Treasury Practice

Treasurers get inventive

Published: Mar 2013

The treasury teams of multinational corporations globally continue to be under great scrutiny and pressure as boards and C-level executives grapple with market volatility and economic uncertainty. The ability to bring back value to shareholders despite the turbulence in the marketplace is top of mind for business leaders, notes Carina Ruiz, Partner and National Leader, Treasury and Commodity Risk Management at Deloitte & Touche. “As such, treasurers are under the gun to provide detailed analytics and perspectives on cash flow projections, repatriation strategies to support share buy-back and dividend programmes, and capital structure and funding options to sustain and fuel the business.”

The pressure is on and resources remain limited. Corporates are therefore looking inwards with a critical eye, determination and creativity in order to survive against the myriad challenges that continue to be presented to them.

Alternative thinking

Among the main hurdles that have – and will have – an impact on a corporate’s bottom line are the current monetary policies of the governments, according to Sigurd Dahrendorf, Vice President Corporate Treasury at Knorr-Bremse. “For example, the European Central Bank (ECB) is trying to fight against the financial crisis by printing money. This is necessary in the short term, but it could actually be dangerous long term – I think it has a hidden impact on the value of the currency,” he warns.

Although a Europe-based company, Dahrendorf ensures that Knorr Brense holds large portions of its cash in currencies other than euro in order to mitigate this potential depression. “Companies need to look at the cash they have on hand on a regular basis and ensure that it is well spread between a number of different currencies, ideally those they are generating cash flows from.”

Stéphane Aubin, Treasury Manager at the European Broadcasting Union (EBU), also cites issues of information – and gaining access to information – as playing a large part in the current global financial difficulties. He foresees this being a challenge for quite some time. “There are numerous challenges around obtaining information, either externally or internally, therefore treasurers need a better source from which to glean an accurate feed.”

As such, Aubin asserts that the solution is to access and compile this data both internally and externally – and on an immediate, real-time basis. “From a treasury perspective, the department always needs to have a transparent, accurate view of company cash and must shorten the time it takes to get a consolidation overview. What was manually done on a daily basis may have been acceptable a few years ago but now needs to be automated where possible.”

While many regional treasuries are still prioritising debt management as available funds are considerably stretched, Bruno Lawaree, Senior Treasury Manager EMEA at Eaton Corporation, reports that there are also a significant amount of companies that are placing their main focus on analysing existing treasury operations and seeking best practice in these processes. Some of these activities include “much more of an emphasis on pooling cash and building strong processes to manage credit risk on our investments. On the foreign exchange (FX) side, treasurers are looking to build robust methodology for the timely assessment of exposures and establish effective consolidation methods, in order to minimise the volume of errors in external trades.”

Centres of excellence

Before the economic downturn several years ago, most treasury organisations were fighting a losing battle when it came to requesting funds from their company Board in order to improve operations through automation and organisational changes, according to Ruiz. “Treasury was purely seen as a cost centre and would typically be subject to cost reduction exercises related to outsourcing activities to shared service centres (SSCs) or downsizing.”

When the financial crisis hit, however, the importance of the role of the treasurer became glaringly apparent and it was realised that the lack of investment in treasury departments left most companies completely unprepared to handle the series of drastic market events that would follow. In this context, the evolution of treasury organisations has been measured, says Ruiz. “The trend has been for treasury groups to first focus on automating manual processes through treasury technology solutions to free up resources. Once completed, they typically turn to moving up the treasury operating maturity model and seek to establish centres of excellence in FX, liquidity management, banking and risk management – that is, components of in-house banks.”

Ruiz adds that a more sophisticated and integrated ERP solution needs to be in place before all aspects of an in-house bank can be implemented, including global liquidity pools, a payment factory and a collections factory. But working on integrating and improving aggregation of all sources (TMS, ERP and non-financial data) is close to the heart of the innovative modern treasurer, says Aubin, who is currently placing a lot of energy into having in-house systems integrated in an efficient manner. “We need to integrate the data from these sources in such a way that we can extrapolate an accurate forecast. This is again where we need near real-time information.”

The EBU is now working on the implementation of the SWIFT network to allow better access to banks for its subsidiaries, according to Aubin. But regardless of what each company has achieved thus far, the drive to constantly improve processes, systems and infrastructure is clearly apparent across the landscape, borne from a need to survive and adapt in a difficult economic and competitive era. In this respect, Dahrendorf sees the Single Euro Payments Area (SEPA) as a very reasonable and welcome development because it makes the payment exchange in Europe much easier, more convenient and perhaps most importantly, cheaper for companies. “Our own company has almost finished our approach to this – we are prepared and essentially SEPA-ready. But what we are now looking at is what others should also address – the fact that there may be establishments outside the SEPA zone, under our company remit, which are also transacting in euros.”

“If they are handling in euros, they have to fulfil the same requirements as any company in the SEPA zone. The majority of companies are only looking at the subsidiaries that are located within the SEPA zone but if you have a company in China that deals a reasonable part of its business in euro, then they have to ensure that payments still reach the beneficiary effectively after the introduction of SEPA,” he warns.

Strengthening the supply chain

In an effort to optimise internal processes, treasurers are also acutely aware of external influences that must be appropriately addressed and managed. For many companies, the biggest sustainability risks they face are embedded in the supply chain. Tied to this process are various treasury-specific metrics – for example, reduction in working capital and reduction in cost of funds – as well as broader finance goals, such as reduction in the cash conversion cycle and improvement of accounts payable (AP) and accounts receivable (AR) terms, inventory and cyclical cash flow.

