital

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Key Performance Indicator Result

Percentage of loans which were ultimately written off as
1.88%
bad debt over the last year

Number of days required to collect organizational data for

8.43 days
regular (e.g. quarterly) financial reporting
"[Biggest room for
Number of days required to report global cash position 5.93 days improvement within Treasury
and Risk are in the areas of]
Accuracy of global cash forecasting (Average variance) near real time information
+1.25% aggregation and reporting;
'+' denotes that actual forecast overshot the budgeted forecast visibility to market dynamics via
Change in percentage of loans written off as bad debt Increased by credible matrices."
over the past year 5.75% ~ General Manager,
Increased by Information Technology,
Change in total annual banking fees over the past year Financial Services
8.54%

Source: Aberdeen Group, January 2013

Two of these metrics, number of days required to collect organizational

data for regular (i.e. quarterly) reporting and number of days required to
report global cash position, warrant further discussion. According to Figure
1 on market pressures, 14.7% of respondents cite the inability to keep up
with market volatility as one of the biggest concerns. Therefore, if an
organization on an average requires eight days to collect financial data and
almost six days to report global cash position, it is probably not agile enough
to respond to the dynamic economic environment and will be inept at
alleviating that market pressure. This is yet another reason why companies
should explore and invest in analytics and real-time reporting capabilities to
reduce delay in access to information and to expedite decision making.
According to the November 2012 report, Real-Time Financial Reporting:
Ensuring Continuous Compliance and Transparency While Reducing Costs, leading
companies which have real-time financial reporting capabilities in place,
reported a 38.9% reduction in time needed to close their books at the end of
the quarter, compared to a 6.2% increase in time reported by their peers
who lagged in the adoption of such capabilities.

Concluding Remarks
Treasury and risk management is a critical function for every organization,
irrespective of size or industry type. Whether formal or informal, every
organization in some way monitors its cash position to fulfill current
commitments and to plan ahead. However, organizations which invest in
systems and processes to support this function are better equipped to
respond to the dynamic economic environment and mitigate risk in a timely
manner than those who wait to react after the fact. The following steps are
some of the proposed actions for building a robust and agile treasury and
risk management function:

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Identify key performance metrics to track treasury and risk

management. In this survey alone, we identified 20 metrics which
organizations use to track and measure their cash flow position and
risk exposure level. This list is by no means exhaustive and may vary
depending on size, type, location, and other attributes of the
organization. By identifying absolutely critical metrics, companies
can reduce data to a more manageable level. Lack of reliable metrics
to measure program success was cited as a top challenge by 14.7%
of respondents.
Appoint and equip treasury and risk management officers
with resources to regularly monitor and address the company's cash
and financial risk position. Limited resources (i.e. staff and budget)
are cited as one of the biggest challenge by 58.8% of respondents
when it comes to initiating a treasury and risk management
initiative.
Invest in technology solutions to systematically monitor cash
position and to gauge risk exposure levels in a timely manner.
Responding after the fact defeats the entire purpose of risk
management. Response time is a critical factor. A lack of technical
capabilities was cited as one of the biggest challenge by 29.4% of the
respondents with regards to effective treasury and risk
management.
Integrate different technology solutions to expedite processes
and to gain a holistic view of the treasury and risk management
function. According to the 2012 ERP benchmark survey, leading
companies are almost two times as likely (76% vs. 41%) than their
Laggard counterparts to integrate their business applications for
complete and auditable system of records. Inability to integrate
different solutions is cited as one of the biggest challenge by 26.5%
of the respondents in the treasury and risk management space.
For more information on this or other research topics, please visit
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Related Research
Real-Time Financial Reporting: Ensuring Putting Your Cash to Work: Reducing Risk
Continuous Compliance and and Maximizing Returns with Treasury
Transparency While Reducing Costs; and Payments Management; February
November 2012 2012
Financial Planning, Budgeting, and Enabling Compliance and Business
Forecasting: Leveraging Risk-Adjusted Improvements through XBRL; April 2011
Strategies to Enable Accuracy; April Enterprise GRC Management for Financial
2012 Executives: Best Practices for ROI
B2B Social Media Marketing: Are We Evaluation; October 2011
There Yet?; March 2012 Effective GRC Management: Positioning
Common Concerns and Shared Your Company for Growth; December
Strategies: AP and AR Lessons from the 2010
Best-in-Class; February 2012
Author: Ankita Tyagi, Senior Research Associate, Financial Management and
Governance, Risk, and Compliance (GRC), ankita.tyagi@aberdeen.com,
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This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies
provide for objective fact-based research and represent the best analysis available at the time of publication. Unless
otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be
reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by
Aberdeen Group, Inc. (2013a)

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