This article is written by Kyriba
While corporations have enjoyed an unprecedented financial boom for years, the recent volatility in global markets is an indicator of changing times that could bring sharply rising interest rates and the end of cheap money. The recent demise of Silicon Valley Bank is a wake-up call to the purpose of capital and liquidity requirements and the importance of strategic treasury management.
In addition to macroeconomic developments, there are other significant changes afoot. Technology is transforming the way we live and work, with ChatGPT passing 100 million users in just two months and becoming a social media phenomenon.
To gain maximum agility in this complex environment, CFOs need to transform their finance operations. One of the best places to embark on that transformation is in the area of Treasury Management, which delivers a low-risk, high-yield value proposition for driving automation, improving working capital, and mitigating risk.
Strengthening Treasury’s Role as a Business Enabler
“At the highest level,” explains Douglas Bettinger, executive vice president and chief financial officer of Lam Research, “treasury’s role is to optimize cash generation in a way that maximizes the value of the company.” In a large enterprise, executive leadership thinks a great deal about the balance sheet, while line-of-business managers focus more on profit and loss (P&L). “I plug my treasury people into areas of the business that need more attention on cash generation.” In this way, treasury can sensibly use the balance sheet in ways that enable new, profitable business activity.
There are many ways Bettinger’s treasury team contributes value to the company beyond routine block-and-tackle treasury functions:
As a global enterprise, it is important to hedge against currency fluctuations. This not only helps deliver on P&L but also delivers the cash flow that must come from different parts of the business. “We hedge different balance sheet exposures and revenue streams in different currencies,” Bettinger says. “Treasury is in a unique position to manage that.”
Nobody else in the company focuses on the currencymanagement piece.” Bettinger’s company creates hedge ladders, where they look out four, three, two and one quarter, with different exposures hedged in each quarter.
Another valuable treasury function involves taking advantage of the balance sheet to enable business that might not otherwise occur. For instance, it may be possible to set up a leasing arrangement for a customer that does not have access to capital it needs to purchase equipment. “We use our balance sheet in a prudent way to protect the asset and at the same time accrue new business,” explains Bettinger. “My treasury people are uniquely positioned to make those risk tradeoffs for the corporation.”
Managing the cash conversion cycle is another valuable treasury function that includes managing collections so that money comes in as quickly as possible while stretching out payables. Optimizing cash conversion is a balancing act that ties closely to inventory management, which involves setting targets and objectives for cash consuming inventory and making decisions about where to place that inventory. “How you balance the debt-to-equity ratio and optimize the capital structure of the balance sheet affects your ability to fund different activities in the business,” Bettinger says.
Treasury is the Value Center of the Enterprise
Cash management in an airline business is challenging for many reasons, especially for an international company. Unpredictable weather events, volatile fuel prices and the challenge of operating with many currencies can significantly impact revenue, cash and profitability. Marina Chase, CFO (Ag.) of Caribbean Airlines, says that treasury has experienced big changes in recent years. “It’s still cash management,” she says, “but treasury has moved away from the traditional operational functions. It is no longer back office.”
In Chase’s organization, modern treasury-management tools have helped treasury become both a knowledge center and a risk-management center for the business. With treasury serving as a knowledge center, all divisions turn to treasury for real-time information related to operational activities. For example, this can include real-time information that’s needed for payments, and providing information about different laws and restrictions that affect transactions in different countries. Treasury also provides information to support strategic decisions, such as evaluating the cash flow and profitability of current and potential new routes.
Because there are so many variables that can seriously impact the business, risk management is a critical treasury function. “We are able to manage risks, especially around currency exchange,” explains Chase. “These are not risks limited just to interest rates. We also have to deal with repatriation risk. The efficiency of cash flow and managing cash have a lot to do with getting your money in real time. Because of laws and restrictions in different countries like Venezuela and Cuba, there are different ways that we have to comply with regulations in order to access our working capital.”
Treasury has become a value center in the enterprise. “We track working capital, and not just working capital, but also the value of working capital,” says Chase. “An important part of this is predictive analytics, which is more than transformational. It supercharges treasury’s efforts.”
Chase sees several key indicators of treasury’s success, including having adequate cash available for all operations, and preserving capital while maximizing the return on the investment portfolio. But there are other measures. “We must track trends and market dynamics that can impact the business, such as anything that might impact fuel prices, which you need to measure daily because this directly impacts cash flow,” she says.
