Treasury Practice

A blank canvas

Published: Apr 2013

Given the opportunity, not every treasurer would jump at the chance to set up a treasury from scratch. It requires different abilities than those in the day-to-day treasury skillset – including project management skills which the average treasurer doesn’t necessarily have. In addition, it usually involves much smaller companies than most treasurers would be accustomed to, admittedly ones that are growing either organically or through M&A activity, or private equity/venture capitalist carve outs.

However, being involved in a greenfield project has many upsides. A treasurer can be seen to be ‘earning their stripes’ in the profession, effectively proving their mettle. A successful job proves that they have the ability to manage a complex project, have a thorough knowledge of treasury issues and can perform well under stress. Plus a greenfield site allows them to unleash their creativity and sculpt a department to their own specifications. That in itself may pique a treasurer’s interest.

For those that take the plunge, it can be a career-defining moment – although not necessarily a career-enhancer, according to Mark Adamson, Owner, Mark JD Adamson Ltd. He believes that it is easy to get pigeon-holed into either a “run-and-maintain” treasurer or a “get-it-done” project manager, and over time it becomes more difficult to cross back over to the other side.

But for Bas Rebel, Senior Director, Corporate Treasury Solutions, PricewaterhouseCoopers, building the European treasury centre from scratch for Perkin Elmer, a US multinational technology corporation, shaped his career and contributed to his professional success. “I think it is a career-defining project for a treasurer, especially today when treasury is at the crossroads of either remaining a tactical contributor or becoming a strategic value driver.”

Ever since the crisis in 2008, the CFO has prioritised cash visibility, getting a grip on cash flow and finding alternatives for bank funding – all of which are in the treasurer’s domain. “The new treasury should be a custodian for cash and risk, and to some extent compliance,” he says. “The treasurer who contributes to these areas makes a strategic contribution to the company. This brings them into working capital management and financing. They also have to define how to work with core businesses to make this happen. If you do it right, then the world is your oyster.”

“It is a career-defining project for a treasurer, especially today when treasury is at the crossroads of either remaining a tactical contributor or becoming a strategic value driver.”

Bas Rebel, Senior Director, Corporate Treasury Solutions, PricewaterhouseCoopers

First steps

It is hard to pinpoint the first step to take in building a treasury. Adamson’s advice is to get to the bottom as to the reason a new treasury is being set up. “This is not an insignificant event, as treasurers are senior individuals in organisations and do not come cheap. Hence, there must have been a trigger event – good or bad. I think that the first thing that the new treasurer has got to understand is what the trigger event was, which will tell reams about the new landscape and the tone of the organisation. I am not sure that this would necessarily come out in an interview process if they hired externally.”

He lists a few negative scenarios for implementing a new treasury, such as investors wanting more influence in the operational executive side of running the business as a result of a control incident, in addition to the more positive scenarios listed above. A new treasurer will need to dig beneath the surface to understand what has instigated their appointment.

This groundwork will also serve to understand what the culture of the treasury will be. Previously, the discussion was whether treasury was a cost or profit centre; however it is less of a black and white discussion today and must be done in collaboration with the directors and executives of the business.

The next step is to understand treasury’s remit and scope of activities. For example, at the larger company end of the scale, a treasurer might be responsible for investor relations, insurance and pension funds, as well as day-to-day treasury activities such as refinancing and managing currency exposures. In smaller organisations, treasury might only be responsible for cash management. However, some companies may include accounts receivable (AR), accounts payable (AP) and credit control – treasury can fill many gaps in a company’s requirements, as most treasurers know from experience.

As part of developing the target operating model and working out treasury’s remit, according to Karlien Porre, Treasury Advisory, Deloitte UK, the treasurer will also need to answer questions dealing with the size of the treasury team, the quality and level of people required, IT infrastructure, controls, etc. This is the time to ascertain whether the company has the in-house skills to run the project itself, or whether it needs to look for external support.

Developing treasury policy is the next hurdle. The treasury policy is a reflection of the company’s risk appetite and business objectives – for example is it looking to grow quickly or conserve existing assets? It is important to engage with the CFO, finance director and also tax and legal advisors, particularly if looking at jurisdictions outside of the home country. Tax and legal considerations are big drivers when deciding how to structure the treasury department, for example where to put staff and keep cash, and which entities to use for certain functions.

This should not prove to be too difficult, says Paul Stheeman, an Independent Treasury Consultant. “With a little bit of experience in using or writing policies, you can use the framework for what you are doing now,” he explains. He stresses the importance of being fully aware of the company’s overall risk appetite before beginning to draw up the policy.

A critical thing to keep in the back of your mind when creating treasury from scratch, according to PwC’s Rebel, is the question: what do you want to be when you grow up? “It is important to think in terms of where your company wants to be in five or six years’ time and plot what you need to do to get there. Don’t think too much about what your capabilities are today because you first have to align your strategic goals to the goals of the company. Only when you have defined the strategic targets/contribution of treasury, can you start plotting what type of expertise you need to have, what your policies have to entail and what functionality is needed to make that happen. It is a top-down approach: strategy, organisation, policies and then systems.”

Once treasury has defined a roadmap, it can then start discussing with management, subsidiaries and banks as to what they can do to help it reach its end goal. “Using this method you can pose open questions, rather than asking closed questions or squeezing out an extra penny. By describing what you are trying to accomplish, you will receive input from the other side of the table, which helps to identify value-driving opportunities that you may not have thought about before. In the end, you will build better relationships,” says Rebel.

“The perils of implementing a new treasury is similar to other large projects, the first being scope creep.”

