Building Corporate Resilience: Treasury Imperatives Now and Next
By Eleanor Hill, Editor
The initial shock of the Covid-19 pandemic is starting to subside and companies are moving out of crisis management mode into planning for recovery and beyond. Patrick Peters-Bühler, Principal – EMEA, Treasury Advisory Group, Citi, and Yan Li, Senior Adviser – Greater China, Treasury Advisory Group, Citi, explain how corporates can develop strategies to become more resilient in the face of future uncertainty.
“When life gives you lemons, make lemonade.” Although this proverb is typically used in the personal sphere, it applies to the business world too – in the form of corporate resilience. In simple terms, this is the ability to reduce vulnerability to crises and shocks and to take action to avoid, absorb, adapt, and recover quickly from such events. It is also about turning crises into opportunities to stay ahead of competitors.
Naturally, not every corporate is at the stage of ‘making lemonade’ just yet, since the impact of Covid-19 has varied by geography, industry and organisational readiness. Nevertheless, research undertaken by Citi’s Treasury Advisory Group demonstrates that positive steps are being taken to improve corporate resilience. As Peters-Bühler explains: “Through our work with corporate treasurers, we have identified four broad stages of corporate response to the pandemic. The first was the immediate crisis response and a handful of companies (3.3%) are still in this phase at the beginning of July. Next is the act of marshalling corporate liquidity, which involves everything from achieving cash visibility and control to resetting foreign exchange hedges. Over one quarter (26.7%) of corporates are currently at this stage.” (See fig. 1.)
The third phase is restoring cash profitability. “The focus here is to reduce Operating Expense, tactically review CapEx (capital expenditure), actively engage all stakeholders, and essentially shift from responding to the crisis to forward planning instead. The fourth and final phase is building for the emerging new landscape, a large part of which involves improving corporate resilience,” he notes.
On the road to recovery
Of course, there is no one-size-fits-all approach to corporate resilience. There is, however, a four-pillar framework under which any company can make a resilience plan, says Yan Li. “The framework covers financial, operational, organisational, and technological resilience. Each of these pillars will have an impact on treasury operations and there is interplay between the pillars, so a holistic approach is required,” she explains.
1. Financial resilience
According to Peters-Bühler, the focus here should be on building liquidity and balance sheet strength – since extremely lean balance sheets are unlikely to be in favour for some time. From a treasurer’s perspective, “Working capital management should be front of mind,” he says. A company’s bargaining power within its buyer/supplier ecosystem will become increasingly important, he believes, and will help enable more flexibility and control over collections and payments. Treasurers may also wish to consider more long-term financing options to help support higher operating working capital, he suggests.
WHAT IS FINANCIAL RESILIENCE?
The financial resilience of a company is often measured by its liquidity, solvency, revenue, profitability, and capital. Companies need sufficient cash in the right currency to absorb a negative impact on cash flow. Firms need to be able to take a hit to their bottom line and have sufficient equity to absorb losses. In addition, leverage ratios must be carefully managed to ensure access to debt financing.
Yan Li, meanwhile, points out that in times of declining revenue, operating cost or fixed cost flexibility will also be critical – in order to protect margins and maintain profitability. “Many corporations have already started this process and may need to further scrutinise their fixed and variable cost structures to embed more resilience. Additional outsourcing could be considered for non-core functions, for instance.”
It will also be important to implement a maturity match of assets and liabilities to ensure short- to long-term cash-flow sustainability. Peters-Bühler adds: “Greater scrutiny of capital allocation is also required to help maintain balance sheet resilience. After all, a strong capital base and a disciplined leverage level should help to enable access to the capital market to address changing business conditions and seize potential business opportunities for M&A (mergers and acquisitions).”