This year, the credit crisis has dominated the financial services industry and global economies. The repercussions of the credit crunch have been felt far and wide, and will continue to impact corporates, banks and the global financial markets into 2009. Who would have predicted back in January, that by the end of the year, the industry would witness the collapse of so many financial institutions, and that governments worldwide would be forced to create financial recovery packages to inject liquidity and stability into their country’s economies?
The collapse of the investment bank, Lehman Brothers, and the takeover of Merrill Lynch by Bank of America in September, set off a wave of events that have truly shaken the foundations of the global financial industry. This includes – to name just a handful of the epic events that have occurred in the last few months – the largest bank failure so far in the US with Washington Mutual (WaMu) being closed down by regulators and sold to JPMorgan Chase; the UK government agreeing a £400bn three-prong plan to bail out UK banks in October; as well as the US stock market suffering its largest loss since the crash of 1987 in the same month. (For a summary of the Credit Crisis, take a look at the gtnews timeline: The Credit Crisis Timeline).
Against this backdrop, what issues have dominated the day-to-day agenda of gtnews readers? A useful barometer of what your focus has been this year is a review of the top 10 most-read articles of the year (see box below), which highlights the hot topics of 2008.
Top 10 Most Read gtnews Articles 2008
1. Tackling the Cash Forecasting Challenge by Timo Hämäläinen, Exidio – 12 Feb 2008
2. The Road to Treasury Excellence by Karsten Kohl, BearingPoint – 06 May 2008
3. European Cash Management Strategy 2008by Jasper Savelkoel, KBC Bank – 05 Feb 2008
4. Treasury Challenge: How to Manage a Global Subsidiary Network by Patrick Coleman, IT2 Treasury Solutions – 12 Feb 2008
5. It’s Liquidity Management, Not Cash Forecasting by Krister Backlund, OpusCapita – 12 Aug 2008
6. Achieving an Efficient Cash Management Structure: Overcoming the Challenges by Diane Barker, BG Group – 02 Sep 2008
7. How to Improve Cash Flow Forecasts From Subsidiaries by Joergen Jensen, Wall Street Systems, Inc. – 12 Feb 2008
8. Treasury Trends in Cash Management by Kathleen Hughes, JPMorgan Asset Management – 01 Apr 2008
9. The Next Generation of Treasury Managementby Elizabeth St-Onge and Laurie McCulley, Treasury Strategies – 13 May 2008
10. How to Further Your Career in Treasuryby James Crichton, Hays – 28 Oct 2008
N.b. The most-read articles are based on cumulative reads since publication.
Effective Cash Management Dominant Theme of 2008
It is not surprising that five of the top 10 most-read articles this year are about effective liquidity management in light of the credit crunch. Members of the gtnews Editorial Board voiced the experience of most corporate treasurers when they spoke to gtnews about the ups and downs of 2008. “The greatest challenge from my perspective has been managing this credit crisis,” affirmed Brad Gilbert, treasury manager at Paraxel International. “From staying on top of collections to really pushing the limits in terms of what to pay and when to pay has been crucial. Cash is king and, therefore, precious so making sure we are receiving payment according to terms and paying out in the same manner has been even more crucial. We do not want to become the ‘bank’ for our customers.”
Len Thompson, treasury analyst at Fike, agrees that the priority for his organisation this year has been dealing with the weak economy and the credit crunch. “While my organisation is doing fine, there is a heightened concern (particularly among members of senior management) that customers and vendors may be in trouble,” he says. “The greatest achievement for me has been a continued streamlining of global cash and improvement in working capital management.”
Funding has also been a focal point of 2008 in terms of liquidity management and this was highlighted by Michael Connolly, vice president and treasurer at Tiffany’s. “This year, the primary elements of this included internal liquidity, i.e. getting market-specific visibility of cash balances and more detailed forecasts of cash needs and local burn rates,” he says. “Finding out which institutions have funds to lend and figuring out how to pry it from them has also been a priority.”
Financial Institutions and Counterparties: Assessing the Risk
The credit crisis has underlined how crucial it is to have effective funding strategies, as well as risk management policies, in place. “Increased liquidity and credit risk premiums have exposed weaknesses in balance sheet funding strategies and counterparty risk assessment methodologies. These gaps were present prior to the crisis and were exposed by the crisis,” explains Dave Robertson, a partner at Treasury Strategies in an interview with gtnews. “Companies that failed to fund long-term needs with long-term stable sources took a hit, and companies that failed to deploy rigorous counterparty risk assessment methods, or which were excessively reliant on the rating agencies, also took a hit.”
