Treasury Practice

Getting off the island

Published: May 2019


Treasury can – and arguably must – partner with other functions for the greater good of the organisation. Doing so can bring distinct advantages for treasury too. We explore the healing possibilities of the ‘holistic treasury’.

The idea that any business function can operate in isolation effectively and efficiently is dead. It’s not necessarily anyone’s fault that certain functions don’t talk; historical and habitual processes, serial mergers, company culture, management attitude, the overly technical nature of roles such as treasury, lack of proactivity within each function – have all played their part. However, in today’s volatile markets, it would be hard to question the value an organisation could obtain by having strong connections between its functions.

Digitisation is helping to blur the boundaries, and treasury is becoming a key strategic enabler, notes Bruce Meuli of the global treasury advisory team at Bank of America Merrill Lynch (BofAML). With many corporates considering omni-channel offerings across multiple geographies for customers, he explains that with treasury’s enterprise-level involvement, in terms of new payments requirements alone, it ensures the customer digital experience across the globe is enhanced – not hindered – by the payments process.

Indeed, keeping treasury out of the loop is a risk. If a business has an online returns policy upon which it wishes to build its reputation but, because treasury was not consulted, its reimbursements cannot be made in the manner in which the customer desires, the customer experience is diminished and the company strategy fails. “Treasury is now very much an integral part of the chain,” states Meuli. “When it doesn’t step up, the effects become obvious.”

Only with an understanding of capital strategy can the business units plan growth within a financial context, says Jonathon Traer-Clark, Head of Advisory for GTS, Bank of America Merrill Lynch. Similarly, if treasury is aware of activities around M&A, R&D or capex, for example, in its role as capital aggregation and distribution agent (see diagram), it has both the context in which its performance will be measured, and the opportunity to challenge and consult on the means by which it will execute both of those activities. A connected treasury, he notes, “enables a more relevant treasury that can be aligned to the overall objectives of the business and its stakeholders”.

Of course, as treasurers prepare to meet the overarching needs of the organisation, it’s tempting to think that the ‘solution’ exists solely in technology. Certainly it has a vital role to play, says Meuli. APIs are full of promise for data visibility and real-time decision-making, and big data and analytics mean collecting, processing and presenting enterprise level data, drillable to transactional level, and tailored to an individual process or function’s needs, is possible.

However, technology aside, there is also considerable benefit in treasury as a function becoming more open and communicative with key stakeholders, and vice versa.

Points of focus

Every business is subject to certain external and internal forces, notes Bruce Lynn, Managing Partner, The Financial Executives Consulting Group. Derived from these are three main intersecting elements – profitability, liquidity and risk – where he believes treasury should be playing a stronger defining, forecasting and managing role.

Lynn cites a 2017 AFP survey that posed a question about treasury maturity: although approximately 80% of all respondents claimed it should be ‘strategic’, only about 16% at the largest companies thought they were actually strategic in their outlook. Among the smaller companies (under US$1bn sales) only 9% thought their treasury functions were strategic.

Clearly imbued with aspiration, the majority were nonetheless effectively admitting to a more ‘tactical’ reality, predominantly engaging in the transactional. In essence, comments Lynn, treasury is often marked by “too much processing and not enough planning”.

With investors typically focused on the P&L, he notes too that, at least from a strategic business perspective, liquidity and risk are still seen as “relatively unimportant”. Of course, the P&L only retains its importance until company liabilities exceed assets, then balance sheet scrutiny takes precedence. By then it may be too late. The notion that “the wrong kind of profitability” is too often the focus, drives to the fore the view that “what gets measured, gets managed”.

A company intent on managing success typically talks in terms of market share, sales growth, EBITDA, EPS and so on. But, says Lynn, these are all P&L measures. What’s needed is for treasury to work with each of the company’s businesses to deliver a set of metrics that link profitability, liquidity and risk. Without these “success metrics”, he believes that a business is not necessarily looking in the right direction, relegating treasury to remain a slave to the short term not the strategic, and the business may find out too late that its P&L is not what it thinks it is. As he comments: “It means you’re too busy counting trees to notice the health of the forest.”

But linking profitability, liquidity and risk is not a radical rethink. Credit ratings agencies usually study these numbers, especially when assessing businesses that are highly leveraged or in volatile industries. And for good reason, notes Lynn: “A well-known global corporate missing a profitability goal may disappoint its investors, but running out of cash will kill any company.”

Whilst ratios such as DSO, DPO, DIO and the cash-conversion cycle offer sound guidance, for Lynn, free cash flow (typically the sum of operating cash flow minus capex minus dividends) is the most significant indicator of company’s health. Even amongst key metrics such as debt-to-equity and financial leverage, the concept of free cash flow should stand proud.

An underperforming company can renegotiate debt when it comes due, but Lynn likens this to “kicking the can down the road”. Debt renegotiation is important, but he argues that the fundamentals need to be solid for longevity. “At the end of the day, if the cash is not there, all the accrual accounting in the world will not help.”

Mindful of his view that “perfectly accounting for your foreign exchange losses should not be a goal”, treasury evidently has a vital role in securing the company’s future. Doing so requires it to get off the island.

Reaching out

From the outset, the company needs a business-level agreement on how much liquidity is enough, and how much risk is too much. Treasury then has to reach out to key financial stakeholders. Few treasuries are exactly the same so there is no ‘one-size-fits-all’ target audience for enlightenment by treasury.

Close connection with the CFO affords treasury a timely view of major events such as M&As, where its approach to funding needs to be timed to perfection. In large corporates, Tax and Legal are natural partners for treasury too. In defining operating strategy (Tax will define attitude and appetite, and Legal may, for example, construct the framework around which the business and its holding companies operate) there will be financial flows or fiscal activities which treasury facilitates.