As CFO, Chase appreciates the global perspective and predictive capabilities provided by the treasury management system. “Predictive analysis and forecasting allow better scenario planning,” she says. “That’s critical because you can plan your cash-flow scenario based on changes in the price of oil, or on revenue going up or down in a particular region because of holidays, or fluctuations due to political situations that would impact revenues.” Chase sees the possibility of leveraging treasury even further by linking to ERP systems, adding business intelligence tools, and linking the treasury system to the corporate reporting system.
Expand Your View of Treasury to Drive Business Value
Most CFOs have not worked as corporate treasurers, which can give them a limited view of what treasury can really contribute to an organization. Typically, CFOs consider treasury’s main functions to be collecting as early as possible, paying as late as possible, and hedging, according to Michael Dinkins, president and CEO of Dinkins LLC and a former CFO of five different companies. But thanks to new technology and evolving best practices, strategic treasury management has grown than ever before, encompassing payments, fraud prevention, compliance and working capital optimization.
Supply chain finance (SCF) solutions in particular are growing in popularity among CFOs who want to increase free cash flow and better manage working capital, not to mention improve supplier relationships. One option available through an SCF program is payables financing, also known as reverse factoring, which leverages a third-party to fund early payments of approved invoices to suppliers. For the buyer, this creates offers an opportunity to extend DPO (days payable outstanding) and improve working capital, while simultaneously improving the DSO (days sales outstanding) of key suppliers.
When it comes to measuring success, most companies emphasize revenues and margins. Treasury usually has separate metrics that may be overly narrow. As a result, CFOs may want to rethink how those data points can be better aligned. “I’m not saying you should get rid of those metrics, but the true value in treasury is around what it’s done to execute the business strategy of the company and how it’s leveraging the technology that it has to do that,” Dinkins says. CFOs can look at the company’s strategic objectives and assess how treasury leveraged technology to help achieve those goals.
Treasury management systems (TMS) are critical to modern finance transformation. The right TMS must meet long-standing requirements related to compliance and security, while also offering capabilities for automation and business process optimization. With that system in place, an organization also needs people who can see the technology’s potential and realize it. “And I think that’s where a CFO can come in, look at what this technology is capable of doing, such as providing early warning about the performance of the business around key transactions or projects, and then bring the business process and treasury people together, potentially along with help from the outside. The CFO can provide the vision and leadership to change the company by saying, ‘I want you to do this.’”
Demands for Strategic Treasury Management Continue to Grow to Ensure Organizational Success
It seems that more and more demands are being placed on treasury these days. It’s no longer just about moving operating cash around or ad hoc management and operational questions about where the money is going. Organizations are looking for positive cash management. They want to see how corporate activities are being funded and how debt is being managed at all times. Strategic involvement by treasury is critically important to manage capital more efficiently and in ways that reduce an organization’s risk exposure.
Treasury decisions trigger other decisions that have a cumulative effect on how the business moves forward. That forward-thinking perspective, and applying it more strategically in the business overall, enhances the business’ value.
Any large company engaged in global transactions needs to pay close attention to its FX exposure. That requires systems that can monitor cash and currency data and track hedging instruments. There are many ways to hedge FX. Treasury relies on expertise, software tools, currency reports and real-time cash analysis to manage these elements. Treasury must understand what’s happening in the countries in which the company operates. Otherwise, the loss could be significant.
The advantage we gain from our global payments platform is assurance that we’re making legitimate, timely payments. When working with global investors and global vendors, questions about payments always arise usually through email from different time zones. There are always due diligence issues, especially now, in the current unpredictable fraud environment.
The treasury team needs to be sensitive about all of these payments and we rely on the system to track our counterparts so that we know if we’re receiving invoice emails from someone outside our vendor list. A single payment platform mitigates some of these issues.
Cash is the lifeblood of every organization. For a business to be a successful company, it must proactively manage its working capital sensibly and in a forward-thinking way. We use a treasury management system (TMS) to enhance our cash management process and we are currently designing a modest investment program to support our cash needs. The treasury team must have visibility into everything that affects liquidity and drives the need for working capital. True real-time visibility requires a lot of integration between the corporate and operational side of the business. Treasury needs to understand both perspectives and gather all the data so that it can manage cash in a way that supports and strengthens the business.