The ability to assess counterparty risk and the credit status of financial institutions has become a priority for all corporate treasurers. The events of the last few months have shown how easy it is for the largest financial institutions to disappear overnight. This was a topic recently discussed by the gtnewsTreasury Insider, who considered the fact that corporations are now faced with the reality that financial institutions themselves might be risky and the risks associated with them have to be analysed alongside any other counterparty. While there is no failsafe approach to addressing this challenge, the Treasury Insider offers some valuable advice in mitigating the risk associated with financial institutions:
- Measure your overall financial exposure to each of your banks. If you are an operation with subsidiaries then this exposure should be measured by subsidiary and globally across the organisation.
- Identify those financial institutions where you have significant exposure. You should keep in mind here the time factor related to the exposure – some you might be able to wind down quickly if necessary and others, of course, may have long-term obligations attached.
- Identify within each group those institutions that you feel have ‘greater or at risk’ fears. Questions to consider would include the rating of the institution and, in particular, any movement downwards. You then need to examine all legal and contractual agreements in place for these counterparties.
Collating this information will at least put corporate treasurers in a position to make strategic decisions about the long-term future relationship their company might want to have with a counterparty – a vital commodity at a time of such volatility.
Cash Flow Forecasting
Three of the top 10 articles are about cash flow forecasting; indeed, the most-read article of the year is on this very subject. We have already acknowledged the importance of effective liquidity management and accurate cash flow forecasting underpins this. According to Robertson at Treasury Strategies, cash flow forecasting remains a challenge on multiple fronts. “While the technology tools that are coming to market continue to improve the situation, cash flow forecasting continues to be a somewhat individualised challenge – dependent on a company’s business, technology architecture, organisational structure, geographic footprint and a myriad of other factors,” he says. “First, there is no single forecast, there are multiple forecasts based on a variety of goals – from confirming short-term liquidity to assessing currency and cash flow mismatch exposures. Depending on a company’s business model and strategy, they will place greater emphasis on different types of cash flow forecasts.”
Furthermore, the better a company gets at cash flow forecasting, the more these forecasts are incorporated into business practices, which places further pressure on them. As a result, says Robertson, ironically, getting better at cash flow forecasting is paradoxically more important as companies get better at forecasting. “As forecasts are incorporated into mission critical activities, this in turn points out disconnects with internal data, lack of co-ordination between business units and treasury and other challenges,” he says. “Because these challenges involve people and technology, it’s an ongoing process to address them. In our experience, it’s not uncommon to see a one-time effort to greatly improve the forecast followed by ongoing refinement and propagation of the forecast (or forecasts) across the enterprise.”
The longevity of the forecasting challenge is demonstrated by Richard Raeburn, chairman of the European Association of Corporate Treasurers (EACT), who reminiscences that the first job he did as an MBA student in the summer of 1970 was analysing cash flow forecasting within a particular industry. “Treasurers are still struggling with understanding how cash is moving through the business and being able to deal with the implications of this,” he says. “Fundamentally, it requires a seamless communications interface between the drivers of the business, the flows in and out of the business, and the analytical side of collating this data and using it for business decisions.”
Cash flow forecasting will continue to be a focus for treasurers in 2009 in terms of liquidity management. By taking advantage of the latest technology, as well establishing effective relationships and communication channels with subsidiaries to ensure the timely delivery of accurate information, treasurers will have the tools to tackle the cash flow forecasting challenge.
A Look Back at 2008
Three of the gtnews Editorial Board members look back over 2008 and consider their greatest challenges and achievements, as well as how their treasury has developed in the last 12 months.
“This year, we took a strategic decision to implement regional treasury execution centres in order to better serve our affiliates needs and to more efficiently use the capabilities of our treasury management system’s (TMS’s) customer relationship management (CRM). Beginning with Asia Pacific, we recruited internally and I spent several months training our new FX manager on treasury issues. At present, we have China, Hong Kong, Singapore, New Zealand and Australia operational on the subsidiary version of the treasury system with FX deals being originated out of Singapore and their FX exposures being consolidated daily into the TMS. In terms of developments, the decision to move to a regional model in order to provide more timely and efficient service through our in-house bank has been the main change. This was driven by increasing standardisation of our accounting systems allowing greater visibility over our exposures and by the realisation that timezone differences have an adverse impact on our ability to respond to affiliate requests. As a result, we decided to put treasury expertise closer to the affiliates needing it most.”
