The evolving role of treasury amidst uncertainty
At the centre of the maelstrom of global risks, corporate treasurers are battening down the hatches whilst steering to calmer waters.
The seismic shocks of the pandemic have redefined the risk landscape, compelling treasury leaders to reassess their strategic outlook. Yet, as the world moves towards recovery, fresh uncertainties have emerged: inflation spiking in domestic markets, interest rate hikes that increase the cost of capital and more recently, counterparty risk has resurfaced in the financial sector.
In this complex environment, speaking at EuroFinance’s 23rd annual Global Treasury Americas Miami, treasurers at the sportswear giant, Under Armour, global travel aggregator, Bookings holding Inc. and the medical device company, Zimmer Biomet, shared their strategies for navigating these evolving challenges.
Recalibrating risks through the pandemic
As the business world evolves in the post-pandemic landscape, the approach towards risk management has undergone significant transformation. For Booking Holdings Inc., a leading provider of online travel and related services, the impact of the pandemic has called for a rethinking of its risk management strategy.
Doug Tropp, Senior vice president and treasurer at Booking Holdings Inc., shared how the pandemic was an unexpected “black swan” event that transformed their business from being cash rich to a scenario of potential zero revenue. Despite their financial conservatism, the pandemic pushed them to reevaluate their cash management strategies and improve cash forecasting.
Under Armour’s understanding of risk has been fundamentally reshaped by the pandemic, which has prompted a more holistic approach to assessing potential threats. Mack Makode, VP and treasurer of Under Armour, shed light on how the company’s risk management perspective has evolved during and post-pandemic.
Makode emphasised the company’s shift towards cash preservation and liquidity management as key areas of focus during the pandemic, underlining the importance of planning for the worst-case scenario, “When COVID hit, we initially withdrew funds from our revolver to cover any perceived short-term needs and then issued new convertible notes as additional long-term insurance since there was no visibility into the extent or tenure of what was to come.”
This experience has reshaped Under Armour’s treasury team’s risk management strategy, pushing the company to proactively identify and prepare for potential risks and disruptions in a rapidly changing global environment. Thus, for the treasury team, the pandemic experience has served as a watershed moment to reassess risk management as an integral part of the company’s overall business strategy.
Pradipto Bagchi, treasurer of Zimmer Biomet, provided an interesting perspective on how the pandemic affected the medical technology industry. With hospitals shutting down elective procedures, which included their primary products, hip and knee replacements, the company experienced a dramatic drop in revenues.
This journey has elevated risk management to a more critical role in Zimmer Biomet’s overall business strategy, with the company learning from the pandemic to enhance its ability to anticipate, prepare for, and respond to potential risks in the global business landscape.
The importance of cash forecasting has been underscored in unprecedented ways during the pandemic. The ability to predict cash flow with accuracy, especially during periods of high volatility and uncertainty, is vital for a company’s survival and long-term growth.
Makode explained the significance of cash flow and working capital management, highlighting, “We started doing a 13-week cash flow forecast, which became an important resource during the pandemic. So we knew what we could pay and what we couldn’t pay.” This shift in forecasting frequency allowed the treasury team to manage their resources more effectively during the crisis.
While the treasury team at Zimmer Biomet adapted its cash management strategies and placed significant emphasis on direct cash flow forecasting. As detailed by Bagchi, the treasury team instituted what it called the ‘cash management office’. This task force, primarily comprising finance functions from across the organisation, was assigned the responsibility of providing direct cash flow forecasts.
Bagchi further emphasised the significance of differentiating between cash in the bank and cash on paper. This distinction highlights the focus on actual liquidity rather than projected or indirect cash flow, a critical distinction during a crisis to ensure liquidity becomes paramount. Bagchi stated, “We actually put together a task force that was primarily a finance function across the organisation that was tasked with providing direct cash flow forecasts for their individual pieces that were then rolled up centrally.”
To aid this endeavour, the company leveraged the flexibility and adaptability of Excel. While there are other tools available, the treasury team at Zimmer Biomet found that Excel provides control over assumptions, and most importantly, works when it is critically needed. Bagchi commented on the preference, stating “Excel is beautiful. And I know there are tools, but Excel works when you really need it to work.”
Quality of forecast
However, a key challenge of any automated system is that, over time, the underlying assumptions can be forgotten, and the models begin to produce numbers that are difficult to interpret. To address this issue, the treasury team at Biomet Zimmer ensures that underlying assumptions are provided for each forecast. However, Bagchi told the audience that while Zimmer Biomet does have a consolidation tool, the treasury team prefers it not to be intelligent or make assumptions on their behalf. He simply wants it to perform aggregations of data.
Meanwhile, Makode, while agreeing on the importance of understanding the assumptions, argued for a more centralised tool. He stressed the importance of having a “sense check” or a litmus test to ensure a forecast makes sense. . He emphasised, “Our philosophy is that the system should be centralised, processes should be standard, and that people can be local.”
At Booking Holdings Inc.,Tropp noted that their operations are decentralised given the nature of their brands. While they have a Treasury Management System (TMS) in their biggest business, other areas rely on different processes and tools for cash management and FX. Tropp concluded, “You learn to live with it, but we’re slowly rolling out better systems and more integrated ERPs.”
From managing liquidity to adjusting cash forecasting, these insights reveal the multi-faceted nature of risk management and the crucial role of treasury operations in safeguarding a company’s financial health. These practices, honed during the trying times of the pandemic, are likely to continue influencing the strategies of corporate treasury operations in the foreseeable future.
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