Is treasury fit for the future? The circuit workout

Dec 8th 2015 |

Companies are a lot like people. They start slim, flexible and open to new ideas. Over time they grow bigger and evolve a mantle of preconceptions and accretions that impede change and smother innovation. That early agility is gone, even forgotten. Unless you’re careful, treasury can be the same too. So how can treasurers give themselves a fitness check? What are the key vital signs and how do yours compare? Be warned, there is no magic pill. It always comes down to the fundamentals of eating healthily and exercising more. By Leslie Holstrom.

1 - Are you doing the basics?
How many of us eat a good breakfast and go to the gym regularly? Good intentions don’t automatically lead to better actions and many treasuries have still not embraced the basics. Do you use spreadsheets as an integral part of any core treasury function? Do you believe that a treasury management system (TMS) is an unnecessary luxury? Do you believe in treasury decentralisation? Do you think global cash visibility is just a nice idea? Are derivatives just a way for banks to rip you off? If you answer ‘yes’ to any of these questions, then your treasury core probably needs a little more attention. Almost certainly you will need to work harder on the next exercises.

2 - When did you last do a treasury audit?
So much is changing that you should be willing to question every part of your existing structures. Is your notional cash pool uneconomic or soon to be unavailable because of new bank regulation? What about your other working capital and cash optimization structures? Does the increasing international ease in using payments or receivables on behalf of (POBO/ROBO) structures alter the usefulness of your in-house bank (IHB) or change the criteria for setting one up? What does the global push for tax harmonization and governments’ desire for tax structures to properly reflect business activities mean for your current treasury structures, staffing and locations? And do you understand the products and services available through new technology and the Cloud and how you may benefit – or not – from them?

3 - Is your head in the Cloud?
If not, perhaps it should be. Technology is a great enabler, but arguably it has become so complex and fast-changing that outsourcing is the only long-term option for all but the largest firms, not just in treasury but across the board. In treasury, the Cloud may represent the best way to combine data from legacy systems in the aggregated form modern centralization demands. It may also be the only way for treasuries with limited staff and resources to keep up with developments in mobile and electronic payments, satisfy customer demands for cutting edge interfaces and maintain data and process security. So have you gone the extra mile to evaluate the multiplicity of SaaS/Cloud solutions? More generally, are you up to speed with developments in treasury technology?

4 - Are you really on top of risk?
Risk management – and in particular FX risk management – often tops treasurers’ lists of priorities. And treasurers typically take a conservative view. They eschew options for forwards, sometimes reflecting a view that treasury excellence should be measured simply by how well exposures have been identified and whether the right overall process is in place. But today, with so much potential for gap risk, caused by technology, policy changes (for instance the Swiss franc revaluation) or geopolitics (including the situation in Greece), is a new, more adventurous approach needed? Have you rejected more sophisticated hedging instruments for business or ideological reasons?

5 - Are your payments centralized?
A 2015 survey by SunGard revealed the surprising fact that of organizations with revenues over $1 billion, only 20% follow standardized payment management workflows across all of their entities. While 89% operate across multiple geographies, only 29% use Swift. A quarter use more than 10 cash management banks and nearly one in four have more than 1,000 bank accounts. How do you measure up? Beyond these basics, are you up to speed on new, local payment-clearing services like the UK’s Faster Payments? Have you leveraged Single Euro Payments Area (SEPA) compliance to drive global standardization in your payments process? Have you looked at whether SEPA makes shared service centres (SSCs) and payment factories viable solutions for your company? And have you looked at virtual IBANs?

6 - Have you kept up with the receivables revolution?
Technology is finally solving the problems that have dogged attempts to replicate in receivables what has been achieved in straight-through-processing for payments. SEPA’s information granularity, and improvements in technology, are opportunities to move further towards automated receivables reconciliation and processing. Advanced payment history analysis now allows for truly proactive and adaptive receivables management. And both traditional and Cloud TMS solutions are available to suit a growing range of corporates. Where is your treasury on the curve?

7 - Are your shared service centres pulling their weight?
Fitness is about continuous reappraisal and improvement: the fitter you are, the more you can do with the same resources. SSCs are a good example. According to one study a fresh look at your shared service centre can bring efficiency gains of between 15% and 30%. Value can be unlocked through better automation, the inclusion of high-value processes and better key performance indicators (KPIs) and service level agreement (SLA) appraisal. So, is your SSC in the right location? Are there additional activities that can be executed within them – for example, a payment factory? Are staff and processes best in class?