A treasury platform that integrates with other business systems makes it possible to quickly resolve questions that otherwise can take a long time to answer. This efficiency can be as simple as account discrepancies that take hours to resolve manually, time that is not being spent working on more valuable issues, such as how better to use cash to help the business grow. There is great value in consistent, efficient treasury operations.
Strategic Treasury Management Plans for Future Scenarios
According to Nathan Lorton, senior vice president and chief financial officer of Feld Entertainment, an organization’s treasury team often focuses on operational treasury, otherwise the nuts and bolts, such as short-term forecasting, daily cash positioning, managing operating cash and more. While operational treasury is important for businesses, focusing on strategic treasury management will help treasurers and their teams align with their CFOs.
“Strategic is short term and long term,” explained Lorton. According to Lorton, expanding upon the short-term forecast and planning for the longer term outcome and various scenarios allows the organization and the CFO to prepare for the future.
Lorton’s team is committed to being strategic in its approach to treasury. The team has implemented various practices to improve overall treasury operations.
Feld Entertainment focused on free cash flow, as well as EBITDA and net income. “Getting to free Feld Entertainment focused on free cash flow, as well as EBITDA and net income. “Getting to free cash flow was key for us,” explained Lorton. “Free cash flow was essentially life or death. From a corporate standpoint, we had to get this right.”
Lorton and team established a 13-week forecast that extended into long range with various scenarios. “CEOs want accuracy in your forecasting, of course. But they also want flexibility in your planning and your ability to do scenario analysis,” Lorton said. “We can’t predict the future, but we can certainly plan for scenarios.” The 13-week cash forecast was eye-opening for Lorton and team.
The team also began comparing the indirect forecast with the direct forecast, which has helped to dramatically improve overall forecast accuracy. Although a fundamental aspect of treasury, the team focused on proactive management of working capital.
Lorton stresses the importance of getting outside of the traditional bank account cash structure to better understand liquidity. “Treasury had to move outside of its swim lane to try to manage liquidity,” he explained. This methodology has helped the team to know where their cash is at all times.
Another valuable function is the ability to do customized reporting, which Lorton indicated has been instrumental and important for Feld Entertainment’s treasury team.
Increasing Visibility Can Result In Unexpected Benefits
As a group CFO in the process of modernizing the treasury operation of Webcor Group, a multinational food distribution business, one key benefit that Frédéric Marret sees in a treasury management system (TMS) is the ability to receive global bank data, allowing for better visibility into group cash. “There is often a misconception that the group team and the local teams are independent. Having the flow of the same information to a centralised system helps bridge the gap,” Marret said.
Webcor’s TMS project was initiated by Marret in order to improve the operational treasury tasks, so that group companies had visibility into was happening in Angola, where the company has its largest volume of transactions, as well as other parts of the world. “It’s not just about the visibility, it’s what you do with this data that matters,” he said. Receiving bank statements was not sufficient, so Webcor worked to integrate the statements back to the ERP. This delivered several benefits, including improved data quality, reduction in time spent importing statements, closing the book quicker, etc. “I know the group value at the end of each day,” he said.
Compared to his cash visibility before he implemented a TMS, Marret now has the ability to look 12 weeks ahead. “We didn’t stop there, the tool should be more than just data in, data out. We include sales, expected receivables and payments. Now you start to build a forecast—this is where the value comes.”
This increased visibility makes it possible for Marret to manage group risk and allow for better strategic input into the business. “Most of our income is generated in Angola, which has its challenges. Having the ability to know my position each day allows me to manage group risk better, including currency risk, over-leveraged bank accounts or bank exposure against inventory. I am now in a better position to challenge operational decisions,” he says.
“The fully implemented TMS will continue to add value. The group is on a fast pace of growth and we need to keep control through the journey—this is where an innovative FinTech can help.”
Cash Visualization Enhances Global Governance and Efficiency
Sachio Matsumoto, executive vice president and chief financial officer of the LIXIL Group Corporation, believes that treasury management systems (TMS) can “enhance global treasury capabilities dramatically.” Matsumoto explains: “Treasury is a critical part of the organization as it directly influences stakeholders’ value and ensures that we have the capital we need to run the business.”
There’s more to it, however. Matsumoto points out that a TMS is a multifaceted application that can help organizations do more to track and balance assets. “Treasury is often the first department to identify potential issues in our group of companies because problems tend to appear in cash flows first. Treasury also protects our financial statements by identifying and hedging foreign exchange and other market risks.”
