Breakout Sessions: Challenge, Debate and Insight

By Helen Sanders, Editor

Participants at the EACT Summit chose to attend two in-depth workshops to learn from leading treasurers, debate and share experiences in some of the areas where treasurers add the most value to their organisations.

Operating in New and Challenging Markets

During this session, Robert van der Zee, Treasurer of the World Food Programme (WFP), the UN agency dedicated to alleviating hunger globally, and Lorcan Travers, Investment Manager at Johnson & Johnson and EACT board member, shared their diverse experiences of operating in challenging markets. For WFP, the primary challenge in many of the 80 countries in which they provide food assistance is to get cash into the country, with cash based transfers, such as prepaid cards and mobile money becoming increasingly important as a way of getting aid to people quickly. For Johnson & Johnson, an AAA-rated company with $40bn of cash, the issue is the opposite i.e., getting cash out of the countries in which they operate. This is critical to maintaining the group’s AAA rating, particularly bearing in mind their risk to banks and commercial counterparties that have a lower rating.

In discussing both situations, participants agreed on the importance of applying global standards and processes, with some flexibility to accommodate regional variations. For WFP, for example, despite operating in challenging markets, two thirds of their flows now pass through SWIFT.  For Johnson & Johnson, a regional treasury organisation, that balances market proximity with standardisation, has proved very valuable.

Finally, participants discussed some of the geopolitical changes that are affecting all markets, such as the potential impact of actions that President Trump may take during his term of office, and the Brexit process. Treasurers emphasised the need to remain nimble in dealing with unpredictability and change. In addition, the markets considered ‘challenging’ are not static, depending on market, regulatory, political and economic changes. Many of the countries in which WFP operated in the past, for example, are those that have experienced conflict; today, however, this is not necessarily the case, which impacts on the conditions in each country, the type of needs experienced by the population, and the best way of meeting them. 

Robert van der Zee

Treasury Technology Innovation in Context

The technology breakout session had  three key themes: big data; digitisation, and the future of technology.  Although ‘big data’ is discussed regularly, what is more relevant to treasurers is data analytics, and how to use data in a more targeted and strategic way. Cash flow forecasting is a key area where data analytics is adding value for a growing number of organisations, for example. Similarly, analysing payment patterns and cash flow dynamics to identify fraud is becoming a more important priority. 

The digitisation theme resonated strongly with most treasurers, but the conclusion was that there is still a long way to go, particularly as current initiatives are often too fragmented. Instead, treasurers are becoming more focused on ‘end to end’ digitisation across the financial value chain, as opposed to focusing on specific elements of it.

There are some treasury activities where treasurers agreed that digitisation would offer some immediate benefit, such as bank fee reconciliation, bank account reconciliation and bank account opening/bank account management. While new opportunities are emerging to address challenges in these areas, there is not yet widespread familiarity or adoption of these solutions, a situation that is likely to change in the coming years as successful case studies become more widely publicised.

Looking ahead, while treasurers welcomed the innovation that had taken place over the past five or ten years, they indicated that the challenge and priority ahead would be to focus more on security. While efficiency and cost savings were central to the business case for new technology in the past, increasingly security and control is front of mind for the treasurer and CFO, which will increasingly drive technology investment decisions.

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The Art of FX Risk Management

Participants discussed different models for foreign exchange (FX) risk management and concluded that while the majority of multinationals do this based on a functional currency concept to align with the accounting function, there are alternatives, particularly amongst privately owned companies.

There was further discussion on whether to hedge forecasted transactions and over what hedging horizon, or whether companies should be hedging the budget. The conclusion was essentially that although there are inevitably differences across industries, the aim is to give the business time to react to price changes, which involves looking at price elasticity in each market and different products to determine the appropriate hedging horizon. This is very difficult in practice, and one of the main reasons why FX hedging remains more art than science.  

Balance sheet translation hedging was also a topic of interest amongst participants, who concluded that this must be aligned with accounting policies. Therefore, intercompany loans that will not be repaid should be part of a translation hedging policy, while those that will be repaid will be part of a transaction hedging policy. There was also a lively debate around active versus passive FX risk management approaches, in particular whether treasurers should be taking a view on the future market, and if not, whether there is any reason to adopt active FX risk management. Ultimately, FX exposures are complex enough, so don't add further complexity by using complex instruments to hedge them.

Lorcan Travers

Creating a Cash Culture

The final breakout session featured presentations from Anne Gobert, Group Treasurer, Ingenico and Armelle Deriex, Director of Credit and Treasury, Adecco. These inspired discussions around how to create a ‘cash culture’ i.e., a universal commitment to supporting a corporate cash and liquidity agenda, including some of the ways that companies had achieved this, and how they had overcome challenges along the way. The first question is why you are trying to create free cash flow e.g., to pay down debt, satisfy financial covenants, boost working capital, invest in R&D, mergers & acquisitions, etc. This is important in validating the cash strategy and gaining management commitment.

Participants then discussed the issues associated with developing a cash culture, including governance, culture and most importantly, people. Communication and education is essential, but a key question was how to establish appropriate key performance indicators (KPIs) and behaviours across the organisation. Some treasurers noted that their business now has clear incentives related to free cash, not only in treasury and other finance or credit functions, but across the business. 

Working capital optimisation is an important element of a cash culture in many organisations, but this concept is not always interpreted in the same way. For some, for example, working capital optimisation relates to factoring and reverse factoring when, in reality, that's the end of the process rather than the starting point. In addition to these techniques, rationalising payment and collection methods, and making payment and collection terms more consistent across the business can be very valuable. Centralisation is often a useful way of doing so: while both Ingenico and Adecco are largely decentralised businesses, centralising some of these activities has reaped rewards, initially in-country, before looking regionally or globally.

The conversation concluded by emphasising that while common tools and processes are important in creating a cash culture, behaviour and incentives are also essential.