Treasury Practice

Transforming treasury: going the extra mile

Published: Oct 2014

As treasurers become more involved in wider business activities, from enterprise risk management to board-level decision-making, regulation is challenging them to rethink the way they approach fundamental treasury tasks and relationships. Meanwhile, technology is enabling greater efficiencies, but also presenting a number of new threats. John Salter, Managing Director, Global Corporate and FI, Global Transaction Banking, Lloyds Bank, discusses five key themes for treasurers to keep firmly on their radar in the months ahead.

John Salter portrait

John Salter

Managing Director, Global Corporate and FI, Global Transaction Banking

John Salter is the Lloyds Bank Global Transaction Banking (GTB) Managing Director for Global Corporate and Financial Institution client sectors. Salter is responsible for all aspects of the GTB relationship across these key segments. Prior to this role Salter held a variety of senior positions at Lloyds Bank and other institutions, managing large international sales teams, relationship management, product management and network management. As a member of the GTB Executive Committee, he is part of the leadership team committed to establishing Lloyds Bank as the leading UK provider of transactional banking services.

Given that HR budgets remain constrained, treasurers must think on their feet to maximise the resources at hand – be that through implementing more cost-effective technology, new cash management structures, or simply by leveraging industry expertise.

Here we examine the key trends that are influencing the way treasurers extract hidden value from the business and deliver added-value to stakeholders.

Working capital philosophy

Despite improving economic conditions, bank regulation – not least Basel III – continues to put increased pressure on the cost and availability of bank finance. As such, ‘working capital management’ is becoming synonymous with ‘cost effective financing’.

In fact, cutting-edge treasury functions are no longer taking working capital for granted or labelling it as a ‘bank product’; instead they are looking to establish working capital optimisation strategies that underpin the business and support long-term growth. There are several common tools and methodologies that leading corporations are leveraging to achieve this goal, including centralisation. Centralisation can not only help to streamline operations, but by bringing working capital responsibilities under one roof, it can also help to improve internal alignment around working capital goals.

Companies are also now looking for smarter solutions to help them build sustainable working capital strategies that create value from existing assets. Solutions such as supplier finance, which offer key suppliers an earlier cash flow injection on better-than-normal credit terms while allowing the corporate buyer to reduce the risk of supplier failure, secure longer settlement periods, and gain an element of exclusivity over the key supplier, are growing in popularity. And with recent estimates from consultancy firm REL suggesting that approximately €762 billion remains tied up in excess working capital across Europe, the opportunity is surely too good to miss.

Regulatory challenges and opportunities

This year has seen a raft of regulatory challenges – and changes. Among the most significant for corporate treasurers was the introduction of derivative trade reporting obligations under EMIR on 12th February. For corporates that fall under EMIR’s scope, all derivative trades (except FX spot) must now be reported to a regulated trade repository (TR), including trades carried out internally. Many transaction banks are helping corporates with delegated reporting services, while vendors are bringing out new reporting tools for corporates that have chosen to connect directly to a TR. Seeking external help can therefore be a significant time-saver when it comes to reporting compliance.

The largest corporates will now need to prepare for EMIR’s mandatory clearing obligations, which are likely to take effect in late 2016 or early 2017. However, some trades entered in to before this date may have to be cleared from the date of implementation – known as ‘frontloading’. Corporates should also be aware of derivative market reform regulations in other jurisdictions, such as the Dodd-Frank Act in the US.

Regulation of the financial sector, such as Basel III, is also indirectly affecting companies through the changing availability and pricing of lending, credit, and trade finance, for example. This means that treasurers need to think carefully about the bank lines they currently have available to them, and how these might change. Open dialogue between treasurers and their banking partners can only assist in properly assessing the impact here – and many high profile treasurers are already doing this. For them, taking into account ‘wallet share’ and ensuring that the corporate/bank relationship adds value for both parties are vital ingredients in ensuring a positive outcome.

Adding to the regulatory complexity are initiatives such as the EU’s Bank Recovery and Resolution Directive (BRRD) which aims to deal with the threat of banks which are ‘too big to fail’. In the UK, structural reform under the guise of the UK Banking Bill or the Vickers Report, is proposing significant changes to the current banking model through the use of ring-fencing, designed to separate a bank’s retail operations from its institutional operations, in order to safeguard retail and SME clients. One of the main challenges for corporates here is that the derivatives offered by the ring-fenced bank (RFB) will be limited.

