Towards a More Efficient Treasury

By Riaan Bartlett, Treasury Consultant

Treasury is the face of the corporate with the external financial markets, underlining its high profile and strategic importance. Since the global financial crisis more is expected of treasury as it has become the financial nerve centre for the organisation, and it has to prove its value to the organisation, without necessarily having the luxury of more resources. This is against a backdrop of an environment that continues to change – making things more challenging but also creating opportunities to be more efficient. Some of the drivers for change have been:

External

• Regulatory changes (e.g., Basel III) – derivative products and bank funding is getting more expensive and potentially scarcer for the corporate. This places more pressure on the corporate to optimise internal liquidity and to diversify funding away from banks
• The necessity to optimise banking relationships has increased – treasury must now better match a bank’s capabilities to the corporate’s needs and ensure the bank’s return expectation can be managed given the available wallet size
• New complexities bring new risks, meaning risk management is becoming more important - there is an increased risk from security breaches and fraud

Internal

• In order to grow their business, corporates are entering new markets and jurisdictions where challenges may be totally different from the home base. The treasurer as custodian of the cash and financial risks have a pivotal role to play in this
• Realising that liquidity gives business continuity, senior management now better understands the strategic importance of the treasury function
• As the profile of treasury has increased, there is closer scrutiny from the board, and consequently they are demanding a more formal measurement of treasury performance.

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What does success look like for a corporate treasury?

Treasury typically looks inward in order to optimise its own efficiency. But with the increased strategic role treasury can play and technological advances there is an opportunity to optimise treasury related processes at a company-wide level. In addition, as treasury becomes more involved in working capital management, supply and procurement, this influence can go further, possibly extending to the end customer.

Treasury will be successful if it:

• ensures the corporate is funded at all times
• manages the risks of the organisation effectively
• makes effective financial decisions
• can respond swiftly to events
• can successfully work cross-functionally
• has credibility both within and outside the organisation, and
• can demonstrate its value to the organisation through objective performance measurement

In order to achieve the above, the following need to be in place:

• A deep understanding of the corporate strategy and alignment thereof with the treasury policies and strategy
• Strong treasury team with different but complementary skills
• Support from the board and senior management, in particular the CFO
• Credibility with the providers of capital
• Simple but transparent KPI’s that will measure the performance of treasury, and
• A strong treasury infrastructure with the optimal use of technology.

But there are challenges in achieving the above, some of which can include:

• Lack of skilled personnel, meaning the treasurer may have to get involved in operational issues, leaving less time for the more strategic issues. Additionally, treasury will have to ‘over-rely’ on banks for advice (banks would expect something in return – nothing is for free)
• Budgetary constraints e.g., implementing  a treasury management system (TMS) or hire good people
• Get buy-in for strategies that may prove to be unpopular e.g., give the organisation the message that capital expenditure must be cut to improve the financial strength when there is a strong focus on growth

Efficiency is not only about systems and technology, it extends to every activity for which treasury is responsible.

Achieving financial efficiency

Business partner

Treasury must be involved with strategic planning from the start, and for this to happen more effectively treasury must be seen as a business partner i.e., they must be visible and trusted. The rest of the organisation must believe that treasury’s input is essential i.e., ‘Has treasury been consulted?’

Get close to the business

Treasury cannot operate in a vacuum and essentially it is a support function to the core business. Treasury should understand the business and build good relationships with the business unit CFOs. Treasury needs to understand what their challenges are, but the CFO’s must also have an appreciation of how their actions can impact treasury and its mandate.      

Financial flexibility

Treasury must ensure the corporate is funded at all times. This means having the right money in the right place at the right time. This is achieved by ensuring:

• Visibility of cash and access to liquidity
• Financial discipline is maintained, and
• Financial flexibility is preserved

Some of the ways the above can be achieved are:

• Accurate cash flow forecasting – rolling cash forecasts that reflect each business unit’s funding priority and real-time control of cash mobility are essential elements of running a business in good times and in bad.  Ideally,treasury must not be just a consolidator of different forecasts but must be a driver.
• Sufficient liquidity buffer – in the form of cash and / or committed facilities. Be careful not to use short-term facilities as core funding, as this may impact the ability to manage cyclical and unforeseen cash outflows.
• Maintain strong relationships with providers of capital (debt investors, banks) – they must understand the credit and broad funding strategy of the company and senior management has an important role to play in this.

Manage the risks effectively

This is about determining what can go wrong, how bad it can be, what can be done about it, and then taking action. It must be determined how much risk the corporate can retain vs how much risk it wants to retain. Treasury as custodian of financial risks will play a critical role in this and being pro-active is the key - the treasurer must prepare for unlikely events. Risk management will be successful if:

• There is a strong risk culture in the corporate and senior management lead by example
• There is a risk committee whose members really understand risk
• Over reliance is not placed on models e.g., VAR-type measures do not tell you how much you can really lose
• A holistic view to risk management is taken – do not manage risk in silos
• A mandate is in place that allows for sufficient flexibility to manage risk

Making effective financial decisions

For important decisions, treasury must get senior management on board as early as possible

The treasurer must have confidence in the numbers that form the basis for financial decisions. For this it is important to have good systems that can provide:

• accurate information (one source of the truth, sourced from a system), and
• timely information (allows for quicker decision-making particularly when markets are moving fast)

For important decisions, treasury must get senior management on board as early as possible. Here, the ability of the treasurer to sell ideas and explain complex issues in a simple manner, is essential.[[[PAGE]]]

Achieving operational efficiencies

Overview

Operational efficiency mitigates the risk of error and fraud, which in turn can reduce costs and facilitate better decision-making based on greater visibility over information and transactions. The treasurer needs visibility into global operations, cash and financial risks as visibility is needed to turn data into advice. Importantly, if operations run smoothly then the treasurer will have more time for the more strategic issues.