But for treasurers to access, report and advise on key liquidity and risk metrics, it is vital to form good working relationships with the operational colleagues too. After all, operating cash flow is commonly the largest source of internal cash flow.

From his own observations, Traer-Clark notes sales departments increasingly seek treasury input on overseas activities in terms of FX, local funding and the cash flow consequences of new distributor relationships. Meuli too notes that treasurers are helping out at the other end, advising on supply chain finance and even purchase card RFPs.

The difficulty is that treasury rarely controls any of these areas (some treasurers may have lost certain activities to shared services as centralisation plans are enacted). Where facets such as trading terms and credit control are out of remit, the primary link between treasury and every other function – the cash flow forecast – is often weak.

With operating cash flows primarily under the control of the operating units, incentivising good cash flow forecasting at the business level is a great starting point, says Lynn. However, he acknowledges it has to go deeper. Perhaps an ‘almost ideal’ position is the holistic treasury, seen in the diagram.

The flow is missing an obvious feedback mechanism, where the functions communicate one to the other on an ongoing basis. This aspect, says Traer-Clark, is essential. “You can’t provide good advice if you can’t understand the context within which you operate.”

If a targeted growth strategy (such as producing more products or expanding into new markets) is envisioned, it must align with operational performance, and the appropriate deployment of capital (an efficiency ratio for cost of sales, R&D, depreciation, AR/AP processes and so on), he explains. Although diagram one defines the connectivity of the capital strategy, it is vital that “all functions help steer the conversation regarding how that growth is achieved”.

It may be that Legal advises on the best overseas structure, Tax on the appropriate structure, AR the most appropriate collections process, and treasury funding and FX risk. As long as there is a unifying language and understanding of growth, and operating and capital efficiencies, Traer-Clark considers it possible not only to deliver a “whole company opportunity” but, by breaking down internal silos, also empower treasury – or indeed any other function – to start the holistic conversation.

The strategic treasurer

Source: Bank of America Merrill Lynch


As such, notes Meuli, the evolution of what it is to be a treasurer can be seen in action, as organisational structures move further from their functional approaches towards more team-based and cross-functional projects. Effective communication is essential.

Treasury can be highly technical and this is precisely why treasurers should make the first move, says Dino Nicolaides, MD, Head of Treasury Advisory UK & Ireland, Redbridge. “The moment other functions begin to understand what treasury does is the moment they understand the importance of treasury and why it should be plugged into the rest of the business.”

Notwithstanding difficulties with company culture and the willingness of the individual to seek change (and in today’s ‘more with less’ environment, even the capacity to do so), treasurers should aim to lead the enlightenment. As Traer-Clark comments, “there can be no progress without first asking”. It goes almost without saying that explanations of the treasury perspective – and its meaning – must be clear and concise for the uninitiated.

Nicolaides advises that before starting a conversation, each function must identify their own responsibilities and map them to the task in hand and duties of corresponding stakeholders. The next step is to reach out to each function and begin explaining and educating, the complexity of treasury in particular demanding absolute clarity.

Establishing relevant communication channels is also necessary. This could simply take the form of regular or ad hoc meetings to discuss strategic decisions. “However it is achieved, it is very important to establish communication channels that enable co-ordination throughout the group,” stresses Nicolaides.

It is a mistake to stop here though, he warns. “It should be an evolving process. Participants need to understand that they are operating in a dynamic economic environment,” he continues. “Successful businesses constantly change to keep pace with the markets. Where treasury or other functions might take on or divest responsibilities, a regular review of the activities of participants ensures everyone has access to what they need.”

Start talking

The manner in which treasury reaches out to other functions depends on the culture and people of the organisation, notes Nicolaides. However, from his observations, a senior treasurer making the effort to travel to and spend time with relevant outposts, intent on understanding their views and issues, can build much closer working relationships. “Putting a face to a name always makes it much easier to communicate; it creates a new dynamic,” he notes. “But more than that, it allows treasury to explain what it can do for those units, and builds upon the idea of partnership.”

Meetings of this kind also present opportunities to clarify treasury policies and to explain how and why treasury needs the help of the different functions. “Successfully explaining that this is not just for the good of the organisation but also to their own advantage is a way of achieving buy-in without them feeling imposed upon,” Nicolaides believes. The process works in reverse too, with other functions able to explain their requirements of treasury.

An effective top-down approach, enabling across-the-board co-ordination between departments within the organisation, that Nicolaides also encourages is to mandate the attendance at special training sessions by all middle- to top-management. Each session, he explains, should cover the work of, and be led by, one function at a time. At the end of each discovery session, the different department representatives begin identifying how communication channels can be established with the session’s leading function, exploring how each will benefit from closer connection.

“From a treasury perspective, it can present a challenge when trying to explain the role to the other functions in non-technical language,” says Nicolaides. “But from my experience, at the end of the sessions, all those involved have a much clearer understanding of what treasury does, why it exists, how treasury can help their function, and in what ways they should communicate certain information to treasury.”

Co-operation rules

In the last decade, treasury has perhaps not had the attention it deserves. Market forces have been such that money was cheap so the business didn’t worry about it. That’s changing. With a number of internal and external factors demanding attention, treasury has to have answers if it is to maintain its rising status as a strategic player.

Creating a holistic approach to treasury should see it operate in the most efficient and cost-effective way. But, importantly, it also means management understands the role of treasury and the benefits it brings to the whole organisation. Of course, ultimately, all functions must get off their island because only that way can significant decisions be made on a fully informed basis.

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