Published: October 12, 2011
The effectiveness of corporate treasury can be greatly influenced by tactical procurement decisions. It is not uncommon that the treasurer is late in finding a new cash-flow commitment. Such unplanned obligations can reduce working capital efficiency and create an unnecessary risk of currency exposure, potentially impacting supplier relations and profit margins. This article looks at how the treasury and procurement functions can collaborate to meet and potentially exceed each of their respective objectives.
The core purpose of treasury is to manage cash flow while minimising exposure to currency and liquidity risk. Many treasuries have a mandate from the board, in the form of a Treasury Policy, to put more emphasis on maximising opportunities, while mitigating risk, where possible. A good example of this is the use of FX options to minimise currency losses but benefit from favourable currency movements. For many procurement functions the primary objective is to drive lower costs through vendor management and various sourcing techniques. It is occasionally possible that procurement will have set the conditions for currency conversion within the supplier contract to achieve the same safeguard. Improperly executed, this can create an accounting issue by inadvertently entering into derivatives that are embedded in the contract.
The key contribution that treasury can provide to procurement is the freedom to contract in any currency and with a vendor in any location.
Inadequate co-ordination between treasury and procurement could prompt vendors to add a premium to their price or to quote in a non-functional currency, both having negative impacts on the business. Closer co-ordination between the two functions could enable treasury to manage that risk more effectively through a number of techniques. Increase the scenario over a global organisation with multiple diverse businesses and it becomes a clearer concern as to why the treasurer is left out of the buying decisions, as the timing of cash availability is not immediately seen as contributing to the cost-save or vendor management objectives.
A great many corporate treasury functions centralise currency risk at the parent entity so that the subsidiaries can focus on managing the business; i.e., customers and vendors. The effectiveness of banking arrangements, of cash flow information management, and of access to cash is paramount in releasing a subsidiary to focus on the business.
While it is generally easier to centralise a dematerialised function, like treasury, this can be more challenging when the procurement function has to deal with receipts of materials. The evolution of the Manufacturing Resource Planning (MRP) systems into the Enterprise Resource Planning (ERP) applications of today have created significant opportunity for a multinational corporation to leverage the investment and create an information bridge between centralised and decentralised functions. [[[PAGE]]]
Discipline is required in the use of ERPs, from the use of requisitions and purchase orders, to timing of goods receipt and payment runs. If the business or procurement function raises requisitions, complete with currency and location of the vendor, then treasury is immediately alerted to a new source of exposure. Equally, the procurement function does not necessarily need to conduct an analysis of the implications of contracting in the corporate functional-currency or the currency of the vendor. Treasury does have an obligation to have matched the capability of its ERP system to that of its banking arrangements such that procurement can rely on the ability to settle with their chosen vendor when required and in the preferred currency. A classic example is the use of daily payment runs, in the ERP, to make payment on time rather than occasionally too early or too late. This may be an overhead for treasury and broader finance but it is crucial for procurement to know that any supplier payment can be made on the day that it is due. Should time-critical payments be required at short notice then treasury must have the capability to execute such transactions as well as fund them in the required currencies; such responsiveness is created by deploying a bank’s electronic payment systems and real-time balance reporting tools.
The key contribution that treasury can provide to procurement is the freedom to contract in any currency and with a vendor in any location. Goods sourced from a company in a regulated market might achieve the most effective result for procurement but if treasury is not aware, then there can be delays in settlement with the vendor. Such delays can impact supplier relations and increase the risk of disrupting the physical supply chain. It is not just the choice of currency that can cause such issues but also the location of the vendor’s bank account.
'Proceasury' may well prove to be more than some illusory soundbite, and actually establish itself as a new discipline.
Should treasury not have sufficiently comprehensive banking arrangements whereby settlement can occur efficiently in all the countries procurement are doing business, then delivery of funds can be delayed due to local regulations for presentation of documentation. In addition, without the right banking arrangements, excessive deductions can occur through using multiple agents to get to the end clearing-system. Moving the cash, and doing so with sufficient information for the vendor to identify his customer, not only maintains the quality of the relationship but also on-going flow of goods. A vendor that cannot identify, through his bank statement, that he has been paid by a particular customer may not release credit capacity for the customer to place additional orders, or even worse the shipment of goods could be halted.
In resolving such challenges it may become necessary for the corporate to put in place on-shore bank accounts in markets where the local institutions present an unacceptable level of additional credit risk. Such factors can add to the overhead of treasury or constrain the negotiating position of procurement. Striking a balance for the business requires close collaboration between the two functions. [[[PAGE]]]
The challenges of recognising and managing currency exposures effectively are not limited to relationships with third parties. Implementing a disciplined multilateral netting process for the settlement of inter-company invoices can achieve significant procurement efficiencies as well as meet treasury working capital and currency exposure management objectives. The ability of each subsidiary to contract in its own functional-currency for consistent settlement, through a netting centre, simplifies the internal contracting process. Inter-company netting is not always practical given local regulatory restrictions. To the extent that it can be deployed, there is a clear opportunity for both functions of a multinational to implement it as a matter of policy and remove the overhead of multiple internal arrangements.
Through the management of multiple banking relationships and the daily execution of FX contracts, treasury could easily be viewed as a hyper-active procurement function. It takes all of the procurement manager’s discipline to manage an effective treasury. The challenges faced by procurement are understood by the treasurer though not often recognised in terms mutually agreed by the two functions. In fact, it is common for treasury not to be governed by when corporate procurement policy is set, on grounds of it being a specialist need, rather than embed the treasury’s procurement know-how for the benefit of the overall business.
Today, successful case studies illustrating where treasury and procurement have shared best practices and formed closer collaboration for the greater benefit of their organisation are more commonplace. The merging of the two functions is unlikely and impractical. However more common ground is being found every day. With the continuing evolution in the treasury and procurement arenas across e-invoicing, cards, mobile, supply chain financing techniques, etc., similar challenges in reconciling cash flow are now emerging. ’Proceasury’ may well prove to be more than some illusory soundbite, and actually establish itself as a new discipline within the multinational as continuing collaboration links the operational functions that exist in both areas.
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