By Wells Fargo Securities Commercial Rates & FX Solutions
A risk management framework helps companies stay on course in even the most challenging conditions. It’s always a good exercise, but in the economic environment created by the COVID-19 pandemic, a solid risk management policy is proving nearly as essential as facemasks and hand sanitizer. Having a clear corporate plan helps businesses safeguard their assets, while simultaneously making swift (but thoughtful) decisions.
Beyond the obvious disruptions to global supply chains, company revenues, and cash flow, COVID-19 has businesses grappling with unpredictable market conditions:
- Interest rates sit at historic lows.
- Foreign currency markets have record volatility.
- Credit markets are showing stress.
- Commodity prices are in flux.
As a result, finance professionals must navigate risk on several fronts at the same time. Adding to that already sizable challenge is global uncertainty, which can hamper forecasting and impede visibility to foreign operations. Seeing the way forward presents a tall order for even the most experienced leaders.
Advance preparation facilitates swift action
Fortunately, a strong risk management framework can alleviate some of the pressure. A sound framework outlines the tools and processes that a company can use to minimize the business impact of various scenarios. In other words, it creates not just plan A, but also contingency plans B, C, D, and E.
When unexpected conditions arise, the plan aligns all stakeholders around the same approach. It gives leadership confidence to move forward, and provides those tasked with executing the strategy a clear set of guardrails to guide their actions.
A financial risk management plan enables companies to:
- React quickly in times of stress.
- Keep staff operating within acceptable guidelines.
- Maintain focus on the most crucial areas of business.
In short, instead of scrambling and reacting, which opens the door for missteps and issues, a risk management framework gives you maximum opportunity for control, while letting you mitigate your risk as much as possible.
Identify your risk objectives, potential solutions, and limits
Several layers comprise an effective risk management framework. The finance portion examines key areas of risk, such as rates, commodities, and foreign exchange (FX), and provides detailed guidance in those areas. The risk management plan then rolls into an overall business continuity plan (BCP) for the entire company.
To create your financial risk management framework, company leaders may wish to consider the following:
- Identify your objectives and expected results.
- Clearly define terms and limits for acceptable risk management solutions.
- Outline which activities require additional approvals.
These components help staff understand their roles and responsibilities, and set realistic expectations for stakeholders. This alignment and forethought is critical in situations that may require speed and agility.
It’s never too late to develop your plan
If your company has a formal risk management framework in place, now is the time to review and activate it. If your business is struggling to navigate the current climate without one, it’s not too late. Convene your top finance, risk management, and senior leadership and outline your approach.
Here are a few financial elements to consider as you create or update your risk mitigation plan:
- Do you have liquidity backup options or lines of credit?
- Do you have coin and currency to cover multiple days of operations?
- Do you have fraud protection measures in place?
- Is your working capital prepared for delayed or suspended receipts?
- Can your company’s short-term investments be rolled correctly and successfully?
- Do you have appropriate limit policies to take large market moves into account?
- Is your company’s trading documentation in order to facilitate quick execution of rates or commodity hedges, FX transactions, or other instruments?
- Do you have appropriate plans to handle your borrowing notices and LIBOR rolls?
- Are you using scenario analysis to test various courses of action?
One of the ways a framework helps is in deciding which critical risks you can hedge, who must be involved in those decisions, and any limits or approvals required to proceed. Outlining these choices in advance gives you more lead time to react as conditions dictate. Other parts of your plan may cover liquidity, commodities, or investments.
For more information, contact your Wells Fargo treasury management representative or fill out the Contact Us form on this site.