Treasurer’s Top of Mind: A renaissance of working capital risk assessment

A Renaissance of Working Capital Risk Assessment – March 2023

The collapse of Silicon Valley Bank (SVB) sent shockwaves through the financial world, and Treasury experts have been analyzing what went wrong ever since. In this article, we’ll explore the insights and opinions expressed at a recent Taulia Treasury roundtable about how the SVB collapse is leading to a renaissance of working capital risk assessment.

SVB’s Collapse

The roundtable discussion opened with a brief about the SVB collapse. It was noted that SVB was the most respected and trusted institution in Silicon Valley, and poorly timed bond purchase decisions set in motion the events that led to its downfall. Poor downside scenario planning, communication mismanagement, and misguided incentives combined to the renown bank’s demise. SVB was the only bank of its kind and its demise had a significant impact across VC’s and tech startups.

Working Capital Management Blind Spots

Duration risk and the possibility of a run on bank deposits represented the two major blind spots in the company’s risk management approach. SVB did not account for how the fiduciary obligations of VC customers as well as the officers of the companies would force an immediate withdrawal of deposits. The company mistakenly assumed deposits they had would allow them to wait out losses and mitigate the impact of declining bond values. Finally and somewhat ironically SVB’s CEO’s attempts to assure customers had the opposite effect of drawing attention to the potential risk and exacerbating the exodus of SVB deposits. SVB may have been able to survive its fateful bond purchase decision in 2021. How communications were handled and customers’ reactions ultimately sealed their fate.

Mitigating Working Capital Risk

The lesson SVB highlights is that for a company’s treasury or CFO, diversification is the key to mitigating working capital risk. Having more than one bank and redundancies to maintain payments in a worst case scenario is crucial. The lesson for companies is to evaluate counterparty risk constantly rather than wait for a crisis to happen.

Taulia’s Risk Management Strategy

Taulia’s Chief Executive Officer, Cedric Bru, explained Taulia’s approach to working capital risk mitigation. Taulia maintains a diverse and deep network of US, Asian, and European banks, ensuring diversity in funding. At any time, Taulia has three times the funding capacity to fulfill the demand on its platform. These steps are taken to mitigate risks of customers that choose Taulia. This diversification in combination with operational capability to seamlessly switch funding sources provides a future proof solution companies can rely on. Last but not least, Taulia, with the backing of SAP high Investment Grade Credit Rating, gives customers the confidence they need to manage their working capital.

Lessons Learned

The SVB collapse highlighted the need for treasurers to be more proactive in evaluating counterparty risk. Diversification is the key to mitigating this risk. It’s also important to maintain redundancies for key elements that could jeopardize the business as a whole. Lastly, the historical data is just a data point, not a predictor, and treasurers need to look at current scenarios and anticipate future risks.

Conclusion

The collapse of Silicon Valley Bank was a wake-up call for the financial industry, especially for treasurers. It highlighted the need for working capital risk assessment and diversification to mitigate potential risks. Taulia’s strategy of funding diversity provides a model that other companies can use to protect themselves from working capital risks. By learning from this experience, treasurers can better prepare themselves for future challenges and build a more resilient financial system.
 
 
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