Ruiz recognises that maximising working capital is not exactly a new concept but believes that the function has grown and improved. “While the method itself may not be novel, I find that CFOs are trending towards giving treasurers greater responsibility for governance over working capital in general. In response, treasurers are seeking to utilise their own cash flow forecasting process and marry this as much as possible with budget and forecasting models to be able to provide independent views to the CFO on opportunities to improve and reduce working capital overall.”

Indeed, supply chain finance (SCF) is an area in which Knorr-Bremse as a company has focused on for almost six years. Dahrendorf and his team, in partnership with Deutsche Bank in 2008, developed one of the very first finance supply chain (FSC) programmes, an initiative that merited an Adam Smith Award in 2009. This is still such a relevant theme, especially in terms of liquidity, says Dahrendorf. “If you look at the fact that many companies have been newly assessed in terms of their ratings by the banks and as a result are sometimes rated worse than before, their credit facilities may be negatively affected. If that happens with supply chain finance, they may get the opportunity to turn to customers such as ourselves to improve their liquidity by participating in a relevant programme which we can offer them. Since they are practically selling AR to the bank, we are actually lending our rating to these suppliers.

“Some companies that were extremely reluctant to take part in a supply chain programme initially have suddenly become interested. They realise that this finance structure is basically the same as factoring. The crucial difference to factoring, however, is that some of the cost/risk components of a normal factoring programme are excluded and that makes it very attractive for companies. The extension of SCF solutions is a very important tool – not only now but also for the coming years – to stabilise especially smaller suppliers and optimise our own working capital structure.”

Lawaree too acknowledges a change in tactics across the industry in recent times, a growing understanding that working with treasury at an early stage and being upfront in order to optimise supply chain structures can be hugely beneficial for all concerned. “We have seen over the past years, both in the structure of treasury department and also in the interactions with external operations an evolution, a move towards a much more dynamic and proactive approach in working capital management processes.”

Innovation meets technology

When the treasury function was highlighted as having such a central role to play in the survival and the development of the corporate, the technology providers and banks launched a tsunami of product releases, solutions that would enable the corporate treasurer to do their job better – and more easily.

Companies of all sizes are either implementing or are looking to implement some form of treasury technology solution to automate tactical treasury processes, according to Ruiz. “Whereas before, companies under $5 billion in revenues would usually rely on manual processes and a series of banking platforms to operate treasury day-to-day, web-enabled cash management-focused treasury workstation solutions have flourished in this space to offer cost-effective and relatively more easily implementable solutions.”

A rapidly advancing industry, Lawaree says that the choice of available products is a welcome one. “Everything that can help treasury to increase automation and controls is appreciated. New regulations plus the need to absorb more and more data is driving our strategy and projects.”

Eaton Corporation is also looking at options for an in-house system that will incorporate cloud services as it is an area, says Lawaree, which has seen mass adoption – and created great benefits – across the corporate system landscape. Aubin, for instance, uses a TMS in his treasury which is cloud-based and cites many advantages of the platform, not least the fact that his team do not have to rely on IT support. However, he does add: “the bad side is that typically for customisation and integration with other systems, you have to somehow rely on the existing features or it means additional costs. While we enjoy using the application for TMS and cash management and so on, it does have its limitations.”

Nonetheless, ultimately the trend is to essentially tap into creativity and find very innovative solutions in order to make sure that the corporate is always well financed and has enough access to cash, according to Dahrendorf, concluding: “there is no way that one size fits all. Every treasurer has to adjust; with the tool box that is available, they must find a solution that is appropriate for their company.”

The regulation wall

Corporates, too, have boundaries – perhaps not to their innovation or creativity – but there are some aspects of the current environment that treasurers may not be able to tackle themselves. The regulatory backlash – that continues to rage on – from the economic slump is one such area. Many market participants believe that a large portion of these rules and guidelines were made in haste and used as a ‘comfort blanket’ to assuage fears of double (or triple) dip with no real consideration for the damage it could have on already suffering corporates.

This is a challenge for medium-sized companies, according to Dahrendorf. “In Germany, for example, are many mid cap companies that are generally not very well equipped with risk management and IT systems to administer their FX deals and so on. But they are also required to do the same thing as the larger corporates if they go beyond the thresholds and for them this is really a challenge.”

Dahrendorf gives us the example of the introduction of European Market Infrastructure Regulation (EMIR) to highlight his point. On 4th July 2012, the regulation on over-the-counter (OTC) derivatives, central counterparties and trade repositories was adopted and it entered into force on 16th August 2012. According to the European Commission, the aim of this legislation is “to ensure that all European derivative transactions will be reported to trade repositories and be accessible to supervisory authorities, including the European Securities and Markets Authority (ESMA), to give policymakers and supervisors a clear overview of what is going on in the markets.”

Dahrendorf accepts that that the fundamental concept of the legislation is relevant enough but cannot fathom why the regulators have decided to extend that small to medium-sized producing companies. “The administrative burden is in no reasonable relation to the risks involved. For banks, it is an acceptable request as it is part of their business model to speculate FX deals; but mid-cap companies, where FX business is just for hedging in order to keep the company cash free from negative currency impacts, are suffering.”

Corporates are not capable of managing this, according to Dahrendorf. They have to implement bigger projects to fulfil the requirements. Also larger companies, such as Knorr-Bremse, have decided to implement projects to deal with these new regulations and facilitate their implementation into their daily business. “Essentially we need the help of consultants for this, as we feel that this is too sophisticated and too complicated with too many traps along the way.”

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