Understanding and working closely with the underlying business is treasury’s raison d’etre. Without business proximity, treasury can largely be outsourced. It is important to recognise that business proximity is not the same as strategic treasury – an oxymoron.
Business proximity means how close treasury is to the business. Some treasuries operate like internal banks; in other words they are largely at arm’s length from the operational business, providing financial services to them in ways that are more cost effective and/or more convenient than what banks offer.
Other treasuries are closer to the business, focusing more on solving finance-related business problems. Of course, the two are not mutually exclusive and there are many shades of grey in the middle.
Just to clarify, business proximity refers to the attitude and behaviour of treasury rather than to its organisational or legal form. For example, treasury centres (TCs) and in house banks (IHB) can be run with either approach. In other words, while a TC or IHB may be a separate legal entity and in a separate location, it can be very close to the business.
Business proximity is about attitude and behaviour. Attitude is hard to measure but we can measure some aspects of behaviour.
At the inaugural Treasury Forum in Hong Kong held by the Asia Treasury Community (ATC) and the International Association of CFOs and Corporate Treasurers (IACCT) last April, participants were asked how much time they spend working with colleagues outside finance. The idea was to gauge the extent of treasurers’ interaction with business operations.
Here are the results from the poll:
Just over one in eight spend more than half their time with non-finance colleagues, while 41% spend 30-50% of their time with non-finance colleagues; so more than half the audience spend more than a third of their time with the business. Given that treasurers are generally overworked and bogged down with the regulatory tsunami, accounting minutiae, not to mention know-your-customer and anti- money laundering (KYC/AML) rules, this shows considerable investment in business proximity.
Why it matters
The ATC/IACCT results show that business proximity matters to treasurers. This makes sense; if treasury is merely internal financial services, then it lacks scale and financial expertise compared to third party banks. Such a treasury should probably be outsourced to achieve critical mass and cost efficiencies.
If treasury is focused more on interfacing financial services throughout the business and on close business support, then it has unique value add that cannot be emulated by banks and other third party service providers.
Of course there are other reasons to have some financial expertise on payroll; notably potential conflicts of interest from third parties who may sell products that are not suitable for their clients but profitable for themselves. Treasury is partly on payroll to keep financial service providers honest.
This finding on business proximity is not unique to Hong Kong. Deloitte’s 2015 Global Corporate Treasury Survey found that “the modern treasury … collaborates with the businesses it serves”.
The survey also found that “treasurers clearly have strong mandates to be strategic.” They then proceed to list various tactical issues, such as risk management and access to funding, that chief financial officers (CFOs) encourage treasurers to address.
To the extent that strategy implies a “plan of action designed to achieve a long-term or overall aim”, treasury tactics can be considered strategic for treasury. Bankers love to flatter treasurers by labelling the cash management solutions they are trying to sell as strategic. But are they really?
Of course, treasury is strategic for a financial institution. But for non-financial firms, treasury is a support function. The relevant strategy concerns what products to deliver to which customers – as the famous writer, teacher and business visionary Peter Drucker put it “to create and retain customers”.
Creating and retaining customers can be supported by treasury by maintaining a strong balance sheet to reassure customers about the business’ sustainability, offering credit terms, offering flexibility in currencies, etc. These are unlikely to be the primary drivers for creating and retaining customers – it is more likely the underlying product or service that attracts them.
At the level of the firm, treasury is a support function executing the financial support to enable a successful execution of the firm’s commercial strategy.
Even some key decisions that delineate treasury’s operating space must be set by the board – such as the size and structure of the firm’s balance sheet, foreign exchange and credit risk appetite and more. These board level decisions, which impact customer acquisition and retention as described above, set the framework within which treasury executes. (This writer developed the theme in a recent piece on treasury metrics.)
Business proximity is what justifies treasury’s existence within a non-financial business. Deep understanding of and working closely with the underlying business enables treasury to add value in ways that cannot be matched by third party service providers. There is nothing ignoble about supporting the business, nor in executing business strategy effectively. Business is team work and most execution is tactical; treasury does not need to be strategic to be valuable.
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