Challenges for Treasurers in 2023

The global economy has witnessed continuing interest rate hikes over recent months as central banks make an effort to curb inflation, which has largely been caused by the consequences of the pandemic, associated supply chain disruptions, and the ongoing conflict in Ukraine.

With inflation hitting a peak in the final quarter of 2022, and tightening monetary policy marking the end of the near-zero interest rate era, what can Treasurers do to help support the health of their businesses over the coming year?

With the cost of borrowing rising, it is essential to unlock potential idle cash around the group as internally generated cash is a company’s cheapest resource. Establishing a robust and accurate cash flow forecasting process is essential to avoid the need to draw down on debt facilities or use costly overdrafts. The key questions to ask are:

• Do you have sufficient visibility of your global cash?
• Do you have real time reporting of all your bank accounts?
• Are your treasury systems fit for purpose?
• Do you have a robust cash flow forecasting process?
• Is your cash pooling structure appropriate?

In this challenging economic environment, treasurers need to be particularly conscious of risk exposures.

Organisations with international operations or trading face uncertain and volatile FX markets. This will not only impact transactional risks associated with foreign currency purchases and sales, but also reported profits from subsidiaries. For those considering cross border M&A activity, FX volatility between deal announcement and close may jeopardise the transaction.

With a particularly fickle funding market, assessing the benefits of using interest rate or currency derivatives for hedging, partial-term hedging or pre-hedging (hedging before a debt is drawn or re-financed) is increasingly important with more volatile markets and variation between short-term and long-term interest rates.

Treasurers play an increasingly important role to partner with businesses across their organisations to develop appropriate risk management policies and take advantage of tactical opportunities to help drive growth.

Treasurers may want to start by exploring the following questions:

• Is your interest rate risk strategy and balance of fixed to floating rate exposure still appropriate in a higher interest rate environment?
• Do any of your interest rate hedges need adjusting and what are the potential accounting impacts?
• Have you re-evaluated your existing FX hedging policy to ensure it is appropriate?
• Are your counterparty credit limits still appropriate and you have a robust process in place for monitoring exposures?
• Are there alternative options for the investment of available cash to generate a higher return in the short term?
• Where commodities represent significant inputs to costs could you benefit from commodity hedging?

We offer a broad spectrum of Treasury services including supporting with:

• Diagnostic assessments to evaluate your treasury function and identify opportunities for enhancement
• Assistance developing or enhancing your treasury risk and cash management policies
• Design and implementation of in-house banking, payment factory, cash pooling, and netting structures
• Support with selection and implementation of Treasury technology
• Review and development of hedging strategies and associated accounting advice

If you would like to discuss potential solutions to these challenges, please do not hesitate to contact KPMG’s Corporate Treasury Services team.