Treasurers are becoming progressively more valuable to organisations, following the financial crisis that shook the globe in 2008. Over the past decade, there has been an understandably greater focus on cash management and liquidity for organisations of all size.
In a 2014 paper published in the US by the Association of Financial Professionals (AFP) and Oliver Wyman, it was reported that 69% of financial professionals believe that this focus equalled a new desire for strategic guidance from treasury. The new trend of increased interest in optimising working capital is one shared by the whole board – and this ability lies almost completely with the treasurer, who has a unique angle from which to approach the problem.
A uniquely positioned function
The treasury department is in a rare position to work cross-functionally and flexibly, within its broad task of aligning itself with cash conversion objectives of the wider business. In order to do this there are a number of key ways treasury can work; managing bank relationships, affecting days payable outstanding (DPO); days sales outstanding (DSO) and days inventory outstanding (DIO). As an increasingly strategic corporate finance function, treasurers has a unique role in driving working capital initiatives; monitoring their success and supporting the business by impacting free cash flow and future financial decisions.
In previous years treasury had appeared more siloed – although this was satisfactory to most boards. However, a gradual shift has meant that more is being expected of the treasury function. A comprehensive understanding of the wider business is crucial; both in terms of its commercial objectives and the wider dynamics. Using this understanding, organisations expect treasurers to provide a number of insights which will help guide significant business decisions.
How has the strategic value of treasury evolved?
So if the strategic value of treasury has been increasing since the financial crisis , what are the new ways they can provide insights or strategic worth? Cash flow and enhancing working capital will always be forefront for the agendas of chief financial officers (CFOs) and finance directors (FDs).
Reducing DSOs is a common focus and can be achieved through various products and methodologies, such as factoring and invoice discounting or other receivable finance structures. Similarly, DIOs can be reduced through a number of ‘just in time’ or lean practices around inventory management and control. Yet poor working capital management continues to cost the UK every year, with recent YouGov research commissioned by PrimeRevenue and AIG suggesting there is a staggering £29bn or more of working capital currently trapped in the UK economy.
Increasing DPOs are the one feature of a cash conversion cycle, which are harder to tackle – in particular for middle market businesses. These particular companies have very few actions they can take to improve their payables besides extending payment terms, which in isolation causes a number of challenges – in particular the negative implications for suppliers and overall supply chain. Supply chain finance (SCF) tools are one of the few to offer a solution for all companies – including middle market – if the treasury utilises SCF it can enable a realistic non-debt solution for improving DPOs, thus producing more working capital. It bridges the gap between DSO of suppliers and DPO of the buyers; thereby improving the cash conversion cycle for both.
A risky business
The most obvious risk of a strategic treasury emerges if the organisation returns to a basic and myopic view of treasury’s role. By focussing too much on the remit within which they expect the treasury to perform, senior executives become blindsided to a number of additional ways in which they could succeed. Beyond the obvious priority task of cash management strategy there are other methods of assistance; liquidity, risk, new regulations and funding strategies.
Treasury teams also have the advantage of working closely with a number of functions. It is logical and vital they have a close relationship with the CFO and FD. Moreover they work closely with a number of other parts of the business; procurement, sales, inventory and the board. This means they can build strong, understanding and lasting relationships with all these individuals and operational teams.
Treasury can also improve working relationships with suppliers through the way they opt to conduct business. Utilising an online platform also means suppliers have more visibility, ease and speed of use when the invoice approval process is ongoing. Ultimately, better relationships mean the organisations can negotiate better pricing with their suppliers.
Companies that utilise their strategic treasury to optimise working capital are far more likely to succeed in a competitive economic climate. By understanding the wider commercial business, from procurement, sales and inventory to the board, treasury should be able to offer insight into the organisation. Additionally, treasury can implement a number of programmes such as SCF, which help enhance the supply chain both financially and strategically and hereby unlock working capital.
It really is high time that organisations began to treasure their treasury.
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