Strategic Treasury

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Treasury in Changing Times The challenges facing treasury are significant and its objectives are ambitious. To achieve its goals, it is essential that treasury works with a suitable bank capable of providing strategic advice and education.

Treasury in Changing Times

Treasury in Changing Times

by Jennifer Boussuge, Head of Global Transaction Services EMEA, Bank of America Merrill Lynch

Macroeconomic and regulatory developments continue to dominate headlines and occupy corporate treasurers’ attention in Europe. After a few years of respite, the Eurozone’s existential crisis has re-emerged, prompting renewed instability across the region. While the immediate threat to most countries is considerably lower than in 2012, for companies, uncertainty and change create risks that they are eager to mitigate. As a consequence, treasury is looking for improved risk management tools and ways to enhance efficiency so it can help the business achieve its strategic objectives. At an operational level, macroeconomic uncertainty can have a negative impact on sales and companies’ ability to do business when currency controls are introduced, as in Greece earlier this year. Moreover, uncertainty has had a sizeable impact on foreign exchange (FX) volatility. While such volatility can be hedged, there may be additional cost implications from such strategy.

Another significant challenge is the ongoing regulatory reform affecting corporates both directly and indirectly. While the forthcoming shape of regulatory change in Europe is broadly known, companies that operate in multiple regions face constant change. The fast pace of developments requires constant attention if treasury is to optimise these opportunities and minimise risk.

One constant theme since the onset of the financial crisis is the low or even negative yields available on corporate balances. A few years ago, treasurers simply parked their cash in a small number of investment vehicles without much consideration of their liquidity strategy. Today, the low yield environment, combined with the impact of Basel III on banks’ appetite for certain types of balances, means a creative and well informed strategy is essential if liquidity is to be managed effectively. As a result, there is a greater emphasis on cash and liquidity forecasting and uses of cash, while the need to achieve acceptable returns and minimising risk have been elevated in importance.

Treasury goals for the coming year

Accelerating globalisation is lengthening companies’ supply chains and increasing the number of markets where they operate. This has a number of implications that are determining treasury’s principal short-term objectives.

Globalisation means that geopolitical and cultural issues are becoming more important to corporates’ bottom line. Risk and contingency are paramount. In this region, companies are seeking to insulate themselves to as great an extent as possible from the ongoing uncertainty in the Eurozone. Treasurers are concerned about risk in the Middle East and North Africa resulting from instability in those regions. While geopolitical risks are, to some extent, difficult to predict, treasurers aim to develop contingency plans and model how these events might impact their day-to-day treasury operations.

More generally, global expansion adds complexity to the business. Many corporates are currently seeking to improve fraud prevention and introduce workflow best practice, such as having separate individuals responsible for making and authorising payments, and safeguards for data. Solutions such as virtual account management (VAM) can help to streamline and automate processes and reduce risks by improving visibility and control.

While corporates’ general aim of best practice is laudable, it is important to recognise that there is no one-size-fits-all approach. Instead, companies need to start by identifying and prioritising their opportunities and challenges. Given the number of variables to consider (such as locations, entities, currencies and technology) advice and support is critical to plan for the challenges ahead and mitigate risks. Operating in new markets – especially in emerging markets – can make treasury functions, cash and liquidity management, more complex. Existing structures may need to be amended or completely reconfigured to take account of operations in markets with capital or currency controls.

Another broad aim is to optimise capital usage across the balance sheet to enable growth and outperformance of industry peers. Effective working capital management generates increased cash flow in the business; reduces external funding requirements and financial costs; reduces leverage – alleviating rating pressure; increases cash conversion, which is an important valuation metric; and enhances return on capital employed. Attaining sustainable improvements in enterprise working capital is an important goal for many treasurers. Finally, many companies look to improve cash flow management and forecasting and revisit their investment policy to ensure it takes account of regulatory and market changes. Treasurers rely on information from their banks about the practical requirements of the Liquidity Coverage Ratio (LCR), such as the need to determine whether balances are operational or non-operational, and also whether some of their balances will still be accepted at their bank.

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