As 2023 draws to a close, it’s once again time to take a look at the challenges treasurers will need to address in the coming 12 months, and the trends and opportunities that they should be monitoring.

And once again, there is no shortage of topics vying for treasurers’ attention. While the challenge of high inflation has somewhat abated in recent months, treasurers are now operating in a higher interest rate environment. Geopolitical risk is a notable concern, from the developing Israeli-Palestinian conflict to the prospect of US elections in 2024 – and the last few years have also clearly demonstrated the importance of managing supply chain risks.

At the same time, treasurers are paying close attention to the opportunities brought by newer technologies and are considering how these could help them address perennial challenges – all while considering how treasury can support the firm’s environmental, social and governance (ESG) goals.

Getting the basics right

In this increasingly complex macro environment, says Bruce Meuli, Treasury Advisory Executive, GTS EMEA at Bank of America, “this is starting to put pressure on treasuries to really focus on getting the basics right. When I’m talking to clients, they’re all thinking about how they can be even more effective and cost efficient than ever before. At the same time, they’re looking to build contingency and resilience into their operations, and build the operational capability needed to manage that volatility and complexity.”

While there is much talk about predicting the next black swan event, Meuli notes, “people are realising that you need to build the capability to respond and react, no matter what the environment may be, or what events may occur.” The difference, he says, “is that this is becoming more technology led: the maturity of core treasury systems and number of new digital tools is increasing – and so is their application into treasuries.”

Navigating the risk landscape

“Geopolitical risk is important to corporate treasurers for the simple reason that it increases business risk,” comments Ashley Parker, Head of Corporate Solution Sales at BNP Paribas. “And when business risk increases, companies typically want to reduce their financial risk to compensate.”

When markets are more volatile, treasurers need to find new ways of managing that volatility, such as increasing the use of options or collars, says Parker. “They may also need to manage risks that they haven’t managed before, such as raw material and inflation risks. Even if the exposures may seem relatively small, once these risks have passed through a certain volatility threshold, they become financial risk parameters for CFOs and Group Treasurers to manage.”

Where inflation is concerned, Parker notes that raw material prices may be more settled than they were 12 months ago, “but wage inflation, for example, is still there – and it’s affecting corporate margins in some sectors, particularly where the wage bill is a large portion of the cost base.” And while higher raw material costs are increasingly being passed through the supply chain with contractual arrangements, “it’s much more difficult to pass on higher wages.”

Deploying capital effectively

In the current environment of high interest rates, effectively deploying capital is becoming more challenging, says George Dessing, Executive Vice President, Treasury & Risk at Wolters Kluwer. “Driving organic growth by reinvesting into the business therefore becomes an even better use of capital,” he notes.

“The M&A landscape, on the other hand, is still competitive leading to high valuations, especially in exciting markets like cloud software and generative AI. This, coupled with high-interest rates, makes finding M&A opportunities that meet our financial criteria more difficult, as funding, as we all know, is not ‘free’ anymore.”

Building supply chain resilience

Until recently, says Parker, a lot of companies designed their supply chains for cost efficiency. “And by that I mean that companies were happy to have a supply chain that was dependent on one or two large suppliers – often in Asia. What we’ve got now is an environment where companies are prioritising supply chain security.” In some cases, this has triggered a re-evaluation of how and where companies source materials, and the ownership of their supply chains.

As they review their supply chain arrangements, a key question for many companies is how to address their reliance on China. For many, the business opportunity is simply too big for companies to reduce this reliance. Others are taking a more cautious approach and are taking steps to mitigate the risks – and a third group are actively diversifying their intra-Asian supply chains into countries such as Vietnam, India and Indonesia.

Making the most of ISO 20022

The transition to ISO 20022 will continue in 2024 – so what does that mean for treasurers? “There are a number of clearing systems which have already migrated to ISO 20022, and there is a timetable of additional clearing systems which will convert in the next year or so,” says Alex Wong, Head of Product Management for Corporates, GTS EMEA at Bank of America. He points out that one of the first mechanisms to adopt the messaging standard was SEPA – “and during that time, a lot of banks helped manage the changes that were required, and did the conversion in the background for clients. I anticipate banks will continue to do that.”

Nevertheless, he points out the companies that don’t take advantage of ISO 20022 won’t be in a position to realise the benefits associated with richer and more structured data. For example, when companies make a payment, they can use ISO 20022 to provide information which wasn’t supported by legacy systems. This data can then support more efficient reconciliation processes and payment models such as on-behalf-of payments. “But if clients aren’t ISO 20022 enabled, that information risks getting truncated or lost,” Wong notes.

