Enterprise Treasury Management: Beyond Departmental Walls

A corporate treasury mandate typically aims at managing the financial risks resulting from core business activities. It is derived from the implicit assumption that stakeholders would/should like companies creating value from only core business activities. The latest credit crisis once more underlined this as being a good business principle, and so we have seen a renewed focus on treasury effectiveness and compliance.

A treasury mandate as defined above requires central treasury consolidating and managing financial exposures resulting from core business activities. Timeliness and accuracy of exposure identification and reporting is key to effective treasury management.

The profession has worked hard to establish best practice models for centralised exposure management; agency treasury, foreign exchange (FX) and cash pooling centres, the evolving in-house bank model and the payment/collection factories are all examples of this effort. To some extent, the result is appealing because it makes treasury transparent; at any point in time one can see when liquidity, FX or interest exposure are reported to treasury and how treasury deals with it. The fact of the matter is that exposure identification and reporting are still outsourced to a local finance manager. Given the level of frustration about the reliability of the operational cashflow forecast and the limited involvement of treasury in working capital management, one has to assume that the circumstances are far from perfect; while treasury positions are covered, enterprise-wide and consolidated level exposures might not be covered adequately.

The impact of this mismatch between true exposures and actual exposure management is clouded by the fact that the information is buried in many different profit/loss (P/L)-lines that are difficult to relate to individual contracts and activities. The mismatch is easily described in theory and financial professionals can demonstrate the impact of different aspects with examples, but, until recently, tackling the issue seemed only to be a priority for the few.

The credit crisis has called attention to this issue. Chief financial officers (CFOs) demand instant and complete understanding of exposures and cashflows at any given time. We have also noticed a new focus on effective cash and exposure management.

Traditionally, improvement projects have been justified by comparing the scope of a project to be implemented with a current practice. While this most certainly yields benefits, it might not necessarily create the best bang for the buck. Improvement projects would be better if benchmarked against the theoretical ideal result rather than current practice. Such approach creates visibility of avaialbe opportunity, as well as potential loss, resulting from compromises made in the decision-making process.

Figure 1: Decision-making Process

Source: Zanders

When translating this approach to treasury management, treasurers should focus on timely and accurate exposure identification and reporting from across the enterprise into corporate treasury. Before implementing systems, treasury professionals ought to estimate the impact of the inefficiency in exposure management from the moment exposures are created by core business activities until it is hedged by treasury. With this knowledge executive management can decide on priority and potential budget for treasury improvement projects.

Figure 2: Treasury Improvement Project Workflow

Source: Zanders

In order to create an enterprise-wide treasury function, treasury centralisation projects need to focus on understanding and tracking of exposures resulting from core businesses before a solution is designed. The following questions need to be answered:

  • When is an exposure or cashflow created?
  • How consistently is it reported?
  • When is it included in a consolidated view?
  • What is the likelihood that a risk or cashflow materialises?

Answering these questions implies an understanding of core business activities. Once the answers have been provided, treasury can define processes for best managing the identified exposures. At the same time, the opportunity loss in terms of hard dollars, soft dollars and qualitative-only items and gaps in the current practice can be identified. This understanding will help in defining priorities and recommended project scope. It will also help to define the system’s requirements.

Not surprisingly, the outcome of the analysis can differ by company. The preferred treasury solution will also differ by company. The solution ultimately implemented will differ even further by company because each company will make their own decisions about project scope, budget and acceptable project risk. Compromises will also depend on staff expertise and internal politics. Exploring the ideal architecture prior to making such compromises makes the decision making process more transparent. The impact of a compromise can be defined and quantified, which provides factual input to decision-makers and project sponsors.


When it comes to treasury, one size does not fit all. Although at a high level, processes might be comparable, priorities and opportunities differ by company. In order to implement the most efficient solution in an individual case, one would best map the entire treasury process from creation of the exposure to its hedging as a starting point for deliberate and informed compromises. Such process mapping goes well beyond the departmental walls. With this knowledge, decision-makers have a grip on the impact of their decision-making process. This will assure support from project sponsors and helps to manage the expectations of all stakeholders, from end users to senior management and external vendors.


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