Treasurers refocus priorities as their strategic role expands

How are changes in the global business environment impacting the role of the corporate treasurer?

Kelvin Ang: Corporates today face unprecedented macroeconomic and geopolitical pressures and complexities. They are encountering geopolitical risk that, in Citi’s view, is at a 25-year high. Tensions are flaring in many regions, from East Asia to the Mid-East to Latin America. The relative slowdown in key economies, such as China, has led to market volatility and increasing financial risk. Elections and national referendums, including the US presidential elections and the UK vote on the European Union (EU), are adding even more uncertainty.

Mounting regulatory scrutiny and pressure from shareholders for more operational efficiency and growth further complicate the global risk matrix. In this environment, the corporate treasurer’s job has become more strategic and more significant than ever before. Today’s treasury must help companies manage risk, drive balance sheet efficiency, and improve liquidity and funding management.

Michael Botek: So it is no surprise that, when it comes to important commercial decisions, treasury has an increasingly prominent seat at the table. There are two key reasons for this. First, treasury is in a unique position to identify and help mitigate risks associated with currency fluctuations and funding costs. Second, the advent of enterprise resource planning (ERP) and treasury workstations tied to globally distributed, functionally centralised treasury models has enhanced liquidity management, widened visibility into risks, increased earnings stability, and helped to address funding inefficiencies across the supply chain.

What steps should corporations take to strengthen their risk-management practices?

Ang: Many companies last year reported significant impact on earnings from currency moves. Based on recent data from our client engagements and global treasury benchmarking platform, we saw a trend in companies operating under foreign exchange (FX) policies that did not always appear to be well aligned with changing market conditions or their own risk management objectives.

An important first step is to more fully understand overall FX risk from a portfolio perspective. In other words, weigh potential impacts from a basket of exposures, rather than from each individual currency. This can help create natural risk reduction from diversification, because the portfolio as a whole generates less risk than the sum of its parts.

The size of an exposure is not the sole measure of the risk it creates. Volatility and correlation to other currencies and additional tangent risks are equally important considerations.

Botek: But here is the key point: gaining a high level of visibility requires better integration of risk management processes and structures. In recent years companies have focused on treasury centralization with a view to cost rationalisation. This led to the development of shared service centers for payables, receivables and procurement. Now, the focus is shifting to more strategic goals. This has led, as Kelvin mentioned, to a functionally centralised, globally distributed model that enormously enhances visibility into risks and funding inefficiencies across the supply chain. That is an important step toward more effective risk measurement and management.

What about planning for the unexpected as well as the expected?

Ang: Corporates clearly should be reassessing risk policies and tactics with the goal of broadening their ability to recognise and mitigate non-traditional risks. A prudent first step would be to develop “risk playbooks” that help anticipate a wider variety of potential business-disruption scenarios. Today’s treasurers need to prepare their companies for a growing array of contingencies.

What is driving the expectation to optimise the corporate balance sheet, and what should companies be doing to enhance balance sheet efficiency?

Botek: Treasurers we engage with are clearly facing growing pressure to uncover every ounce of value from their balance sheets. This typically results from a combination of investor expectations for higher returns, the impact of past merger and acquisition (M&A) activity, and organic growth into new markets. M&A can lead to balance sheet “bloat”, while market expansion can deteriorate the credit quality of customer receivables. Add inefficient subsidiary funding management and you have a recipe for heightened risks and excess equity exposure.

Ang: For many treasuries, this creates an urgency to right-sizing both corporate and subsidiary balance sheets. These pressures shine a light on the need to reassess finance strategies, with an eye toward deploying more efficient alternatives to fund working capital.

Treasurers are increasingly looking at supplier financing, dynamic discounting, and receivables financing as ways to improve their working capital. Treasurers we talk with, in addition to employing more effective risk management techniques, are working to tighten up their metrics around working capital utilisation.

Evolving global financial system dynamics and regulatory scrutiny are forcing global and regional companies alike to reassess their funding infrastructures. What else can treasurers do to drive better, more strategic decision-making?

Botek: We see heightened urgency around improving liquidity planning and management, with treasurers taking a hard look at their banking and liquidity structures, the critical “pipelines” to visibility and control over internal cash usage. Given volatility in FX markets and interest rate divergence companies should also continuously assess whether neutral hedges are in place, or if old ones have evaporated.

Ang: With regulations changing how banks operate, treasurers also should be reviewing their bank relationships. The bellwether for future success is which relationships offer the capabilities and footprint over the long term to help facilitate corporate objectives. Successful cash flow forecasting also is a critical prerequisite of future success.

How are global banks helping treasurers navigate new requirements and pressures?

Botek: Strengthening enterprise risk management (ERM), driving balance sheet efficiency and improving liquidity and funding management – all require a robust governance and control environment. Centralised, globally distributed processes can provide the visibility needed to achieve this integrated control environment.

Our advisory engagements suggest that most treasury organisations will not always have the luxury of adding more staff, which makes it even more important to find ways to redeploy existing resources with a focus on risk and efficiency. To free up the much-needed human capital to manage new and emerging risks or opportunities, treasurers should continue to invest in new treasury technology or technology enhancements to automate operations and processes.

Ang: We have helped world-class treasury organisations develop clear road maps for increasing their role in corporate decision-making and delivering value to their companies. For the past eight years, Citi Treasury Diagnostics, our web-based global treasury benchmarking platform, has been helping treasurers to measure the effectiveness of their organizsations relative to their peers and identify top treasury priorities and solutions. Data gathered from the more than 600 companies that have leveraged CTD together with ongoing client engagements, tell us that the role of corporate treasury is changing quickly and substantially. Increasingly, treasury’s focus and function is typically to protect the company against uncertainty, pave the way for business growth, and deliver on shareholder expectations.

Without question, the job of corporate treasurers continues to become more complex – and more valuable – to the health of their businesses. In the months and years ahead, their level of success can be expected to hinge on:
• Adopting best practices that deliver wider global visibility and keener insights.
• The ability to measure the effectiveness of their treasury and working capital practices and systems, and
• The intensity of their resolve to drive continual improvement.


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