by Seamus Desouza, Executive Director and Senior Product Manager for Foreign Exchange, J.P. Morgan Treasury Services, EMEA
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.
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