Financial Resilience: Building and fostering trust | Deloitte UK has been saved
2020 has been a year which has tested the resilience of our society, the economy, businesses and our own personal circumstances. Whilst many of us will welcome the opportunities that 2021 may bring, the current pandemic does highlight the multitude of challenges that lie ahead.
With the acceleration of climate change and the digitalisation of the global economy, the corporate landscape is likely to be significantly affected in the coming years. Many investors recognise this and are seeking enhanced resilience in their investments, focusing on organisations where their return is derived from operational, reputational and financial resilience.
In this blog, the third in our series on Resilience Reimagined, we focus on financial resilience – what it is, what it looks like, and how to evidence it and foster trust.
What is financial resilience?
Financial resilience is the ability of an organisation to withstand events that affect their capital structure, liquidity, revenue and assets. Without it, operational and reputational resilience cannot be maintained. Uncertainty and variability in financial risks can directly influence financial performance, which in turn can affect the value stakeholders place on your organisation.
What does financial resilience look like?
Financial resilience differs from organisation to organisation. However, there is a standard framework which most organisations use to build financial resilience and which focuses on capital structure, liquidity management and financial risk management.
2020 is not the first time this framework has been tested, and organisations have navigated volatile and complex financial environments whilst facing liquidity pressure before. These types of events show us that financially resilient organisations generally have a diverse and flexible framework and this is integral to delivering on planned strategic change and navigating a financial crisis. Recent events may have identified weaknesses in your organisations framework and in anticipation of uncertainty in the coming decade, many organisations are taking the opportunity to reassess and redefine the make-up of their financial resilience framework. Good practices we see include:
Capital structure | Your capital structure should support the delivery of planned strategic change, allowing you to capitalise on potential opportunities such as investments and provide for a quick and robust response in times of crisis. In response to the recent uncertainty, some organisations are reassessing their capital structure. This is not necessarily about fundamentally changing the structure or increasing indebtedness but rather about considering alternative sources to create diversity and flexibility. This includes diversifying the type of instrument, sources and markets. Allocation of capital is also under consideration, with a focus on funnelling capital to building resilience in their business model. |
Liquidity management | Following the crisis, organisations across a wide range of sectors have a better understanding of liquidity risk in their business and are redefining their liquidity policies and strategies. This includes reassessing their forecasting processes and questioning the adequacy and frequency of existing liquidity stress testing and early warning indicator frameworks. The liquidity risk management framework should provide support for early identification and measurement of liquidity risk. |
Financial risk management | Financial risk management has always been fundamental to protecting the value of an organisation. Resilient risk management strategies can minimise sources of volatility. Organisations are asking themselves if their framework achieved this during recent events and whether they had the flexibility needed to respond effectively. Reassessing how your organisation identifies, measures and manages financial risk may help you understand the true nature of your underlying risks and how they affect the value and resilience of your business. |
While you may not make any radical changes to your financial resilience framework, the same cannot be said for underlying processes and supporting technology.
There are learnings for corporates from the actions driven by regulation within financial services following the 2008 financial crisis. Many financial services firms were required to develop recovery and resolution plans, detailing how they would safely wind down their businesses without access to taxpayers bailout. Given the importance of some corporate entities to the public interest, we are expecting such plans to become more commonplace in the corporate environment and to become central to communicating financial resilience to internal and external stakeholders.
Stress testing is a fundamental tool used by financial services firms to demonstrate their resilience to a range of stakeholders, including regulators. Corporates could consider adopting some of the best practices and methodologies employed by the financial services industry to enhance their approach to financial stress testing. The more resilient organisation constantly monitors their resilience and stress tests it under reasonable worse case scenarios. It is likely similar stress testing will also become the normal for operational resilience in the future.
Advancements in technology, such as robotic processing, cognitive computing, and artificial intelligence were changing the business landscape before the pandemic and their use will only accelerate. Embracing such change is not about simply changing your technology but rather changing the way in which you operate your framework. Technology can allow for rapid, timely, accurate and relevant data that allows for real time reporting, providing you with the flexibility to respond in a crisis and make informed decisions. How powerful would your liquidity management processes be if supported by live data and scenarios that allowed you to continuously redefine stress tests?
How to evidence and foster trust?
Sir Donald Brydon’s independent review into the quality and effectiveness of audit (the Brydon Review), made a series of recommendations which will have profound implications for an organisations reporting product and also for the audit profession. It is possible that we will see the move away from a financial reporting product focused mainly on the financial statements, and as a starting point, the Brydon Review recommends the inclusion of a “Resilience Statement”.
In parallel, investors and other stakeholders are seeking to differentiate between organisations that are truly financially resilient and those that are not. A key question has emerged around how an organisation communicates their financial resilience, demonstrating that they have the levers to respond and adapt in a volatile and complex financial environment. In reassessing your framework, you will need to consider the development of a series of financial resilience indicators, some of which could be reported externally. Resilience indicators provide the necessary transparency to distinguish you from peers, win the confidence of regulators and investors seeking enhanced resilience and help Boards make informed decisions.
Communicating your financial resilience presents a real opportunity for organisations to create value and foster trust. Now is the time to consider whether you have the necessary resources to react rapidly as and when needed and protect your financial position.
To find out more on how Deloitte can help your business thrive, visit our Resilience Reimagined hub here.
Key contacts
Adam Knight
Partner, Insurance Risk and Regulation
Leading Deloitte’s General Insurance Regulatory and Strategy team. This work includes internal audit, due diligence, section 166 reviews, control framework reviews (including risk, compliance, internal audit and governance) and other bespoke regulatory work, for example conflicts of interest reviews.
Aisling Kavanagh
Partner, Corporate Treasury, Audit & Assurance
Aisling is the Partner responsible for leading our Corporate Treasury Audit and Assurance practice in the UK and is the Partner in charge of the UK Firm’s Treasury Audit process. She has extensive PCAOB and ISA audit experience across a breadth of industries. Additionally, she serves a large range of non audit clients on a variety of treasury topics. Aisling’s extensive portfolio of clients has provided her with significant exposure to a wide range of treasury issues including risk management, complex accounting, hedge accounting, treasury financial reporting processes and controls, valuation methodologies and treasury technology.
Key contacts
Rick Cudworth
Partner, Crisis and Resilience
Rick has over 25 years’ industry-leading experience in Crisis Management and Resilience. He has been interim Group Head of Resilience for two global banks has supported and facilitated executive leadership in responding to crisis events. He is a recognised industry leader in his field and Chair of the British Institution Technical Committee for Continuity and Resilience.
Alice Abdullah
Partner
Alice has over 13 years of experience in Deloitte's Insurance practice and specialises in providing risk and regulatory assurance in the General Insurance industry. She is a qualified Chartered Accountant (ICAEW).
