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Navigating Financial Risk

The market landscape alongside financial risk management has grown increasingly complex during recent years. Centrus Advisors give an overview of how finance professionals should best steer through these challenges.

Treasury and risk management

The role of finance is even more critical and diverse. Dealings and exchange of information with both internal stakeholders and external stakeholders are more demanding and time-consuming while senior management and shareholders are even more engaged in reviewing the risks that could impact the financial health of the organisation.

At Centrus Advisors, we advise many clients in the housing association and infrastructure sector across the UK and Republic of Ireland on their business plans and Treasury Management Policies to meet financial standards and funder requirements. Such policies need to incorporate the key treasury risks of the organisation such as liquidity risk, credit counterparty risk, interest rate risk, operational risk, and legal and regulatory risk. Financial standards require the treasury function to also detail some key areas such as decision making, performance measurement, segregation of duties and reporting requirements.

Following the financial crisis, regulatory frameworks provide greater transparency but are demanding from an information and process point of view. Bank institutions have experienced deterioration in credit quality, lower credit appetite and have fewer resources, but at the same time regulatory changes have increased their operational and compliance needs as well as their return-on-capital requirements.

A holistic approach to financial risk management is imperative for a finance team to achieve both strategic and operational objectives. A best-in-class risk management programme spans from organisational alignment and policy design to accounting, reporting and monitoring. The following steps are key to building a robust framework:

Strategic and quantitative assessment of financial risk exposures

The identification and evaluation process is an assessment phase involving:

• review existing risk management framework;

• benchmark against peer group companies with similar risk profiles;

• gather reliable data such as existing and forecasted business and financial exposures;

• construct the appropriate key performance indicator (e.g. gearing, interest covenants); and

• quantify, by analysing the data, the impact of different market movements to the relevant metric(s) at risk.

Credible business planning

A business plan should serve as the centrepiece in helping boards and management place decisions in context, centred around desired goal and evaluate potential consequences. It is essential that the board and management, along with other key stakeholders such as the regulator and investors, have confidence in the proposal.

Efficient implementation of the desired debt strategy

A detailed and coherent debt strategy which is driven by your business plan will assist greatly in mitigating key financial risks. The strategy should balance the key factors between maturity (and the stability of same), the quantum of debt (including the optimum capital structure analysis), the cost of debt (together with any hedging policy) and the level of security given (recourse versus non-recourse, level of asset security etc.).

Effective treasury management involves:

  • understanding and quantifying the key financial risks in your business;
  • creating and maintain a business plan which has the support of all stakeholders;
  • designing and implementing an effective debt strategy; and
  • consistently updating your overall treasury strategy to take account of the changing environment.

Technology should be combined with expertise so that finance can produce high quality information and interpret this information appropriately to meet the demanding requirements of internal compliance, auditors and regulators.

Jason Murphy, Managing Director
Matthew Reast, Director
Centrus Advisors
40 Fitzwilliam Square West
Dublin 2
T: +353 (0)1 905 8642