Karlien Porre, Treasury Advisory, Deloitte UK

Avoiding implementation pitfalls

The perils of implementing a new treasury is similar to other large projects, according to Deloitte’s Porre. The first is scope creep. “Although you start out with an initial plan outlining what treasury should cover, as time goes on your scope – whether operationally or systemically – gets expanded and delays or derails the project. Therefore, sticking to your defined scope is quite important.” Commitment of funding and resources, both quality and quantity, is an area which often causes delays in projects. Another pitfall is changes in the leadership or steering committee of senior management driving the project. The new management may not agree with past decisions, leading to a review which could change or delay a project.

Drilling down into more treasury-specific hurdles, Adamson argues that impatience can be an issue. “Directors have made a decision at a Board meeting that the company needs a treasurer, so they have gone through an extensive – and expensive – job search and recruitment process, and hired a treasurer. Monday morning when they turn up, the treasurer is at their desk and the directors relax, thinking that the job is done. The reality is that it has only just started. And, perhaps, it is worse than they think because the treasurer, with their specific skills, is going to perhaps find out more than the directors actually knew before.”

Through dialogue and relationship building, the treasurer plays an important role in ensuring other executives in the company understand that the implementation of a treasury or treasury solution is not an overnight activity. “They need to understand that they are starting a journey, there will probably be some mistakes along the way and it will take some time before the treasury department is in the desired state that the business needs it to be in. It depends on size of company but from walking in on a Monday morning to feeling that something controlled, secure and rational is in place is a two-year timeline,” says Adamson.

Brian Welch, Managing Director, UserCare Treasury Consultancy Limited, agrees that directors and the finance department might have heightened expectations as to what treasury can deliver immediately, but he adds that they also may not have any idea as to what to expect from treasury. Either way, there is usually a lot of education to be done from the outset.

Stheeman’s advice at this point is to be prepared for the unexpected. “You will often find that you are being caught wrong-footed, for example a bank may suddenly question credit lines; or you may have to settle an FX transaction when you don’t have sufficient records or settlement instructions; or someone signs off a payment without sufficient authority. At the beginning, you just don’t have the routine in place that you will have after a few months and therefore the unexpected is bound to hit you at some stage.”

Implementing best practice

Despite each company – and the countries they operate in – exhibiting unique features, there is a far greater degree of best practice in treasury than everyone tends to believe, according to Rebel of PwC. But a treasurer must define best practice upfront in order to be able to aim for it. The extent to which best practice will be achieved is another thing. That is also dependent on external constraints (such as legislation, regulation, etc) as well as internal constraints (such as resources and budget).

This comes back to Rebel’s point about creating a roadmap. “Try to be bold and don’t assume that things are impossible. Once you have decided ‘what you want to be’, then you have a benchmark for a gap analysis. Any compromise will be transparent and documented. In addition, when you get into the territory where you have to make compromises, you come up with the right reasons why you want to make those compromises and you can explain it. But if you pick a point on the horizon with implicit assumptions about what is possible and what isn’t, then you will be challenged as to whether you have thought about this or that.”

By creating a roadmap treasurers also have a greater chance of making sure that the goal remains in place even when it isn’t immediately achieved. “It comes back to commitment to the initial scope and model. You shouldn’t stop striving for best practice when you have something up and running in six months to a years’ time, but should continue with the plan and improvements,” says Deloitte’s Porre.

It is so much easier to get a poor treasury function set up on the basis that it will be sorted out later, but Adamson believes that it is a false start. However, it takes a certain type of person to hold out for best practice. “It takes mental strength and stamina to implement best practice without compromising,” he says. “Maybe best practice implementation is painful, but if we want to do it we should do it now and not set up a compromise solution that is revisited and reworked in the weeks and months to come. It is possible to do but it takes a certain strength to do it – which doesn’t necessarily fit in with regular day-to-day treasury activities.”

Stheeman is more pragmatic. “In treasury you should have a vision about how the future treasury function will operate, which will include having appropriate policies in place and staff, but at the outset you are not likely to have either. You will have to move forward gradually. You should keep best practice as a goal but not make unrealistic expectations or shortcuts to a first-in-class treasury operation,” he explains.

Measuring success

Performance measurement is always difficult in treasury, according to Welch. Gone are the days of volatile interest rates when treasurers could benchmark their return on surplus cash. “Although we do try to identify benchmarks, it is one of the most difficult things in treasury, mainly because objectives can differ depending on the company,” he explains. For example, companies may have different ways of measuring foreign exchange (FX) achievement in terms of the impact of FX and foreign currency on their results.

When setting up a new treasury function, the action plan should include completion deadlines and relevant comments to each particular item, so that it is possible to regularly track progress. For example, a company may decide it wants to incorporate x% of its accounts into a cash management structure, then at the end of the year it can see whether it has captured x% of cash in the treasury centre, thereby minimising interest cost and optimising interest earned.

But Adamson believes that looking at just financial metrics jumps over an important dimension. “You should measure and record control incidents – or ‘near’ control incidents – which every business and treasury department has to differing degrees. This should be done on a ‘no blame’ basis, with lessons learnt, understood and disseminated. Therefore one measure of success is whether the number of control incidents has stabilised or gone down.”

The third important area is staffing engagement, which many treasurers ignore. “If you have come in as a new treasurer and your staff is turning over every six months, then that is a sure indication that it isn’t a nice place to work. You will have absolute chaos on your hands if you are constantly re-recruiting and retraining. This softer measure around staff turnover, training, knowledge and contentment is something that you need to think about. In my experience, with a good team of people you can achieve great things,” says Adamson.

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