Posted: 15 Dec. 2020 8 min. read

Financial Resilience: Building and fostering trust

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

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Key contacts

Adam  Knight

Adam  Knight

Partner

Adam is a partner in our Audit and Assurance team in London. He specialises in auditing insurance brokers and MGAs and has a significant amount of experience in the market. Adam leads our Insurance Regulation and Strategy Team and provides an extensive range of regulatory support to the global insurance market (including life and general insurers and insurance intermediaries) and to regulators across the Globe.

Aisling Kavanagh

Aisling Kavanagh

Partner

Aisling leads our Corporate Treasury Assurance team and provides both audit and assurance services to a variety of corporate clients across all industries. Aisling’s extensive portfolio of clients has provided her with significant exposure to a wide range of treasury issues including risk management, processes and controls, valuation methodologies, treasury technology and treasury accounting. Aisling also leads our practice’s approach to IFRS 9 and IBOR transition for the corporate market.

Key contacts

Rick Cudworth

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

Alice Abdullah

Director, Insurance Regulation & Strategy

Alice has over ten years of experience in Deloitte’s Insurance practice and specialises in providing risk & regulatory assurance and advisory services in the general insurance industry. She is a qualified Chartered Accountant (ICAEW) and leads the Deloitte Insurance Regulation & Strategy team’s Risk and Governance offerings.