The Key to Smarter Liquidity Management: Breaking Down Silos

Treasurers must lead the charge to bring down organisational silos that stifle optimised liquidity management. To do this successfully, they have to recruit critical stakeholders from other departments to the cause through a mixture of education, communication, and technology.

A treasury team’s understanding of the timing of a company’s cash flows is vital for both the function and the business. The treasurer must collect that information from across the organisation in order to understand when payments need to be made, when the company will be paid, and what to do with excess cash. Good communication between the treasury and other departments is key. Sometimes, however, silos between different departments can hamper this efficiency.

Independent treasury consultant Bas Rebel outlines an example of opposing interests within a company: “I was once not permitted to make contact with a client about an overdue item because, at that time, the sales team was negotiating a bigger ticket deal. I would argue that there is no better time to discuss payment on the previous invoice than when the client is looking to buy more from you. These factors have a huge impact on treasury operations.”

Bas Rebel
Independent treasury consultant

Indeed, many core treasury processes can be hampered by such organisational silos. For example, it can quickly impact working capital if the procurement team grants a longer than usual payment term to a supplier.

Dennis Baljeu, Executive Director Treasury, Vanderlande, explains that the same challenge applies to cash forecasting: “I like to forecast out to three months. The first month is pretty straightforward with invoices going in and out. For a longer time horizon, I need procurement and sales information. The familiar maxim ‘garbage in garbage out’ applies to this information. If there is no objective for a procurement team to keep that information current, then treasury cash forecasting will not be very valuable. It is all intertwined.”

Dennis Baljeu
Executive Director Treasury, Vanderlande

There are also technological challenges that can impede the treasurer’s ability to optimise liquidity management. Some treasurers have never been equipped with a TMS, for example. At the same time, manual online banking creates its own challenges compared with automated and streamlined integration of banking feeds.

Johannes Berghoff, Senior Value Solutions Consultant, Coupa, acknowledges this. “There are many different root causes of obstacles, but the consequences are more or less the same when it comes to unearthing the data, the precision of the data, and the timing of the data. That is one of the most difficult tasks when trying to create cash visibility.”

At Vanderlande, the treasury team has a TMS but also carries out its cash forecasting through a system that was built in-house.

“The idea was that if the data from the procurement and sales departments was already kept somewhere in the company, then it would be easier to connect in-house systems to an Excel-style reporting tool on top of all that information,” recalls Baljeu. “This could be better, but this is how we try to do it and it does work. However, there is still much work going on around it, including analysis of actuals versus forecasted numbers. It is an ongoing process.”

Johannes Berghoff
Senior Value Solutions Consultant, Coupa

Benefits of continuous conversation

Removing the ‘glass walls’ between departments is critical for treasury to gather better information earlier regarding liquidity, currency, and interest rate exposures. Having these details means the treasurer can assess the risk probability within that information. This creates a much better position from which to adjust hedges as necessary. But while technology integration between departments is essential to ensure the smooth flow of data, human interaction is just as important.

“Breaking down silos implies that you have to talk,” notes Rebel. “Systems exchange necessary information daily, but treasurers need to talk to colleagues in those departments to gain perspective on that information. You will never be able to get the information right the first time, but it will be better over time. That continuous conversation is important.”

Organisations will benefit from this dialogue as it can improve the quality of the treasury’s cash flow and the company’s overall financial results.

“If you can run your treasury with a lower cash balance, that also implies that your return on assets employed will go up,” continues Rebel. “That is treasury’s contribution. If you have a WACC [weighted average cost of capital] of 10-12%, you get a negative return on your cash. You can reduce it by whatever percentage in absolute terms, but make sure that the other assets run slightly slower to meet the KPIs.”

To some extent, the existence of silos between departments is understandable as companies become more complex and geographically widespread. Functions such as procurement and sales have the same visibility issues that treasurers face, albeit with different KPIs.

“On the procurement side, for example, the CPO is concerned about how much spend they have under management,” comments Coupa’s Berghoff. “We can use technology to bring all the departments back together.” Drilling down into the point around technology bringing departments together, he outlines Coupa’s approach to supporting corporate data management.

“Coupa provides a unified platform that integrates treasury, procurement, and the account payables where we can see transactional living data,” he explains. “Think about hedging – imagine if the treasurer could have this information in the TMS as soon as somebody raises the requisition and the price is set. This is the creation of the economic exposure, so then treasurers can take hedging decisions. Once this data evolves and becomes an invoice, it translates into a balance sheet exposure and can be adjusted accordingly.”

Another example of Coupa's technology supporting the overall breakdown of silos is seen in the payment of invoices, specifically in identifying payment terms. Whether the accounts payable team manages invoices on a ‘first in, first out’ basis or don’t even know their suppliers’ payment terms, it all directly impacts treasury.

“Say you just respect the payment terms, classify all your invoices by the payment terms, and pay on the last possible day – that's one example,” adds Berghoff. “Or are you cash rich? Can you earn on your invoices by allowing early payments to your suppliers against a discount? All this becomes possible through an integrated Coupa platform where you no longer have to think about the touch points.”

