The Cost of Inaction: Is Your Company Prepared for a Bank Failure?
As we’ve seen in recent headlines, bank collapses, even among well established financial institutions, can have disastrous ripple effects on businesses if they’re not prepared. The volatile macroenvironment, triggered by rising interest rates and inflation, are exposing vulnerabilities of the banking system. During this recent collapse, many businesses, especially venture-backed customers, became concerned about the safety of their deposits above the $250K FDIC protection threshold. In addition to the cash needed to fund ongoing business operations, corporate customers became concerned about access to their bank deposits, which resulted in a textbook run on the bank and as expected, the bank couldn’t keep up with customer withdrawals and scheduled payments.
Interestingly, this bank run revealed just how unprepared smaller- and mid-sized companies were for this situation. We’ve heard stories about small and large organizations alike that were unable to pay employees and make payments on other bills due to their inability to access cash from their bank accounts. This recent bank run sent a shockwave of concern to CFOs, controllers, treasurers, and cash managers as several banks are now facing similar challenges. As regulators work to stabilize the industry, now is the time for finance leaders to ensure that their company is prepared.
What problems have bank failures exposed?
1. Lack of diversification means more risks
The impacts of rising interest rates and inflation exposed additional risks across the entire financial system. Without banking partner diversity, treasurers and cash managers leave their company highly exposed to liquidity-access risks, especially with a cash concentration above the insured threshold at a single bank. For example, an organization relying on one bank relationship can jeopardize the continuity of its business operations if that specific bank collapses. In addition, lacking an overnight investment policy creates more exposure if an organization isn’t spreading available end-of-day cash across multiple banks or investments overnight. Having this heavy reliance on a single bank, or even a small and disconnected pool of suppliers and partners, ultimately leaves a company vulnerable to additional external threats if one fails. This lack of diversification and absence of contingency plans can be detrimental in industries where free cash flow (FCF) is the lifeblood of business operations.
2. Manual processes and silos prevent companies from responding quickly and effectively
Using manual processes, which are slower and more error-prone, prevent a company from achieving real-time visibility and monitoring. Treasurers and cash managers who lack these up-to-date insights are flying blindly without knowledge of their per-bank cash exposure across all banks, how many operating bank accounts they have, how much cash is in each account, and what measures they need to take in order to guarantee that their liquidity is insured. Thus, they’re unable to quickly move cash, open or close bank accounts, quantify their exact risk, and stop payments. Without a connected system to work from, finance, treasury, AP and procurement teams are also unable to execute effective, timely decisions when a company needs to stop or redirect payments.
How can your company mitigate these risks?
To proactively mitigate these risks, technology that provides full visibility and control in a connected system, coupled with a robust corporate treasury and cash management program, are essential. A successful cash management program typically includes at least two bank relationships and has the ability to view real-time cash positions in each bank and bank account in order to make changes at a moment’s notice.
In this time of banking upheaval and an unpredictable macroeconomic environment, we at Coupa strongly encourage companies to consider adding a Treasury Management Solution (TMS) in order to diversify cash, gain full visibility, and proactively monitor liquidity risks at scale. Coupa Treasury eliminates manual administration and allows companies to view real-time cash positions and bank exposures across all banks, bank accounts, entities, and currencies all in one place without having to log into any bank websites. It also facilitates cash projections and mitigates liquidity risks with automatic monitoring and alerts that reflect your banking limits, pre-set thresholds, and policies.
With Coupa Pay, there is immediate visibility into committed spend and in-flight payments, enabling you to quickly move cash, open and close bank accounts, and stop scheduled or outbound payments. From there, further optimize financial performance by extending Days Payable Outstanding (DPO) with virtual cards and/or more favorable payment terms, and reduce borrowing costs.
To achieve these benefits at scale, companies must have one platform that connects all of these solutions across buyers, suppliers, and banks. Coupa’s Business Spend Management (BSM) Platform combines these capabilities and provides a single source of truth for finance, treasury, AP, procurement, and IT to work from. It goes beyond traditional core transactions and creates a seamless end-to-end process from source-to-settlement. With real-time visibility, analytics, and mobility, an organization is able to quickly pull levers in response to volatility, proactively mitigate external risks, and ensure that their company is in the best financial position.
With this recent bank collapse, our customers were able to do just that. They quickly assessed and managed their bank exposure in real-time, switched banks, updated payment instructions and ensured that their liquidity was safe:
“As soon as the bank failure news happened, Coupa was able to outline all of the steps we needed to update all of our outbound digital payments in Coupa Pay. Bottom line: we were able to make a critical change in a short period of time without any disruptions to our P2P process.” — David Hose, Coupa customer and Director of Financial Systems at Bowery Farming.
As a former Treasury practitioner who oversaw cash management at some of the largest investment banks in the world, I couldn’t imagine a CFO, treasurer, or cash manager not adhering to the basic tenets listed above, nor could I understand trying to weather the volatility in today’s environment without the benefit of a Treasury Management system at their fingertips.
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