The reality of today’s complex and often unpredictable world of corporate finance is that companies can no longer allow FP&A and Treasury to operate in silos. The dynamic business environment in which we operate demands a new paradigm — one where these two critical units work in tandem, much like co-pilots in an airplane.

This is the topic that was recently discussed in the webinar “Navigating Risk: Treasury and FP&A as Co-pilots.” The webinar was moderated by AFP’s Director of Treasury Services and Payments, Tom Hunt, and Director of FP&A Practice, Bryan Lapidus, who were joined by two skilled “pilots,” Ahmad Makhlouf, CFO, Egypt and North Africa, and Syed Zeeshan Pervez, CFO, to discuss the key roles FP&A and treasury play in managing risk for their organizations.

The key points that emerged for all organizations include:

• Risk management requires close collaboration between treasury and FP&A. Each function has a distinct role: Treasury focuses on managing liquidity and balance sheet risks, while FP&A takes a broader view, analyzing scenarios and strategic risks and the impact of income.
• All speakers highlighted the importance of scenario planning in preparing for risks like FX volatility, geopolitical tensions and economic shifts.
• Today's risks are complex and often contain one or more elements of the VUCA framework — volatility, uncertainty, complexity and ambiguity.
• Treasury and FP&A need to coordinate to manage both short-term and long-term risks, ensuring that liquidity is maintained for operations and that the business is financially solvent in the long run.

A Framework to Think About Risk Management

Syed Zeeshan Pervez said that despite Saudi Arabia’s exciting economic growth tied to the 2030 Vision (substantial investment, new projects, real estate), there are obviously considerable geopolitical risks in the region. Rising tensions, combined with the lingering impacts of the coronavirus pandemic, have created uncertainty in the logistics and supply chain sectors, leading to increased costs and delays.

“There are a lot of disruptions happening in terms of the logistics side of the trade lanes,” said Zeeshan. “Lead times and costs have also gone up based on the supply and demand dynamics. This puts geopolitical risk at the top of my list.”

Zeeshan said that while growth is typically seen as positive, rapid growth without careful planning can pose risks, especially when a country is diversifying away from its traditional industries — Saudi Arabia is moving toward a non-oil economy. When companies grow too fast, they may not have the necessary capabilities (people, processes) to sustain that growth. This capability gap can be a significant risk, especially when leadership fails to recognize the need to develop skills and competencies in parallel with business expansion.

When it comes to navigating the complexity of current risks, Zeeshan said, “Risk is the possibility or likelihood of any event happening that would result in a negative consequence, loss or any adverse economic impacts.” He added, “There are two aspects of risk that are very important to consider: One is probability, which is the likelihood of an event happening and the impact, the severity of the consequence. Then this brings us to the [VUCA] framework, which looks at the current decision-making paradigm in four areas.”

• Volatility: Rapid, unpredictable changes (e.g., FX rates, oil prices).
• Uncertainty: Ambiguity about the outcome of political or economic developments.
• Complexity: Multiple interconnected factors (e.g., regional geopolitical risks).
• Ambiguity: Unclear paths forward, such as uncertain geopolitical resolutions.

Risk Management for Finance

Bringing it down to a more personal level, Ahmad Makhlouf spoke about the major risks in Egypt. “For us in Egypt and the Middle East, the most significant risk currently is the macroeconomic risk.” This is particularly true in regard to the severe scarcity of foreign exchange (FX), which affected business operations significantly — it made it difficult to fund imports.

The risk management approach that Makhlouf’s company adopted was proactive, placing significant stock in scenario planning to help anticipate potential FX shortages. “We always have risks and opportunities,” said Makhlouf. “And we have several scenarios that we use to anticipate what kind of situation we're going to be in. It's more or less a ready-made plan. Whenever this happens, we go into this approach instead of reinventing the wheel.”

Their six-step risk management process includes:

1. Understanding the company's risk tolerance (based on maturity, industry, etc.).
2. Assessing the likelihood and velocity of risks.
3. Quantifying the impact and likelihood of the risk.
4. Comparing identified risks with the company’s tolerance level.
5. Developing strategies such as avoidance, mitigation, transfer or acceptance of risks.
6. Monitoring and continuously revising risk strategies to adapt to evolving risks.
7. Reviewing and modifying strategy as needed.

Makhlouf also talked about the practice of formation of a “war team” that is comprised of treasury, FP&A and legal/compliance. The team tackles the FX availability issue by brainstorming weekly to explore alternative ways to obtain FX.

“What kind of alternatives do we have?” said Makhlouf. “Are they compliant? Are they legal? Can we approach them? Is this within the overall policy of the company? This was our challenge. And we succeeded, after brainstorming a lot of alternatives, in reaching one that allowed us to survive the two-year crisis.”

In the enterprise-wide risk management structure, Makhlouf said that responsibility for monitoring risks is distributed across functions (e.g., finance, operations), with each functional manager responsible for managing specific risks. “Recently, all over the globe, our company decided that it is a full enterprise responsibility,” he said. “Every function has its own manager who is responsible for monitoring the risk of its area.”

Reflecting Makhlouf’s insights, the two primary risk management techniques Zeeshan employs are scenario planning and SWOT (strengths, weaknesses, opportunities, threats) analysis, both proactive tools. He uses scenario planning to manage risks and opportunities, and warned against the "trap" of generating too many irrelevant or unrealistic scenarios, which can dilute focus. And when it comes to ongoing risk assessment and specific situations like new business segments or expansions, Zeeshan employs SWOT analysis.

If we were to boil it all down to one cohesive thought, it would be this: Risk management is not a one-time task but an ongoing conversation that requires collaboration between different functions across the business, including treasury and FP&A.

Get more tips on how to handle risk management in your organization.