Breaking down silos to gain better insights and cash forecasting enables treasury to optimise areas such as borrowing and managing excess cash. For the organisation, better insights make it possible for a customer to have slightly longer payment terms for a slight price increase, which is good for the bottom line.

“Cash forecasting is important for treasury in terms of the interest results and FX hedging, but in the end it should serve the whole business,” outlines Baljeu. “This is a message that I try to convey internally, that the entire organisation can benefit from accurate cash flow forecasting.”

Navigating treacherous waters

For corporates wanting to unlock more intelligent liquidity management, it is crucial to understand the total benefit of such a project. Without making a case for these advantages, it is impossible for all parties to know whether or not it will be a worthwhile project.

“Over the years, I have seen many companies underestimate the total benefits of creating a cash culture,” recalls Rebel. “There are a lot of intangible parts to such a project, talking about it and sharing information, that can seem somewhat soft. But suppose the treasurer is able to see that treasury has better coverage of interest exposure or currency exposure, or the predictability and reliability of cash flow increases. In that case, it is possible to quantify the benefit.”

This visibility shows the treasurer how much they can invest to ensure it is a worthwhile project. Understanding the total benefit gives the treasurer a story to tell the other stakeholders, making it easier for them to rally behind the cause.

“During the project, various changes will be necessary throughout the implementation,” continues Rebel. “Once the treasurer has identified what they want to do and where they will spend the money, the benefit case can also help them navigate those treacherous waters during the project. It gives them a guide to understand that if they go in a specific direction, they can at least achieve something, rather than going a different way and missing that opportunity.”

Defining what success means in such a project, and establishing the KPIs, are essential to whether the endeavour will be successful or not.

“If the only goal is to realise a specific percentage of savings, the project is likely to fail,” cautions Berghoff. “Treasurers should define multiple KPIs depending on the specific business and their project partners. One essential factor in this is the technology and how data is integrated. Gathering as much data in one place lessens the need for reconciliation and data maintenance. That is also where the importance of APIs comes in. Even if you cannot integrate all the data, you can at least effectively exchange this information in real-time.”

Vanderlande’s Baljeu agrees that obtaining the right underlying data from the business is critical to getting a positive outcome from such a project:

“Treasurers can have the best tools in the world, but if that data is incomplete or incorrect, the outcome will be unreliable,” he affirms. “The focus in our company is to get that data right and have an efficient data landscape. In the past, we had 25 people worldwide manually keying data into the system for the cash forecast – we don’t want to go back there. Once the data is right, you can take it from there with projects, technology, and KPIs.”

Sharing a common goal

As already noted, making a successful change towards more innovative liquidity management is as much about an organisation’s culture as it is about the technology stack. This co-ordination should start from the beginning of such a change project, ensuring that there is joint responsibility or a joint objective between the different stakeholders in the process.

“By definition, it breaks down the silos if all stakeholders share one common goal,” notes Baljeu. “Working on that and getting the board to support it is important. In my experience, if the board has a shared goal, it is easier for that message to flow down into the business. Communication and education around the common goals are vital.”

The messaging from the treasury department is just as crucial in this regard, particularly when it comes to communicating the benefits of the treasury’s actions for the business.

“Whenever you want to improve liquidity in a company, treasury must continue educating everybody in the organisation as to how the debits and the credits translate into cash in and cash out, and the difference between them,” Rebel explains.

The time value of money may be common terminology for treasurers but not necessarily as logical or self-explanatory for everyone within the company. Treasurers need to insert examples of this, such as the difference between paying in 30 days compared with 60 days, into discussions with the sales and procurement departments so that they can combine expertise to gain the best result for the company.

“Sometimes treasury will be focused on speeding up the cash flow, but sometimes it makes sense to extend the cash conversion cycle and slow it down as, in the end, that is a better result for P&L,” Rebel adds. Treasury might be able to afford it because it has access to funding more cheaply than a strategic commercial partner. That’s the discussion these functions can have, and build on each other's expertise to combine for a better solution.”

Demonstrating the benefits of such a change management programme can also help with getting the project buy-in from other departments, as Berghoff outlines:

“One of the most crucial factors to make or break a change management project is if the treasurer can show how the project will take away tedious manual tasks that do not add any value,” he says. “Demonstrating the difference that automation will also make to their lives is a powerful way to get other stakeholders onside.”

Rebel agrees that for the project to be a success, accentuating the mutual benefits is a must:

“In the end, success is about partnership,” he notes. “If the other parties believe that treasury is getting the lion’s share of the benefit, it is unlikely to become a winning collaboration. Try to look for an outcome where everyone gets a win. There are plenty of opportunities to achieve that, such as through SCF.”

Stepping into the smarter liquidity world

The good news for treasurers is that today there is already an awareness of the problems of organisational silos across various departments, while the importance of liquidity and understanding of cash culture is getting better. However, as Baljeu emphasises, there is still more work to be done to convert awareness into action:

“Technology can help with this, as can common goals and objectives, while a focus on communication is a must,” he concludes. “With smarter liquidity management, the goal or objective is to help the business. This could be to help it grow or even to stay alive, or perhaps help suppliers or customers – that’s smarter liquidity management. Treasury is in the driving seat concerning liquidity but remember that this approach to change is a business process.”