Perfecting cash visibility and forecasting

Cash visibility and forecasting continue to present difficulties for treasurers everywhere. Unsurprisingly, the 2023 European Association of Corporate Treasurers (EACT) survey identified cash flow forecasting as the main priority for treasurers in the coming 12-24 months.

With the increased cost of borrowing, and the associated greater opportunity associated with short-term investment management, Steve Wiley, VP treasury solutions at FIS, says that treasury departments “are re-evaluating all things liquidity management related, including cash forecasting capabilities, investment and debt management strategies, and working capital management.”

Dessing points out that higher interest rates mean that the time value of money is now playing a bigger role than it has in previous years. “In this environment, parties delay payments in order to benefit from the yield on cash,” he says. As such, cash management is set to be a high priority for the company’s treasury team in the year ahead.

Where forecasting is concerned, Dessing says his team is leveraging an internal Wolters Kluwer product, CCH Tagetik, which provides high levels of cash visibility and insights into forecasts by the company’s business units. “This allows the treasury team to extract and centralise as much cash as quickly as possible and thereby optimise cash management,” he adds.

Royston Da Costa, Assistant Treasurer at Ferguson, predicts that in 2024 the treasury world could see some interesting breakthroughs in the area of cash forecasting. “We have got a cash flow forecasting process, but we’re not using a solution as yet because we are currently reviewing our internal processes,” he says. “A lot of corporates have the same challenge that we do, with disparate systems that don’t talk to each other.”

At some point, says Da Costa, treasurers need to implement technology that will get them closer to their forecasting goals. In 2024, he predicts that banks, corporates and fintechs will increasingly come together to solve the forecasting challenge. “The question is, when will corporates truly begin to engage and implement solutions that address this area?”

Harnessing technology

Increasingly, developments in technology are presenting new ways to tackle longstanding challenges. “For instance, many of our clients are in the process of migrating to S/4HANA, so they’re asking how they can leverage that technical upgrade and capability going forward,” says Meuli. “They’re also looking to complement what they have with best-of-breed applications for specific capabilities, such as reconciliation, cash forecasting, data visualisation and analysis.”

Treasury teams are also looking to automate processes using artificial intelligence. As Wiley points out, “2024 will be the first year that technology providers and banking partners begin to offer a multitude of AI, Machine Learning and Robotic Process Automation-related services.”

As such, he predicts that treasury adoption rates will increase significantly, with treasurers spending much of 2024 evaluating opportunities and implementing these new technologies.

Da Costa believes that AI will “without question” be one of the most important topics for treasury in 2024. “Up to about five months ago, I was in the camp that thinks AI is hype – I could see there was something that could be useful in the future, but I couldn’t quite see where it would add value for treasury,” he recalls. “And then I stumbled across Microsoft Copilot.”

With AI becoming increasingly democratised, Da Costa says there are numerous opportunities for treasurers to harness this technology – particularly for companies that haven’t implemented a treasury management system. “For example, with the payment approval process, you can actually use this Microsoft software to write the program – you don’t need to have any programming capability to help you automate that process.”

Meanwhile, treasurers will also be looking to unlock the potential of application programming interfaces (APIs), as Viktoria Hadarits, Assistant Treasurer of Lightsource bp, explains in The Corporate View.

Meeting ESG objectives

Finally, ESG continues to be an important topic, with 83% of respondents to the PwC 2023 Global Treasury Survey stating that they consider sustainability in their treasury decision making.

“ESG reporting is at the top of many corporates’ agendas, including at Wolters Kluwer,” says Dessing, noting that the company’s integrated risk management platform Enablon allows the firm to automate the collection of ESG data and embed ESG into strategic decision-making.

“Alongside reporting, it is important, in our case, to align the ESG KPIs in our syndicated loans with firm ESG commitments we have made externally, so as to align the organisation onto a set of targets,” Dessing adds. “Science Based Target Initiative (SBTI) targets are potentially a great example of a firm-wide commitment that sustainability-linked loan KPI’s can be based on.”

As such, the company submitted its targets to the SBTi in early 2023, with a plan to reduce absolute Scope 1 and 2 greenhouse gas (GHG) emissions by 50% and absolute Scope 3 GHG emissions by 30% by 2030, from a 2019 base year. “These are ambitious targets and we hope to obtain SBTi validation in the coming months,” Dessing adds.

As well as looking at its own ESG performance and setting targets accordingly, the treasury is also looking at its stakeholders. “We have created an internal framework based on publicly available data which we use to rank our banking partners’ ESG performance,” says Dessing. “At Wolters Kluwer we have a Supplier Code of Conduct that we ask our suppliers to commit to, and we might want to echo this as a treasury to our banking partners as well.”