Risk is inherent in any business venture, as founders well know. Some risks are palpable and even thrilling when expanding into new products or markets. However, when it comes to cash and treasury,  risk appetite is usually low. Having a simple framework in place to proactively monitor and manage your risks could be just what you need to sleep easy at night.

Utilise these 3 simple tips to guide your thinking about the risks your business faces, and follow the steps to take action towards creating an easy-to-use risk management framework.

1. Identify - Know what you’re facing

All businesses are unique in the risks they face, and spending time considering where the exposures are will be an invaluable exercise.  The main risks to look out for are:

• Liquidity Risk- Liquidity risk occurs when a business does not have enough cash to sustain its operations. This can happen unexpectedly as a result of various unforeseen events, such as customers making late payments or unplanned expenses arising.
• Market Risk- Market risk is caused by external factors that impact the economy as a whole, like increased interest rates, which can decrease consumer spending at a macro level. It can also arise from industry-specific trends, such as the popularity of one product over another.
• Credit Risk- External parties may create credit risk by being unable to fulfil their financial obligations. For example, a customer may be unable to settle its outstanding invoices.
• Operational Risk- Operational risk encompasses a broad range of roles throughout the business. It refers to any process or task that could potentially result in a financial loss for the company.
• Financial Management Risks- Poor financial management and the need for short-term financing or excessive debt can result from a lack of, or inaccuracies in the budget and cash flow forecast. 
• Foreign Exchange Risk- When operating overseas, FX risk is inevitable as fluctuating rates pose a threat to the bottom line if not correctly managed.

2. Take action

When it comes to risk management, often the simplest solutions are the most effective.

Spending time going through all of the risks identified and ideating about how they could be mitigated could be the difference between saving your business or losing it if a risk were to materialise.

Some helpful pointers to start with:

• Diversify your cash - operating with at least 2 banks is critical to keep the business running smoothly. Although banks are robust institutions and subject to stringent monitoring, they are not devoid of their own risk management procedures which do sometimes fail.
• Review your systems access - Although not the most glamorous of tasks, making sure that the right people can access the right platforms could save your business from fraudulent activity and unexpected losses, whether intentional or by accident.
• Hedge FX exposures- with more players in the FX space, it has never been easier to access quality advice from experts to hedge your FX risk. Even a very simple hedging strategy should protect your business from unexpected market swings.

3. Write it down

Writing a simple treasury policy will help to keep the business decision-making on track, and give a framework with which to manage the risks identified.

The framework of the policy should capture:

• Policy Objectives -> preserving cash, maintaining sufficient liquidity to operate, minimising idle cash, reducing exposure to foreign exchange
• Roles and Responsibilities -> Who can instigate cash movements, who can approve investments, who will review the policy and its effectiveness
• Risk Management Guidelines -> What actions need to be taken to protect the business from the outlined risks and how often do these tasks need to be completed
• Reporting -> How will the effectiveness of the policy be monitored and reported 

Written by guest contributor Jen Pearson

About the Author:

Jen Pearson, is a qualified ACCA, ACT treasury consultant who has worked in the industry for 10 years across many industries including, big manufacturing, professional services, financial services and fintech before starting her own consultancy firm in 2023. Jen specialise in treasury risk management, specifically cash forecasting and management, foreign exchange, and long and short-term liquidity. The growing demands of the treasurer mean her role is ever-evolving. She feels very privileged to do the work she does, and thrives on helping businesses not yet big enough to have a treasury function to address their financial risk.

Links:

1. Try our Quiz!  Financial Leadership Foundations Scorecard.  
2. Work with me in the Financial Leadership Foundations course  that includes monthly Q&A sessions where we can discuss all of your questions and how to apply your learnings to your current role. 
3. Work with me as a Founder needing guidance and support from experienced Finance leaders. Take a look at our guide on Outsourced bookkeeping.