Published: September 01, 2011
As we saw from Erik Seifert’s article, ‘Meet Today’s Treasurer’, treasurers’ activities have never been so much in the limelight, nor valued so much as they are today. Continuing economic uncertainty and an ongoing focus on risk management, cost control and liquidity have fixed the spotlight on treasury, which in many organisations is leading to treasurers taking on an expanded role, particularly taking oversight of the financial supply chain and enterprise-wide risk management. There are other factors too that are resulting in treasurers’ horizons expanding. Sarbanes-Oxley and similar corporate governance initiatives around the world necessitate end-to-end control and visibility over financial processes. Ongoing pressure on working capital is also a driver. No longer is treasury engaged simply in the outcome of processes that contribute to working capital, but with constrained liquidity and an increased awareness of risk counterparty, liquidity and operational risk, it is becoming more influential in controlling these processes.
Introducing the Corporate Financial Value Chain™To respond to changing organisational and external demands, and continue to find ways to add value to the organisation, treasurers need a new approach to reviewing and refining their treasury strategy, processes and technology. With such a broad scope of responsibility, it can be difficult to prioritise improvements that would deliver the greatest value. Consequently, to support treasurers in their enhanced role, at SEB we have successfully pioneered a proven new framework to support treasurers, known as the Corporate Financial Value Chain™ (CFVC) which is already delivering substantial value to many of the world’s leading organisations.
Continuing economic uncertainty and an ongoing focus on risk management, cost control and liquidity have fixed the spotlight on treasury.
The CFVC is a powerful, innovative approach to optimising the financial supply chain that helps our clients to identify, prioritise and deliver improvements to financial processes, release working capital and create additional value. We help our clients to map every process in the financial supply chain, from purchasing and sales to payments and collections, combining both cash management and trade finance processes. Trade finance is frequently excluded from cash and liquidity optimisation projects, which disregards an area in which substantial value can be added in accelerating the cash conversion cycle, supporting imports and exports more effectively and enhancing forecasting capabilities. Consequently, SEB was one of the first banks to promote an integrated approach to trade and cash. The CFVC is based around six ‘mega processes’ as outlined in figure 1.
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Taking a structured approach to identifying and addressing opportunities for process improvement is vitally important to isolate pockets of inefficiency. In our experience, while around 20% of financial processes have visible costs (such as transaction fees, interest costs etc.) the remaining 80% of costs are hidden (e.g., manual processing for reconciliation, producing reports, IT integration costs etc.) It can be relatively easy to reduce visible costs, but addressing the majority of financial transaction and processing costs can be far more difficult. Leveraging the CFVC approach focuses on the underlying causes of performance issues, and therefore enables hidden costs to be isolated and addressed, often through efficiency enhancements, some examples of which are illustrated in figure 2.
From price to valueIn the past, treasurers and their banks typically focused on how specific banking products could be used to address specific business requirements. Today, there is a greater emphasis firstly on ensuring that treasury objectives are aligned with those of the wider business, and constructing specific solutions to optimising underlying processes, and transaction and information flows. This change in approach affects the way that treasurers work with their banking partners, but also their priorities. While many treasury decisions may have been price-driven in the past, value creation is now a primary consideration. For example, typically, a key treasury objective is to optimise liquidity and minimise risk in order to release as much as cash as possible, as illustrated in figure 3.
SEB was one of the first banks to promote an integrated approach to trade and cash.
To achieve this requires a focus on: i) commercial and financial process efficiency; ii) working capital efficiency; iii) investment and financing, and iv) risk management. These form the basis of the CFVC approach.
i) Process Efficiency – Commercial. Optimising commercial flows such as sales and purchasing is critical to an efficient financial supply chain, with a combination of the right commercial terms and information relating to each transaction that will later facilitate efficient reconciliation and related processes. Electronic invoicing, commercial card solutions and efficient cash handling may be key to achieving this.
Process Efficiency – Financial. Efficient financial processes may include ensuring that the right panel of cash management banks are in place, efficient technology to enable visibility over cash, and effective cash and liquidity management techniques such as cash pooling. To optimise this area, changes to legal structures may be required to enable better liquidity management together with the right bank communication technology integrated with internal systems. Cash flow forecasting is typically more straightforward and accurate once both technology and financial processes have been enhanced, focusing on communication across the business as well as with banking partners.
ii) Working Capital Efficiency. According to REL Consultancy’s 2011 Working Capital Survey, many companies’ working capital efficiency has deteriorated over recent years, despite efforts to improve days payable outstanding (DPO) and days sales outstanding (DSO). Consequently, treasurers and finance managers need to look beyond individual metrics and look at all the processes that contribute to working capital and determine where the greatest benefit can be derived without compromising the financial stability of suppliers or customers.
iii) Investment. By focusing on effective commercial and financial processes, particularly centralising cash, and optimising working capital efficiency, treasurers are then in a better position to maximise the amount of cash available for investment. By taking a centralised approach to cash investment, treasurers are in a position to manage counterparty risk, ensure appropriate access to liquidity and maximise the return on cash within the company’s risk appetite. [[[PAGE]]]
iv) Financing. Centralising group funding also brings advantages as treasurers can maintain visibility and control over counterparty risk, reduce the cost of financing by creating economies of scale and leveraging a higher credit rating than those of individual subsidiaries. Furthermore, efficient commercial and financial flows make it easier for companies to source alternative forms of financing, such as receivables financing. The better the underlying processes, typically the greater the proportion of receivables that can be financed, and the lower the financing rate.
Risk management should be an integral element of every commercial and financial process, as well as forming the basis of every financial decision.
v) Risk Management. Finally, risk management should be an integral element of every commercial and financial process, as well as forming the basis of every financial decision. An effective approach to risk management requires a top down as well as a bottom up approach. For example, the risk appetite of the business needs to be defined clearly at board level and translated into an appropriate treasury policy, including counterparty/credit, market, liquidity and operational risks. Transaction flows and financial decisions can then be made in this context. While many companies found ways to manage counterparty, market and liquidity risk that appeared effective before the financial crisis, many of these techniques and policies were found to be lacking in an environment of greater extremes of volatility and a more pronounced emphasis on liquidity and credit risk. Every transaction, process and decision includes an element of risk, so treasurers need to ensure that the information on which these are based is as reliable, complete and timely as possible, which necessitates efficient end-to-end processes and robust technology and communication mechanisms.
SEB’s CFVC approach incorporates a range of functional tools to explore, identify and prioritise potential improvements across these areas and beyond. These include the CFVC Scorecard™ to provide a benchmark of a company’s treasury activities against peer companies and best-in-class organisations, a Business Case Model™ to construct a robust cost benefit analysis and a Common Agenda™ to underpin the delivery of solutions and process revisions to ensure that all parties in an optimisation project have a clear, common expectation about the project, its goals, deliverables and outcomes.
Almost no process and decision undertaken, or overseen by treasury stands alone, and each has a knock-on effect on another. Ensuring that every element of the financial value chain is as efficient as possible, based on robust information and secure processes, is vital to maintaining a company’s competitive position. With the cost of liquidity and risk now becoming more apparent than ever, this is a trend that is set to continue with the advent of Basel III and ongoing financial uncertainty. With treasurers looking for ever greater opportunities to add value, these are most likely to be found by ensuring appropriate access to liquidity and managing risk effectively. The CFVC is a powerful tool to enable them to achieve this, whilst minimising project risk and working within organisational and resourcing constraints.
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