Success can be measured in a variety of ways, and each organization has specific metrics that carry more weight than others. For Matsumoto, the success of a TMS is in the numbers.
He explains how LIXIL considers it a success when “Treasury operations improve shareholders’ value by strengthening nominal key performance indicators, such as return on invested capital; net debt/earnings before interest, taxes, depreciation and amortization; and financial leverage.” In addition, treasury achieves success—from Matsumoto’s point of view— when its TMS is “mitigating day-to-day governance, compliance and currency risks.”
Treasury management might not be the most exciting aspect of Matsumoto’s day, but he explains, “TMS can add significant value, such as added productivity and more accurate cash forecasting and cash visibility for the company to deliver the objectives and value of treasury previously mentioned.”
A Global, Unified View Enables Treasury to Support Corporate Goals
Electronics maker JVC KENWOOD has 90 subsidiaries spread across 19 countries, nearly 250 accounts with about 100 different banks, and it operates in 12 major currencies. As chief financial officer (CFO), Masatoshi Miyamoto oversees this complex, global network from the company’s headquarters in Japan, where treasury operations are concentrated. The treasury department’s current top priority is reducing operational costs by reducing the company’s interest-bearing debt. The department is also responsible for efficiently raising funds to support strategic projects and for managing foreign-exchange risk. “All of these obligations demand a treasury solution that enables fast, accurate decisions,” Miyamoto says.
Historically, though, Miyamoto’s team used manual spreadsheets to manage cash and to capture foreign-exchange risk. This could sometimes result in inefficiency. “Group treasury management across the globe requires a single dashboard and single source of truth so that all may understand the management policy. The treasury management system (TMS) delivers this unified visibility,” he notes.
In addition, the spreadsheet data wasn’t real time, making it a challenge to achieve the department’s goals in an optimal way. A holistic TMS, however, gives a real-time view on cash positions at all the accounts at all the banks, as well as real-time foreign-exchange positions for all relevant currencies. That consolidated, updated view allows Miyamoto’s team to more effectively manage cash and hedge foreign-exchange risk. It also makes it easier to invest available cash into growth-spurring activities, such as capital expenditure and mergers and acquisitions.
“With the added visibility, we can also pay back interest-bearing debts,” Miyamoto says. “Compared to the manual Excel work, the TMS gives us direct and far-reaching benefits. We are now able to make more elaborate cash forecasts that allow us to reduce our reliance on external financing. That helps us achieve our key performance indicator—reducing our debt ratio.”
A TMS helps multinational JVC KENWOOD in other ways, too. It connects to banks wherever the company operates and allows the centralized treasury department to interact easily with subsidiaries and recently acquired companies. It also offers rich reporting functions that automate inefficient spreadsheet-based processes. As a result, Miyamoto and his team can manage complexity and stay focused on maximizing the company’s financial strength.
A TMS Can Contribute to Increased Productivity and Growth
As Graff Diamonds grew its retail operation to 45 stores in 15 countries around the world, CFO Andrew Nicholson recognized early on the need for a treasury management system (TMS). The challenge of running six regional finance teams that managed banking and payments in 11 currencies across 15 countries was becoming a tremendous burden. “It was simply unsustainable to continue logging onto each individual e-banking platform in order to approve payments,” he says. “We needed a single point of access across all our bank accounts to set up payments, to define different payment types and to receive notification of pending approvals.”
Early benefits of the TMS have been primarily operational for treasury, but Nicholson pinpoints additional capabilities that will give treasury a more strategic role in managing cash and risk. “In the upcoming year, we will be rolling out FX exposure management and GL reconciliation functionality,” he says, adding that they are considering a payment fraud detection module for the TMS system, which is important given Graff’s focus on high-value, luxury-based retail.
As CFO, Nicholson also appreciates how the TMS provides him with the greater global cash visibility, which has improved balance and forecast accuracy. “The main benefit I personally get is risk mitigation through much greater confidence in my treasury,” he explains. “I receive meaningful data to analyze, automated standardized reports and accurate cash forecasts. I can authorize transactions remotely. We access real-time, centralized bank statements first thing in the morning, and we source and analyze historical data for bank queries.”
All of this is great, but is it benefiting the business? Nicholson is confident that it does. “We don’t formally measure the success of our treasury and finance operation in terms of KPIs,” he says. “The owners do recognize improvements in operational efficiency, cost savings and the ability to make more informed and strategic decisions, which in turn is contributing to overall productivity and growth of the company.”
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