VIDEO: Risk Management Overview for CFOs and Treasurers
Amol Dhargalkar of Chatham Financial discusses Risk Management considerations for CFO and Treasurers and the key to getting a handle on what it means to the bottom line. A full transcription of the video is available below.
Amol Dhargalkar: Risk Management has definitely become one of the core issues that are on the minds of CFOs and Treasurers today. A few years ago, it was working fine. The currencies weren’t as volatile. Commodities prices weren’t moving as much. The impact on margins wasn’t felt as much, because businesses were growing, economies were growing, markets were growing. Now, you see every day in the press analyst reports around how large companies are providing earnings guidance that’s impacted by currency movements or commodity prices. What we’re starting to see is audit committees of boards, and even, generally, the entire board of directors, starting to ask questions to the CFO. “What are we doing with respect to our international exposure?” Is it sufficient to just say, “We have a little bit of exposure, but it all nets out at the end of the day” or do we need to be doing more?
What Chatham Financial can do, not just for treasurers, but for CFOs and boards of directors, is help reduce volatility. We help reduce volatility through helping them to design programs that make sense for their business. By helping them to implement those programs in a cost-effective manner.
Quantifying risk is one of the most difficult things that companies can do. It really begs the question of where does all the risk come from? That is a big project in and of itself, just to understand what are the risks we truly care about, and then the second part of that, what are all the contributors to that? Then, how do I measure volatility around that? Do you have more risk or less risk than you thought? There are companies out there that have spent literally millions of dollars a year building internal teams to do this type of work. It’s a very vexing issue for most treasury teams.
Chatham works with a broad spectrum of companies. Everywhere from companies that are starting to just explore what their risks are and how they should be thinking about risk management, all the way through to the more sophisticated corporation that have had programs in place for a while and are actually looking to optimize them and then take them to the next level. All of our conversations with hundreds and hundreds of companies every year, there’s one common theme. Treasurers want to play that more strategic role within the organization. The question is always, “What’s holding you back?” Usually what we’ve found, what’s holding them back is, they need time, they need tools, they need a little bit of expertise to help them along their way.
Chatham is unique in its offering of advisory solutions and technology solutions to its clients help them solve risk management issues. One great example of how we offer both of these services is in our hedge accounting practice. What Chatham does with out clients is we act as partners up front in developing the program itself, helping to ensure that the designation memos are written correctly, that the strategies themselves are well-articulated, and that the company understands what it needs to do on an ongoing basis. Then, on the technology side, we offer our clients tools that we’ve been using for 20 plus years ourselves to allow them to streamline their program. Anything from the effectiveness testing to the journal entry reports that are required to be done on a monthly or quarterly basis.
Not many people in the treasury marketplace are focused on both advisory and technology. We strongly believe in the need to integrate these two. We really have always felt that the advisory, and everything we do on the advisory side, working with companies to help develop programs and to implement those programs, really strongly feeds into everything we do on the technology side.
Risk management has always been a difficult area for treasurers to talk about with respect to senior management. The difficulty comes in because it’s not about, necessarily, increasing revenue growth, or decreasing expenses. Oftentimes it requires an investment, which might be an expense, and the question is, how do you measure the return of that type of an investment from a treasury perspective or from a company perspective? It really comes down to understanding that risk management is truly about reducing volatility. To invest in a risk management program, the best way to measure that is to see how much volatility has been reduced in that bottom line. With the right set of tools, you can see that an appropriate risk management program can cut your volatility of EPS in half, perhaps, due to currency movements.