If cash is the lifeblood of a business, then treasury sits at its heart – and the treasurer is the one with their finger on the pulse. But today’s treasury leaders have myriad challenges to contend with and must upskill their teams and upgrade their technology in order to keep the corporate entity’s ‘blood’ flowing freely.
In this tough economic environment, concern is increasingly shifting from black swans to grey rhinos: as tail risks continue to materialise more frequently, the ability to identify and quantify vulnerabilities, scenario planning and stress testing have become all the more pertinent to treasurers.
Mandated with ensuring a sustainable level of liquidity, treasurers play an important role in instilling confidence to the broader investment community with regards to an organisation’s financial resilience. It is not enough to get cash forecasts right. They must be prepared in a timely manner to keep the treasury team informed as to the organisation’s liquidity position. In other words, digitisation can enable liquidity optimisation.
During the pandemic, treasurers were predominantly focused on cash availability due to major supply chain disruptions – but debt was cheap and the earning potential of surplus cash was negligible. Now, with higher interest rate levels, it is not just access to capital that is concerning but also its cost, posing challenges for highly leveraged firms. More broadly, cost of capital is also affecting investment hurdle rates and capital allocation decisions, be it whether to invest in organic growth, acquisitions, repaying debt or returning cash to shareholders through distributions or buybacks.
With economic volatility persisting, treasurers are closely monitoring their funding mix (accessibility, committed funding lines), interest rate exposure (fixed to floating debt ratio), and debt-servicing capacity (to pre-empt potential covenant breaches). At the same time, with cash having a higher cost of carry, companies with cash buffers are looking to make their cash ‘sweat’ to minimise net interest expense, pushing large corporates especially to explore alternative instruments beyond deposits, including MMFs, Treasury Bills (T-bills) and short-term bonds where liquidity access is not compromised, providing diversification in the process. Counterbalancing this, however, is the risk of financial sector instability, which has made corporates reassess their counterparty risk exposures as funds fly to safety.
How treasury can add value
At a time when shareholders are increasingly looking for capital protection, initiatives that can pull on levers that free up cash have the potential to contribute to shareholder value creation, thereby partially offsetting growth slowdowns or deteriorations. Cash optimisation, though, is as much about improving the efficiency of internal finance processes as it is about analysing an organisation’s financial standing.
Improving working capital metrics across the order to cash (OTC), procure to pay (P2P), and forecast to fulfil (F2F) cycles can drive enhancements in cash flow forecasting and, by extension, cash deployment. For example, sound customer credit policies improve the predictability of collections, which reduces variances, lowering the required cash buffer, thus freeing up cash to be invested for shareholder value creation.
A company’s performance is ultimately reflected in its cash flows. This affords treasurers an excellent opportunity to add value through an integrated approach. Internally, treasurers can leverage the large amount of information they have at their fingertips to inform the cash flow forecasting process by soliciting inputs from various stakeholders, including the sales/credit teams, payables, procurement, investor relations, and corporate development.
Cross-functional collaboration
Externally, treasurers are well positioned to be the voice of the business by virtue of their interactions with key financial stakeholders such as banks, other creditors, and rating agencies. Overall, treasurers recognise the need to champion their organisation’s cash culture, but there needs to be sponsorship on the part of the CFO and buy-in from internal business partners. To achieve this, cross-functional (co-)ownership is needed, as various stakeholders are involved along the cash value chain, but reaching agreement does not come without its challenges. Regular dialogue is also key to drilling down into and reconciling disparities, especially as the cash picture is ever dynamic, requiring vigilance and a constant feedback loop.
AI has dominated treasury conversations in recent years while the topic of emotional intelligence has been ignored. Organisational partnerships, like all relationships, are founded on respect: respect of other stakeholders’ priorities, their position within the firm, their expertise, and their bandwidth.
Capital, whether financial, human or temporal, is always bound. It is natural, therefore, for competing initiatives to be evaluated against one another in pursuit of the highest return. Logically, then, building a compelling business case is a vital initial step in seeking buy-in.
Treasury centralisation, for instance, is often a sensitive endeavour that can be met with strong resistance. Subsidiaries may rail against local treasury responsibilities being stripped away from them and shifted to the centre. Positioning cash as a corporate asset and quantifying savings from economies of scale can help overcome objections, or, at a minimum, gain top-down executive sponsorship to enforce centralisation on controlled entities.
If, however, the scope of local treasuries is changed, so should their financial performance metrics. Can a local CFO be held accountable for net income when the decision to hedge interest rates has been centralised? In this case, perhaps changing his KPI to EBIT is more appropriate. Separating ownership over FX impact on the P&L is even more tricky to manage. In this case, perhaps a joint approach would suit, whereby subsidiaries propose the hedge response, and HQ, acting as an adviser and centre of excellence, validates hedge proposals and executes on behalf of their subsidiaries.
Accepting trade-offs helps foster better collaboration. For instance, a modular as opposed to wholesale approach to enabling TMS functionalities can not only demonstrate deliberation on the part of the treasurer in ramping up capabilities commensurately with business needs, it also shows consideration for IT’s broader Book of Work.
Being mindful of business partners’ bandwidth is a key factor when in pursuit of success. In the context of TMS implementations, for example, following suggested templates and being clear on business requirements helps ensure that TMS design reflects business needs, and goes a long way towards obtaining approvals and channelling energies more efficiently by limiting iterations.
Equally important is the treasury team dedicating enough resources and not expecting business partners, like IT, to carry a disproportionate load. A common pitfall in TMS implementations relates to treasury resource constraints, where staff are caught up in day-to-day responsibilities, detracting them from giving sufficient attention to strategic transformation projects.
Divorcing oneself from failure is typically the first resort – but also a mistake. When interests intersect, failure reflects negatively on all involved parties. A failed TMS implementation is as much a treasury failure as it is for the IT department. If taking accountability and being solution driven does not prevent failure, it may at the very least mitigate criticism from leadership. Each function has its role to play in the broader corporate body and there are always interdependencies. Regular dialogue and a collective mindset are therefore essential for cross-pollination.
There’s no substitute for real intelligence
Because it is impossible to fully predict the future, treasurers ought to balance robust governance with agility. This typically means seriously considering leveraging technology to gain visibility for actionability, but a cost-benefit analysis should first be performed.
Some treasury digitalisation benefits are closer in reach than others. Mechanical tasks, such as bank account reconciliation, cash positioning, and FX trading execution can be automated relatively easily with the right treasury system or robot.
Improving cashflow forecast accuracy with ML, on the other hand, can be more laborious; it involves statistical techniques and training algorithms on datasets to analyse patterns and relationships between input variables and target values. Predicting outliers would, of course, be a boon to any treasurer, but this is not a low-hanging fruit.
Accordingly, before tapping into AI, real intelligence ought to be first leveraged. Cash planning, which entails understanding drivers and trends, necessitates close partnering with business and finance stakeholders. These are, after all, the providers of data, which systems rely on. Integrating systems can then be the next evolutionary step for this data to be properly harnessed (sanitised, unified, and effectively consolidated). Ultimately, both human and system intervention is needed for accurate forecasting and meaningful scenario analysis.
By automating manual and transactional tasks, the focus can shift to more strategic considerations such as funding, liquidity, and bank relationship management, where cash is not ‘disjointed’ but rather ‘connected’ to both internal business drivers and external market forces. With better insights on cash haemorrhages and other credit deficiencies, a corporate’s financial health can be sustained by the treasurer, if not strengthened by administering the right treatment.
