Increasing tolerance to risk in an uncertain geopolitical climate

For so many reasons geopolitical risk remains high. You only have to watch the daily news headlines to see that volatility is the underlining theme of international politics and economics, and few parts of the world are unaffected. This is creating an environment of uncertainty in which treasurers are struggling to make financial risk management decisions.

Research suggests that further economic shocks can be expected. The latest Cambridge Centre for Risk Studies’ Global Risk Index report predicts that in 2017 the global economy will face an expected loss of US$1.17 trillion as a result of increased risks. This is against a backdrop of economic growth but with this comes more output that has the potential to be disrupted.

On a day-to-day basis treasurers, credit managers and financial directors have become accustomed to dealing with very low interest rates and currency rate fluctuations that are set to become even more pronounced as the Brexit negotiations gather pace. There is a tendency to turn towards lean operational practices and cost cutting and many have concerns about bad debt.

The UK Chartered Institute of Credit Management’s (CICM) most recent Credit Managers Index for Q4 2016, for example, found that 32% of its respondents saw bad debts increase across 2016, with only 13% expecting them to drop this year. One in five of those surveyed expected debts to continue rising, but most worryingly a further 28% remained unsure about how debts would change, and are budgeting for rises.

Yet despite this, many treasurers will also recognise that taking an overly-cautious approach may also have the effect of significantly hampering growth and progress. Now is not necessarily the best time for a conservative strategy, and a balance has to be reached between managing volatility and risk and embracing opportunities.

Investment strategy

Dynamic financial or strategic investments could be a prudent way to progress during this geopolitically unstable period; particularly if they allow companies to become more insightful and better prepared for managing risk.

The various studies illustrate how important it is to have the right technology tools in place to be able to monitor and manage risks. Furthermore, where everyday trade finance is concerned, if insurers are becoming more cautious it will be down to internal financial decision makers to specify investments that could make a tangible impact on the bottom line.

Treasurers will be best positioned to make crucial decisions against the most volatile backdrop if they can access detailed analysis. There are two key approaches to this.

While big data has been over-hyped, leveraging it can still transform processes in the finance department, where multiple mixed ledger-based systems are increasingly inefficient.  By combining and analysing data on all the company’s customers, anywhere in the world, treasurers have actionable insight. It might require a considerable change to IT systems, but this challenge has to be weighed up against the increase in financial risk of using complex and in some cases conflicting systems.

Existing, embedded processes will need dealing with and changes made, to ensure that any fragmented information held in different departments, or on different systems, can be brought together into a single view of the customer, and even more importantly, how that can then be translated into practical information.

Start off small

It is advisable to start any big data project on a small scale, so that clear benefits can be recognised and their value to the company acknowledged and emulated. If treasurers aim for easy wins to begin with – such as data that can analyse trade payment behaviour – they will get an overview of the characteristics of customer payments that allow them or credit managers within the business to form a case-by-case view on credit limits and access. This empowers finance departments, enabling them to bring siloed teams and departments together, to collaborate and combine efforts for optimum return.

It is very much to the benefit of all operational employees, not just treasurers, to promote big data as a means to making good financial decisions. The net result is that big data projects are seen to have real value and those invested in the process gain board-level endorsement to extend them more broadly.

The second approach to analysis is by using a third-party consulting service. This will provide a company with access to expert risk analysts with real-time information on any buyer in any country and in the context of the current political and economic scenario. Short of being on the ground themselves, treasurers will find no better or quicker access to risk assessments, with the added benefit that all sectors and geographies are under constant surveillance.

The most effective third-party risk analyst services also offer on-call expert opinions. This is helpful for treasurers who recognise that there may be a risk with a potential buyer, but are unable to access the appropriate information. The insight that individual advisors can provide can realise significant savings in time and money.

While analysis tools may require a financial investment, and buy-in from the board, their impact may be more easily understood than a change in company culture. However, one of the reasons that silos exist in companies is because individuals and departments lack the appropriate mechanisms and incentives to share data.

It is in the treasurer’s – and ultimately the company’s interest to ensure all departments are linked and sharing their data. A smart risk culture will become essential in order to thrive during geopolitical and economic uncertainty, and the best way for a company to increase its tolerance to financial risk.

 

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