Adapting and Evolving towards Excellence is an Opportunity, not an Obligation

As corporates grapple with the challenges hurled at them by the pandemic and seek to protect themselves against future turbulence, José-Carlos Cuevas, Vice President, Spanish Finance Association (ASSET), and Board Member, European Association of Corporate Treasurers (EACT), discusses the steps treasurers can take towards making their operations more ‘lean, agile, and flexible’.

The Covid-19 crisis is having an unprecedented impact on most of the corporates and main players of the economy as a whole. The repercussions include:

These issues generated a situation that, during the confinement stage of the crisis, forced the CFO to concentrate efforts on two lines of action:

Regarding this last point, the different measures adopted have been the usual examples applied to cash stress situations: exhaustive monitoring of available liquidity, updating the cash forecast more frequently, application of actions aimed at reducing working capital, and tactical adjustment of costs.

These measures have generally been completed with the maximum use of available liquidity lines and with access to government financing channels structured either in terms of loans, mezzanine, or equity injections.

All corporates, even those that have reasonably covered their liquidity needs, require an additional buffer with which to face greater liquidity tensions associated with a more adverse evolution of the business context. The future is difficult to predict and carries many unknowns.

In Spain, from summer 2020 the most popular and useful instrument to cope with liquidity constraints has been the banks’ loans backed by public bodies, the Official Credit Institute (ICO) and the Spanish Export Credit Insurance Company (CESCE). The way in which these operations have been structured has led us to the following conclusions:

On the other hand, the amounts approved for direct financing from public bodies without banks’ intervention have been found to be insufficient. Furthermore, since such direct financing is conditioned to the entry of financial entities, the problems described above also occur in direct lending.

More than that, all the already mentioned instruments increased companies’ indebtedness in balance sheets without being able to provide a solution to the weak equity position due to the accumulated losses in 2020 and 2021. Consequently, new instruments appeared in the effort to cover the solvency needs and cope with the huge impact on equity caused by the crisis. The Sociedad Estatal de Participaciones Industriales (SEPI) and Compañía Española de Financiación del Desarrollo (COFIDES) started providing temporary participative loans together with regular loans in an attempt to strengthen corporates’ balance sheets.

Theoretically, both instruments (SEPI for big corporates and COFIDES for SMEs) were adequate and created at the right moment. Unfortunately, the time needed to implement the packages on a case-by-case basis (on average more than six months) became a problem. As a result, most of the corporates that have asked for this support are now facing difficulties.

In the ‘new normal’, companies will be concentrating their efforts on minimising the contraction of their income and reducing their costs in order to preserve their income statement. They are waiting for the global recovery and assessing how they will pay off their loans. In Spain, the tenor of the Covid loans supported by the ICO and CESCE has been extended from the initial five years up to 10.

Obviously, ensuring liquidity levels will continue to be an essential factor, but the focus will be on mitigating the impact of the crisis on the margin, and adapting the business to the new environment. In this context, the CFO and the treasury team in particular face two challenges: contributing to the generation of cost savings, and ensuring the fluidity of liquidity with additional measures beyond those already adopted in the previous phase.

The crisis has highlighted the advantages of digitisation, its benefits including greater flexibility, operational agility, and a more effective interaction with the business ecosystem.

The CFO will have to reflect on the operating model of the treasury function, seeking to generate savings without affecting the level of service required by the businesses. This reflection will lead to the assessment of scenarios that can offer greater centralisation and rationalisation in the management of payment and collection flows. Payment factory-type models, with multilateral netting schemes, payments-on-behalf-of (PoBo) and, as far as possible, collections-on-behalf-of (CoBo) constitute a clear alternative, and are already proven in practice.

This review of the operating model must, in turn, contemplate an increase in the automation of cash management processes through the automation of tasks, and maximising the application of the treasury management system (TMS) functionalities and its connection with the enterprise resource planning system (ERP).

Most companies have a broad enough view of the possibilities of robotic process automation (RPA) technology and are in the right position to expand its adoption and assess more complex use cases. For these assumptions, it will be necessary to combine RPA with machine learning in order to incorporate the intelligence that is required to be able to raise the level of automatic reconciliation of the statement or the preparation of a proposal to place surpluses on the market, as illustrative examples.

With these measures, not only will it be possible to generate cost savings of between 15-25% over the initial cost baseline of the function but a better use of liquidity and lower financial costs will be induced by simplifying cash flows.

Regarding the safeguarding of liquidity levels, and from a more operational perspective, it makes sense to continue making progress in improving the forecasting model, extending terms and understanding deviations. During the first phase of the crisis planning, the focus was on the definition of a procedure capable of providing a view as agile and complete as possible of the evolution of the cash position in the short term. Thus, in this new stage, efforts have to focus on the systematisation of the process, and on increasing the level of certainty in the projection of available cash, emphasising understanding the differences forecast vs. actual and forecast vs. forecast.

To achieve the latter, it will be necessary to reinforce the quality of the base information through the capture and processing of commercial and logistics information (orders, receptions, shipments and invoices), and advance in the integration of analytical capabilities for its advanced analysis and detection of behaviour patterns.

Regarding working capital management, the actions for the ‘crash plan’ adopted in the initial phase of the crisis must be maintained and evolve towards a dynamic of continuous improvement in the form of a working capital team. The controls for the prevention of liquidity leaks (adherence to contractual conditions, compliance with payment and collection terms, control of banking fees etc.) must be sophisticated. This is achieved by applying analytical capabilities similar to those already mentioned. The possibilities offered by supply chain finance platforms should also be explored.

One aspect that should be key is collections follow-up. The financial crisis of 2008 forced companies to implement a series of measures aimed at reducing debt and increasing the rate of recovery. The review of the scoring models, the segmentation of the debt, the continuous definition of outlined recovery strategies, the application of revenue assurance techniques to the order-to-cash (OTC) process, and the dynamic management of the collection agencies are once again vital processes in the current scenario. The difference this time is the myriad possibilities that digital technologies offer.

In a scenario of greater liquidity stress that cannot be addressed by applying the aforementioned measures, additional means of financing, or even a financial restructuring process, must be considered. The current situation differs from that experienced in the previous financial crisis and directly impacts its execution approach. The debt situation of companies has changed, as has the perception of credit institutions. Other alternative sources of financing have gained popularity and the restructuring of corporations’ operational processes is considered increasingly important, which, of course, is accompanied by a financial restructuring. Debt sustainability is key today in the decision-making process of Spanish financial institutions, as is finding solutions to unsustainable debt. For this, as well as for the financing with collateral of practically any type of company asset, alternative financing sources acquire enormous relevance.

The pandemic has turned the spotlight on the role of the CFO and that of the treasury function with emphasis on the evolution of its management capabilities. However, this process should not be viewed as an obligation. It is, in fact, an opportunity to evolve the function to its next level of excellence. This evolution must leverage digitisation to the maximum in order to achieve a more lean, agile, and flexible operation.

We are, in short, facing a new turbulent scenario, not only regarding the situation that currently surrounds business but also regarding the different stakeholders’ perception of the situation. It is vital that corporates’ treasury functions adapt and understand the new rules of the game if they are to make a reasonably successful exit from this extraordinarily complicated situation that we have found ourselves in.

This article was originally published in September 2021 and is reproduced by kind permission of the EACT.