As these regulatory changes come into effect, corporates are encouraged to have open dialogue with their relationship bank(s) to discuss both the challenges and opportunities that they present.

Cash management efficiency

When it comes to cash management, the ultimate goal remains 100% visibility and control, while simultaneously managing risk and maintaining liquidity. Innovative industry solutions such as SAP’s financial services network (FSN) are allowing corporates to communicate with many banks though a single window, for example.

SWIFT is also changing the rules of the game. Having been successfully used by many large-name corporates to achieve improved cash visibility, it is now making its services more accessible to mid-tier corporates through its Alliance Lite2 offering.

Elsewhere, despite the hurdles the Single Euro Payments Area (SEPA) has presented, a number of companies are starting to leverage the structural changes enabled by SEPA (eg rationalisation of bank accounts) as a catalyst to improve cash management efficiency and visibility. That said, there is still much value to be derived from SEPA and the 1st August 2014 deadline did not mark the end of the migration process. Not only will corporates in non-euro countries have to comply with the SEPA Regulation by 31st October 2016, but many Eurozone companies can still take their SEPA projects further.

SEPA is also driving the use of a number of e-solutions within treasury, which again all add to the clarity of the overall cash picture. Virtual accounts, for example, can significantly improve processing efficiency and allow the real-time capture of transactions.

Tackling cybercrime

Recent research by internet security company McAfee estimates that cybercrime now costs the global economy £266 billion annually. As the guardians of corporate cash, that figure illustrates very clearly why treasurers must join the fight against cybercrime.

But cyber criminals are not necessarily motivated by profits alone. We are witnessing a growing trend towards cyber terrorism – where institutions and companies are being targeted by ‘hacktivists’ because of their business activities or ethics, not just their coffers or data vaults. What is more, given the constant evolution of technology, cybercrime is becoming increasingly sophisticated and there is no silver bullet.

Nevertheless, the treasurer has a duty of care to protect the company’s assets in the face of this evolving threat. To fulfil this duty, treasurers must think beyond their traditional perceptions of cybercrime. While payment fraud remains a significant concern, as does keeping track of the treasury department’s access to and storage of data, ensuring that IT can deploy appropriate solutions is also vital. This means dedicating budget to technology – not only to fund new software and systems, but also to allow for the company’s critical infrastructure to be tested through simulation, rather like the Waking Shark II exercise which saw the Bank of England co-ordinate a major simulated cyber-attack on the UK’s financial sector in November 2013.

Being a successful treasurer is about more than just hitting targets and making the numbers stack up; it’s about adding real value to the company and acting as a strategic business partner. The treasury function can support the growth and operational goals of the company by leveraging the strong banking relationships that it has nurtured.

Like the banks, corporates may also wish to consider seeking expert advice from consultants and technology leaders around cybercrime – as well as setting up business units tasked specifically with managing the company’s cyber defences. And although a great deal can be done to prevent cybercrime, having a plan in place to deal with a breach if one occurs will be extremely beneficial.

Treasury as a value creator

Being a successful treasurer is about more than just hitting targets and making the numbers stack up; it’s about adding real value to the company and acting as a strategic business partner. The treasury function can support the growth and operational goals of the company by leveraging the strong banking relationships that it has nurtured. This entails not only securing affordable access to funding, but also choosing a forward-looking bank that will deliver an efficient cash management infrastructure.

Assisting the company in retaining its competitive edge by assessing the latest treasury technology, or bank innovations, is another facet of the treasurer’s developing role in value creation. Similarly, using technology to analyse key metrics that paint a clear picture of the company’s health and ability to withstand adverse scenarios, can help treasurers to add value the board by turning what was previously seen as ‘data’ into genuine information.

Finally, communication skills are becoming a highly valuable attribute in the treasury function. In addition to board-level communication, there should be a constant flow of information, and a sharing of best practices between the treasury function and other internal departments such as legal and accounting, tax, procurement, sales, and credit control to help enable the company to achieve its full growth potential.

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