Every year those working in treasury get a year older. This inescapable fact, combined with a general decline in labour force participation in the US economy, injects a degree of uncertainty into the plans of companies that depend on properly staffed treasury functions to assist them in maintaining/enhancing their competitive profiles.
Percentage of US Labour Force Participating in the US Economy:
Source:US Bureau of Labour Statistics: Feb 2014 http://data.bls.gov/pdq/SurveyOutputServlet
Another factor influencing a company’s future is the general consensus that interest rates will be rising after several years of remaining at historic lows. Prior to 2009, the benchmark London Interbank Offered Rate (Libor) was much higher from where it is today. A simple regression to the mean could double interest expense for any net borrower of funds and increases the importance of knowing the answer to the question, ‘Has my company over-borrowed?’
Additionally, it has been widely acknowledged that many companies have more cash on their balance sheets today than any other time in the past 10 years. This ‘surplus’ will place a premium on forecasting the best use of those funds. Should treasury use company funds for capital expenditure (capex) or the purchase of new businesses? Should it use its liquidity to reward investors via dividends or stock buybacks? What about repaying various counterparties? How much liquidity is needed to simply ‘turn on the lights’ and operate each day?
For most non-financial companies, future performance will be a balancing act dependent on three factors:
- Profitability: The ability to sell, produce, collect and distribute ‘enough’ profits/cash over time to please a variety of constituents, especially investors or owners.
- Liquidity: The ability to pay liabilities, namely creditors, when they become due.
- Risk: Profits or operating cash flows do not always occur when planned, or in the proper amounts. Uncertainty can be as much due to internal or operating issues as external issues caused by fickle markets or customers. Managing this volatility will require a team effort throughout the company.
Arguably, treasury’s contribution to this balancing act will be its capacity to manage the company’s liquidity and risk. By assuring the company that it will be able to access the ‘right’ amount of funds in the right currency at the right time and place (that is after considering various countries’ tax regimes) the company will be able to attain a performance level equal to, if not superior to, its competitors.
Using Resources Appropriately
Making this fund matching process work in an era of declining labour, potential higher interest rates, increasing expectations about best use and general economic uncertainty will require a company’s treasury department to focus on attracting and retaining the appropriate resources, since mistakes can be costly. Remember, treasury staff failures contributed to the demise of companies as large as Enron and MF Global.
- Treasury staffs are small. The loss of an individual at a critical juncture could reduce a company’s ‘horsepower’ by 20% or more, given that the average treasury staff typically consists of five or six people.
- Companies become more complex, but prior banking structures can constrain best fund uses. Using treasury’s limited resources for repetitive tasks best handled by others – such as bank reconciliations and accounting – instead of planning for the future could jeopardise opportunities to simplify banking structures, leave available funds idle, increase bank related expenses, contribute to debt or investment non-compliance, trigger taxable events through inappropriate funds movements, or prevent decisions associated with balancing best use of funds with access to ‘enough’ funds.
- A focus on treasury’s operating budget may be misplaced. Treasury’s budget is just the tip of the liquidity management iceberg. Banking fees, interest expense, foreign exchange (FX) exposures and losses, and non-treasury administrative costs all add to the total cost of managing liquidity. Reducing treasury expense alone may be the wrong solution to the right problem.
- Employing more technology may offer a false sense of safety. Today’s treasury management systems (TMSs) are more integrated and capable than the disparate ‘systems’ – such as spreadsheets, emails and multiple bank websites – they replace, but they are more complex to operate. Inability to properly utilise or maintain a TMS could allow a company to make its mistakes faster or even remain blind to certain exposures.
Tips for Navigating an Uncertain Environment
No treasury organisation can afford to maintain staff levels appropriate for all possible business scenarios. After all, the future is inherently uncertain. However, certain commonsense alternatives suggest themselves for companies wishing to attract and retain a treasury workforce with the capacity to add value and support the company’s business goals.
For 2014, companies and their treasury areas should seek to take the following actions. As with any change the devil is in the detail.
All treasury staff should be part of the company’s planning/forecasting efforts through frequent meetings or receipt of plan materials, including plans of the company’s competitors.
Establish or re-examine workflows, policies and procedures associated with liquidity and risk, and then allocate work to the financial unit best able to accomplish tasks within defined deadlines. Treasury’s small staff may be burdened with tasks capable of being performed by units with equally capable staff but with larger capacities.
Provide ‘purpose-built’ training to treasury staff by allowing staff to attend external meetings or training sessions. Examples could include courses on banking, international cash management, taxes or regulatory topics.
Adopt the mantra of ‘less processing, more planning’ to avoid situations rather than react to them. Adoption of comprehensive policies and rolling forecasts can provide advance warnings and are used by top-tier companies according to research by the Association for Financial Professionals (AFP).
Maintain an appropriate level of ‘dry powder’ to access more resources when certain situations occur – for example acquisitions, mergers, reorganisations, debt renegotiations or international expansions. Attaining this state may require ready access to high quality interim staff with specialised knowledge. Better to acknowledge lack of capacity upfront than create staff burnout situations, missed deadlines or other cascading impacts throughout the company.
Define, then measure treasury success. According to AFP research, nearly half of US companies have no metrics. Those associated with the balance sheet or cash flow statement are better than profit and loss (P&L) measures. Examples: set target levels by currency, length of cash conversion cycle, level of free cash flow, percent exposure to market forces. What gets measured, gets managed.
Allow non-treasury users appropriate access to TMSs. Managing liquidity and risk is a team sport. Access to balances and transactions should be available to operating units, auditors, controllers and tax staff as soon as possible, based on their roles under various policies and procedures. All users should be supported with continual training for each system feature acquired.
Build strong relationships with external counterparties based on clearly stated goals. Frequent meetings free of recriminations can help prevent misunderstandings and lead to faster solutions when actual problems occur.
Allow treasury to act as internal consultants to other parts of the company. Many treasury or finance principles require special training or years of learning. This knowledge should be shared with others to give all a sense of contribution and shared values. Those who feel their skills are not valued or utilised will seek to employ them elsewhere.
Embed liquidity goals in the compensation plans for both treasury and operating units. While treasury can influence financial cash flows associated with debt, investments or FX, only the operating units can truly affect operating cash flows, the major source of a company’s ability to repay it creditors and investment in itself. Assuming liquidity is valued, then those who contribute toward attaining this goal should be rewarded appropriately.
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