Financial resilience & agility: treasury management

As treasury teams react to shifting economic conditions, high interest rates and ongoing inflation, financial resilience has taken on added importance and urgency.

But how can organizations adapt, survive and thrive despite these dynamic challenges? The answer may lie in finding ways to improve operational efficiency, mitigate risk and fraud, and modernize cash forecasting. 

This article explores three financial resilience strategies that could help organizations navigate economic uncertainty.

With increased market volatility and borrowing costs, treasurers may be tasked with finding new savings opportunities. Improving operational efficiency is one resilience-boosting tactic to consider.

The case for digital transformation 

Tech-led initiatives—like digital transformation and automation—can create more agile workflows, help minimize risks and reduce expenses.  

A recent McKinsey report assessed how resilient companies navigated the Great Recession of 2008. The findings revealed that these companies used digital tools to proactively cut operational costs. 

Since then, more organizations have adopted digital transformation strategies to increase efficiency and reduce expenses. During the pandemic, billing and payment processing couldn’t be performed in a traditional office setting. Well-positioned companies shifted from check processing to digital payments—like virtual card and ACH—to bridge this operational gap. 

For example, Capital One first saw commercial card volumes eclipse check payments in August 2021. 

Digitalization trends remain strong as organizations recognize the potential to help:

• Reduce costs
• Minimize potential risk
• Boost performance

Transforming treasury functions can also give teams more time to focus on intensive tasks—like improving forecasting capabilities. If organizations want to help optimize cash flow, they should also consider the potential benefits of automated payment solutions. 

Fostering resilience through payment automation

Teams can review existing treasury processes to identify potential bottlenecks—like unnecessary manual intervention in the accounts payable process. Such inefficiencies could cost organizations time and money. 

Implementing automated processes can help organizations overcome these pain points and enhance cross-organizational performance. Automation could also help minimize the risk of potential fraud or errors, streamline payment processing cycles and generate faster access to working capital. 

Treasury operations play a vital role in an organization’s risk management strategy. But in a tough economy, companies may place increased emphasis on minimizing monetary risks. 

According to a 2022 Strategic Treasurer survey, 85% of respondents believe accounts payable and receivable are key areas of focus for fraud prevention and investment control. A 2022 survey by the Association for Financial Professionals shows that checks pose the greatest risk of payment fraud. 

Treasury risk in the digital age

Check payments aren’t the only source of increased fraud risk. Email-based schemes, like those that target ACH credits with phishing attacks and social engineering, are also on the rise. 

Implementing treasury function safeguards can help protect against these vulnerabilities. Teams might consider:

• Multifactor authentication
• Dual approval system access
• Payment beneficiary validation—like positive pay confirmations

Digital transformation strategies can also play a critical role in helping to reduce treasury risks. For example, commercial card programs may potentially offer lower payment fraud risks than check payments. 

Financial preparedness is the foundation of financial resilience. When interest rates are high, accurate forecasting and effective cash management can help treasury teams anticipate and mitigate financial risk. 

Anticipate market shifts

Higher interest rates have resulted in higher borrowing costs, yet some organizations have a significant amount of liquidity trapped in working capital. If released, these funds could provide a buffer to help weather economic challenges. 

Some companies rely on their own funds instead of using external debt. But higher interest rates could put additional pressure on freeing up cash. If this happens, organizations can explore tactics that unlock much-needed funds, such as:

• Reducing inventory
• Collecting customer payments faster
• Renegotiating payment terms with vendors

A cash-conscious approach

Increased cash levels may offer companies a lower-cost option to pay down debt or fund investments than relying on credit alone. 

An EY-Parthenon analysis of the 5,000 largest global companies was revealing. When faced with economic challenges, cash management leaders were 25% better at reducing initial shocks thanks to optimized liquidity. 

Organizations can improve cash flow management and monitoring capabilities with targeted digitalization and automation strategies. Having a firm understanding of the money flowing in and out of a business is key for financial resilience.

For example, effective cash flow forecasting may help identify early warning signs of financial vulnerability, such as frequent—or deeper—drawdowns of cash reserves. Alternatively, improved forecasting could indicate that well-positioned organizations are ready to initiate new financial commitments.

Modernizing forecasting models

Combating market volatility may require advanced scenario modeling and planning. Treasurers can leverage machine-learning solutions to establish a forecast baseline, analyze historical trends and increase forecast accuracy. 

Scenario modeling, where organizations can generate multiple forecasts to fully analyze the impact of different factors on cash forecasting, is available and may help teams make efficient and informed decisions despite rapidly changing market conditions.

Organizations can use industry benchmarks to identify gaps, or opportunities, in digital payment processes. For example, applying benchmarks to payment fraud can provide insights into potential risks or cost-reduction opportunities. Performance insights can also help organizations recognize opportunities to optimize their working capital and cash positions. 

Capital One helps clients use benchmarks to identify opportunities to help optimize payment processes and, in turn, improve their balance sheets and working capital.* 

2022	Manufacturing	Retail trade	Health care & social assistance
Outgoing payment mix	ACH: 3.9% Card: 83.7% Check: 11.76% Wire: 0.7%	ACH: 14.7% Card: 32.1% Check: 52.8% Wire: 0.4%	ACH: 10.2% Card: 45.7% Check: 42.9% Wire: 1.2%
Days Payable Outstanding (DPO)	43.9	32.3	26.4
Days Sales Outstanding (DSO)	49.9	12	51.4

Source: Capital One Commercial Bank payment and working capital benchmarks, December 2022.

• The outgoing payment mix shows industry-specific averages and allows clients to compare their company’s payment mix data to these benchmarks to help identify gaps. This comparison focuses on paper check volume versus lower-cost digital payments, like ACH and card. Shifting from check to more efficient options, such as ACH and card, could help clients create more cost-effective outgoing payment mixes. 
• Similarly, DPO and DSO averages by industry allow clients to compare these figures to their own data and highlight gaps that may be addressed to create additional efficiency.
• When interest rates are high, any inefficiency could be particularly costly. As such, clients should prioritize strategies that accelerate the collection of customer payments and lengthen DPO where possible. 

Benchmarking working capital ratios may also reveal opportunities for adjusting supplier payment terms. Reviewing existing policies can help companies ensure new contracts are aligned with current rates and benchmarks.

A company’s balance sheet plays a pivotal role in driving business growth. Organizations should consider the ways treasury functions can combat high borrowing costs, inflation and foreign and domestic market volatility.

Identifying operational inefficiencies and vulnerabilities may be a good starting point. Implementing tech-led initiatives could increase cash visibility, reduce operating costs and minimize fraud threats. 

Capital One is here to help our clients navigate the challenges ahead. Call us to learn how our custom solutions can support your organization.