8 - How hard are you working on working capital?
There are two basic routes to working capital efficiency. The lazy way is outsourcing the problem to suppliers, but the fittest companies strive for excellence within. They standardise and automate where others give up. They optimise the hard stuff, collections and the whole accounts receivable (AR) process. They act quickly when regulations change to allow new structures, like POBO/ROBO. And they go one step further – for example, not simply creating vendor financing programmes but also integrating the vendors’ invoicing into their own payments factory. How many different ways are you attacking the working capital issue?

9 - How’s your foresight?
The ideal treasury is not an accounting function primarily concerned with historical data, it’s real-time and forward looking. Forecasting is its bread and butter and forecasting starts with visibility since you can’t forecast what you can’t see. And visibility by definition requires aggregation – centralisation at least of data. This in turn, as is true in so much of modern treasury, raises the question: have you truly centralised all those processes and functions which can be? There are a few exceptions, but a modern, sophisticated treasury is a treasury that is centralised as much as regulation and local operating conditions allow. Second, in terms of forecasting and visibility, do you trust your start-of-day balances? Assuming they’re accurate, how good is your transaction pipeline data? How fast can you adapt forecast minimum/maximum balances to payments and receivables data and how good is that data? And are you continuously improving each link in the treasury chain to reduce ‘garbage in’ to the minimum?

10 - What are you doing about Basel III?
The full force of Basel III is, according to one consultant, “about to come crashing down onto the desks of corporate treasurers”. Even the fittest may struggle as regulation overturns much of the conventional wisdom about bank/treasury relationships. Basel III affects pricing and availability in core cash management, cash investment, risk management, core funding and local banking services. Because banks do not need to be in full compliance with all of Basel III until 2019 (depending on the target measure), it may seem as though there is plenty of time to formulate a response strategy. This is wrong. To ensure full compliance banks are already working to Basel III standards where they can. And, according to EuroFinance polling, treasurers across the globe are already seeing dramatic changes in the level of services available to them and in the price of those services (see article p8).
There are win-win scenarios, but first treasurers must be working to realign their business flows to banks just to make sure they don’t lose. So how hard are you working to restructure your treasury to ensure you remain a valuable relationship for your banks? If your banks exit a market or product, are your contingency plans in place?

11 - Are you serious about cyber security?
It’s not your problem, right? Cyber security, if it’s a problem at all, is an IT issue – it’s network passwords, it’s Windows XP, it’s about malware and anti-virus software? Not anymore (see article p42). Treasury initiates significant technology relationships with external systems vendors, banks and platforms such as Swift. In future, these relationships will become even more security critical as more of treasury (and IT itself) is outsourced to third-party Cloud providers. This means that treasurers must take responsibility for the so-called ‘attack surface’ that they create for cyber criminals in simply carrying out their day-to-day activities. They must understand the exposures they create, the probabilities of breach and the effects and costs of different breach events. The fittest treasuries recognise this – indeed a number of surveys put cyber risk at the top of both treasury and C-suite concerns for 2015. Are you one of them?

12 - Is your treasury truly strategic?
And finally, the big picture. It has become a given of treasury development that ‘strategic treasury’ is the way forward. That is, that as treasury becomes a centre of company-wide information and sophisticated, real-time analysis, it can move beyond its original functions to act as an adviser to OpCos and the board and as an overall controller or rule-giver of core business functions. In some companies this transformation is happening, while in others, it is hardly even a consideration. So do you believe that an aim of ‘strategic treasury’ is realistic or relevant to you? Is it worth the investment in time and resources? Is it better to focus on the individual components of treasury excellence which, if brought to best-practice levels, may in themselves give your treasury a strategic role?
If you have the right answers to these questions then you are well on your way to being fit for the future. More than likely they represent the kind of overload being experienced by most treasuries as technology moves on apace, resources remain limited and treasurers’ portfolios are enlarged by boards who want more for less. If so, take comfort from the fact that there are many others like you.

Want to know more?

EuroFinance’s 21st international treasury event in the Americas will bring leading experts to discuss the next steps for global growth and how you can take advantage.

Strategic International Treasury
May 11-13, 2016. Miami, USA