Turning Exposure Management into a Competitive Advantage
By Eric Cohen, Principal, Financial & Treasury Management, PwC US, (Lead author), Robert Pierson, Manager, Financial & Treasury Management, PwC US and Tom Lawson, Manager, Treasury Advisory, PwC New Zealand (Contributing authors)
Three principles to consider when implementing an exposure management programme to manage financial risk effectively while also positioning your organisation for growth.
The top threats CEOs are concerned about include both uncertain economic growth and exchange rate volatility, according to PwC’s 20th CEO survey. CFOs play a critical role in helping organisations address these challenges, from identifying growth opportunities to effectively managing financial risk. So what can the CFO and finance function do to manage financial risk better while also positioning their organisation for growth?
CFOs and treasurers alike are increasingly focusing on exposure management, particularly because shifting dynamics between financial markets in today’s integrated global economy are consistently impacting companies’ financial performance. Thus, leading CFOs and treasurers are working to establish tools, processes and solutions to identify, manage and expand visibility into the company’s underlying exposure profile. Upon implementing the solutions, the enhanced tools and processes provide their organisations with a better understanding and more meaningful analysis of how financial markets impact their businesses, as well as an improved ability to explain results to investors.
|Fig 1 - How concerned are you about the following economic, policy, social, environmental and business threats to your organisation’s growth prospects?
Exposure management is the framework and operational process of identifying, analysing and reporting financial market risks for foreign exchange, interest rate, commodity price risks and, to a lesser extent, funding and liquidity risks. Such risks are embedded across the organisation and typically managed in silos, such as balance sheet hedging of currency exposure or a cash flow interest rate hedging programme. While many elements of downstream risk management are well known and widely systemised, the complexity of each company’s operations often makes the inception of the exposure management life cycle and underlying execution of the process more challenging, esoteric and labour intensive.
Unsurprisingly, reviewing and overhauling the exposure management process from beginning to end is often equally daunting and intensive. However, if undertaken correctly – with a strong strategic view of the objectives and a clear focus on the three key principles presented in this article – the end result can be extremely valuable and the execution less daunting. When taken into consideration, these three principles aim to balance operational processes with IT initiatives by centering on standardising data, strengthening analytics and, finally, aligning systems.