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On the Road to Treasury Transformation: How Far Have We Travelled?

by Jiro Okochi, Chief Executive Officer and Co-Founder, Reval

It’s now been three years since once mighty companies tumbled without cash, credit or liquidity. Today, a company should no longer be without its global cash position first thing in the morning. Bank and supplier credit risk should never again go unmonitored. Market exposures must be efficiently and accurately gathered with hedging strategies properly deployed. Liquidity forecasting should no longer be witchcraft, but an exact science. But as we face down the barrel of a European debt crisis, an uncertain global economic environment and geo political risk, it is worth examining how far companies have come in fulfilling the transformation of treasury that CFOs have called for, which will at long last make treasury the strategic linchpin to the business and health of the company.

Companies have certainly followed through with the natural reaction to hoard cash. According to Capital IQ data from 376 nonfinancial S&P 500 companies, or about 91% of the nonfinancial companies in the S&P 500, aggregate cash and short-term investment balances totaled $1.023 trillion by the end of Q1 2011. The Federal Reserve’s Flow of Funds report of September of 2011 shows $2.047 trillion cash being hoarded. One way to save cash is to squeeze out every penny profit by increasing productivity and efficiency. This did trigger a new buying cycle in treasury technology as companies are striving to improve business process in treasury with new technology, seeking better tools to gain better visibility into their cash and liquidity positions. In the U.S. and other progressive countries, treasury departments are turning to Software-as-a-Service solutions to gain the benefit of outsourced software and technology. So yes, some treasury departments have initiated change through system replacement, but many had antiquated systems to begin with and now had a budget to replace their old client server TMS.

In the U.S. and other progressive countries, treasury departments are turning to Software-as-a-Service solutions to gain the benefit of outsourced software and technology.

There are more reasons than the standard turn-over in treasury management systems to consider heading further down the road to full treasury transformation. The market volatilities in FX rates across the globe and the rollercoaster ride of commodities prices put the spotlight on companies who did not have the proper hedging strategies or, as in many instances around commodities were not hedging at all. Basic rolling hedging strategies were tested to the max as both exposures and hedges did not behave as expected. In times when stock prices soar and profits flow, hedging performance can be a rounding error. But in times of slim margins, every penny per share counts; yet, overall, there did not appear to be any noticeable new trends in hedging approach for 2011.