How to build resilience during recession 2022 with treasury management solutions

Understanding market volatility

Treasury recession is a severe, pervasive, and protracted decline in economic activity. It refers to the measurement of price alterations throughout a given time frame. It is calculated as the difference between the top of the previous expansion and the bottom of the downturn. Market volatility might only last a few months, whereas it might take years to recover economically from the previous state.

Source: Mozo

Impact of a volatile market on treasury

The treasury recession has the following impact on treasury:

1. Variations in interest rates: During high economic activity and spending, interest rates might be hiked to balance the supply-demand gap. This suppresses buying and spending and gradually leads to a recession. To stimulate the economy during a recession, the government reduces interest rates. 
2. High FX risk: All types of businesses are expanding globally, looking for new sales prospects and enlarging supply networks. Treasurers have to deal with increased complications involving different currencies, which increases operational and financial complexity. The profit and loss statement is significantly impacted by currency swings, making it challenging to evaluate FX risks using spreadsheets.
3. High cash buffer: Companies raise their cash reserves when projections are off because they are ill-equipped to deal with macro-level volatility. This prevents confident decision-making related to the utilization of idle cash that might otherwise be used for M&A, fixed assets, or stock buybacks.
4. High borrowing cost: Companies may make the mistake of expanding infrastructure or acquiring more inventory, especially since loan rates are likely to be low during a treasury recession. However, if business declines further—as it may in a recession—it may be challenging to make interest payments on time. Due to this, companies might go for nighttime sweeps and last-minute borrowing at high-interest rates. 

Importance of treasury management solutions to recession-proof your business

How treasury management solution can help protect your business against volatility

Planning and taking action before and during an economic downturn are necessary to recession-proof a business. To create and execute these plans, business leaders require reliable analysis tools and valuable and accurate financial data. To comprehend current outcomes and create what-if scenarios and forecasts, business executives need the visibility that treasury management solutions offer into financial and operational data. 

Here are some ways in which treasury management solutions can help recession-proof an organization:

• • Monitoring liquidity closely: Markets are volatile, and circumstances can quickly deteriorate during a recession. Successful businesses rely on treasury automation to constantly monitor liquidity during every stage of the recovery. Automation ensures a centralized and consolidated view of all cash assets to better monitor and allocate cash resources.
  • Improving cash flow: Treasury automation helps examine the cash flows across entities, regions, company codes, and time horizons. It enables the treasury team to reassess the flow of capital expenditures and identify projects, or significant outlays that need to be postponed or canceled and those that must be accelerated. 

• • Increasing accuracy in forecasting to prepare for the future: Companies forecasting their cash flows regularly have a clear view of their cash resources, which helps in risk management. AI-based cash forecasting enables businesses with cash shortages to forecast on a weekly or daily basis so they may make informed and proactive borrowing decisions. AI-based cash forecasting has higher accuracy than manual cash forecasting as it:
    • Captures customer-specific variables
    • Uses suitable models for different cash flow categories
    • Captures external data and seasonality

It also helps perform variance analysis across various cash flows and time horizons. The “closed-loop feedback mechanism” lowers the difference between forecasts and actuals. This mechanism enables treasury management solutions to discover what they did correctly or incorrectly and gives them the information they need to improve forecast accuracy.

• Enabling stress testing using historical data: Treasury management solutions offer manual override for quick stress testing of numerous scenarios. Additionally, it gives the foresight to track present and anticipated cash shortages. It helps treasury teams improve scenario analysis to prevent cash shortages. By carefully analyzing the risks and benefits of numerous solutions through realistic stress testing of best- and worst-case scenarios, it can help businesses make smarter decisions.

Best practices for recession-proofing in a volatile economy

The best practices to build resilience with treasury management solutions are:

1. Utilize APIs and treasury automation to gather information in real-time
2. Utilize dashboards to gain real-time insight into financial flows
3. Make forecasts frequently that aid in identifying patterns in liquidity
4. Track scenarios to manage numerous risks, such as the volatility of currencies and interest rates
5. Automate cash positioning and bank data reconciliation
6. Streamline bank administration and signatory tracking
7. Control internal banking, sweeps, and corporate transfers
8. Prepare various report iterations for multiple stakeholders

Building resilience during a treasury recession comes down to operating deliberately and always being ready to adapt. Automation can free up bandwidth when the treasury team already has enough on their to-do lists. Speak to our experts to learn more about surviving the treasury recession with treasury management solutions.