Some of the ways operational efficiency can be achieved are:       

Centralisation of treasury activities

The decision to centralise is often driven by:

• developments in technology (enterprise resource planning – ERP and TMS and internet capabilities mean even smaller companies can centralise their treasury activities)
• the need to demonstrate good governance i.e., greater control over treasury activities
• importance of having access to immediate information (e.g., counterparty risk during the global financial crisis)
• obtaining visibility and optimum control of cash (need to have cash where it is needed)

Centralisation can take different forms: for example having all activities and policies centralised, central policies but regional execution, using vehicles such as shared service centres and payment factories etc. Factors to consider will include size of the company, geographic distribution, use of technology, available local expertise and the need for control.

Technology

Using technology is about managing, securing, reporting and sharing information. It becomes increasingly important where the business is expanding into new locations where the level of technological use is low or different from the home base.

In terms of choosing a TMS, there are different options available e.g., a dedicated system, treasury module of the company’s ERP system (e.g. SAP), software-as-a-service (SaaS) or application service provider (ASP) model, or the increasingly popular cloud-based systems. Some of the key factors to consider are functionality, scalability, flexibility, security, cost, integration and support from the provider and internal IT. A good treasury system can achieve benefits that include:

• reduced risk of manual error (automation)
• reduced operational risk and costs
• reduced process complexity (simplification)
• access to transparent financial information
• improved risk and financial analytics

Many sub-systems can be integrated: for example forecasting, accounting, reporting, confirmation, risk management and market data systems as well as trading platforms.

Below are some of the most common ways in which efficiency is increased by using technology.

a. Straight-through processing (STP)

STP is the efficient, secure and instantaneous flow of information within a system, within systems within a department, with other internal systems, with other parts of the business and with external parties. The result is lower costs and faster, more efficient transaction processing. An example of STP is the automatic posting of journal entries created in the TMS into the general ledger system and cash balances reported from banks.

b. Connectivity

The format of financial messaging between counterparties is standardised – efficiency is enhanced as data is transferred between systems and counterparties in a consistent way. This reduces cost and improves control. It also facilitates the expansion of trade both geographically and demographically as well as giving transparency and visibility over transactions and positions across the corporate’s network of banks.

c. Liquidity structures

Liquidity structures are designed to support pooling, visibility and access to cash of the corporate. The aim is to optimise liquidity across currencies and borders. In designing a liquidity structure the corporate should seek to:

• use pooling and cash concentration where possible
• improve reporting for risk management, control and governance purposes
• automate functions as much as possible and maximise STP

 

One of the structures to be considered is an in-house bank (IHB). Group treasury acts as the primary source of all banking services to business units on an arm’s length basis. Some of the benefits of an IHB include:

• minimising banking costs
• more accurate forecasting of daily cash requirements and minimising idle cash balances
• simpler and transparent bank account structures and bank account rationalisation
• automatic cash concentration mechanisms, and
• improved processes around intercompany loans

Technology can also improve working capital management through the use of shared service centres and payment factories.

Shared service centre (SSC)

An SSC performs common finance and administrative functions for multiple subsidiaries. There are a number of requirements, however, in order for an SSC to achieve maximum efficiency including a fully integrated accounting or ERP system for the group, skilled staff, centralised cash management and a TMS. From a cash management perspective an SSC can lead to:

• a significant reduction in costs and greater STP
• improved working capital position due to streamlined collections, and
• improved forecasting due to centralisation of financial information.

It also provides benefits to the subsidiaries by allowing them to focus on their core business.

Payment factory

A payment factory is an extension of the IHB and facilitates processing of inter-company payments and loans and provides more control over the timely and secure transmission of the payment instructions. Some of the benefits include:

• centralisation of payment information that can help improve overall liquidity
• more effective management of foreign exchange by concentrating exposures at the group level
• improved internal controls as automated and standardised processes will reduce operational risk, and
• greater transparency achieved contributes to increased security

 A payment factory will, however, require a common technology platform within the group. This is often done as part of a company-wide ERP implementation.

Taking treasury to the next level

A focus of any treasurer must be to position treasury so that the department is seen as a business partner to the rest of the organisation. The more treasury can do with the least amount of resources the better,

The more treasury can do with the least amount of resources the better

especially in a world where managing cost is increasingly important. Technology is an important enabler in this regard – scalable solutions must exist that support future growth at minimal cost and minimal additional resources.

Additionally, treasury must aim to eliminate all forms of duplication, stop non-value adding tasks and simplify processes where possible. This will mean a more effective and efficient treasury department that will be to the benefit of the whole organisation. It will enable treasury to spend more time on strategic issues and to engage more actively with key stakeholders. Furthermore, as treasury continues to evolve in tandem with technology, this will require a new skillset for treasury personnel - a strong focus should therefore be to attract, retain and develop the talent that can facilitate this in order to take treasury to the next level.