Kelvin Hayes, group treasury, corporate finance at SGS
“I spent most of 2008 implementing our global banking arrangements. This project represented my biggest challenge implementing over 150 bank accounts plus a number of payment and statement interfaces between our ERP system and our banking partner. It also represented my biggest achievement having gone live successfully. As a result of the project, treasury has a much better view of its account balances alongside improved controls surrounding vendor payments.”
Diane Barker, treasury operations manager at BG Group
“This year, my challenge has been to smoothly ride through the credit roller-coaster environment in China through the careful selection of banks and developing banking relationships. Treasury has developed by building a stronger cash culture and ensuring that there is less idle cash sitting in businesses.”
Sue Lee, regional treasury manager, Asia Pacific at Danfoss A/S
Treasury’s Rise as Strategic Partner
Two of the most-read articles in the gtnews top 10 are about career progression and achieving treasury excellence. The role of the treasurer has substantially evolved in recent years and this has been particularly evident this year, as treasurers have risen to the challenge of dealing with the impact of the credit crunch. “What has dominated every treasurer’s thinking this year is the way the financial sector has changed and how to deal with the unpredictability of this change,” affirms the EACT’s Raeburn. “The current conditions have created the perfect opportunity for treasurers to excel in their professional skills because treasurers do tend to thrive on uncertainty and volatility. This is one positive consequence of today’s market conditions – it has certainly made the job much more interesting and challenging.”
He also believes that the real value-add from treasurers is when they are integrated with the business and seen as business advisors dealing with the implications of risk and facilitating funding. “Good treasurers do this well while bad treasurers are perceived to be isolated from the business,” he adds. “Treasurers need to become good at communicating with the outside world, particularly with financial institutions, about how the business is doing.”
Robertson at Treasury Strategies – who says that treasury has become more efficient and strategic in the last 12 months – supports this opinion. “Treasury is partnering more effectively across the organisation in a variety of areas, ranging from business development to risk management. Given the importance of effective risk and liquidity management, treasury is gaining more senior visibility with the CFO, executive management and the board,” he says. “We are seeing our clients automate operational and analytical activities to improve control and access to critical data and to also free up resources for strategic initiatives.”
The members of the Editorial Board that gtnews spoke to provided examples of how their treasury has evolved this year and reflect the overall development of treasuries around the world. For example, Gilbert at Paraxel says that his treasury has definitely changed from being a more operational-based unit to a strategic partner to the business during this year. “From arranging a financing facility to really spearheading a day sales outstanding (DSO) project, senior management looks to us to leverage our knowledge of the working capital cycle to make improvements and shore up weaknesses,” he says. “We have also added headcount to adequately face the growth of our business.”
Tiffany’s Connolly also underlines the fact that the visibility of treasury within the global organisation, as well as in the sights of executive management and the Board, has never been as prominent as in the last 12 months. “The other change is that there is a new appreciation for the complexity, sophistication and impact of the treasury discipline,” he says.
In a previous commentary, I said that it is the corporate treasurer who has visibility over cash flows, access to funds, makes the investment decisions and who often owns the relationship with bank partners. It is because of these responsibilities that no one within the organisation is in a better position than the treasurer to navigate the current economic downturn. This is absolutely the time for treasurers to take centre stage and demonstrate their value-add and significance within their organisations – this has been the overriding trend this year and will undoubtedly continue to be in 2009.
Read the gtnews commentary in January to find out what our predictions for 2009 are.
Four Key Events of 2008
While the credit crunch and repercussions of the downturn in the global financial markets dominated the headlines and day-to-day lives of corporate treasurers worldwide, there were also a number of other key developments this year. Four significant events of 2008 are highlighted here.
1. SEPA Launched
In Europe, one of the most significant events of the year so far was the introduction of the single euro payments area (SEPA) with the launch of the SEPA Credit Transfer (SCT) – the new file format for mass euro payment transactions – on 28 January. While this was a major milestone, the discussions around SEPA this year have focused on outstanding challenges, such as concerns that corporates and public authorities have shown little interest in adopting the new products and services, and the remaining issues around the launch of the SEPA Direct Debit (SDD) as well as the Payments Services Directive (PSD) in November 2009. Next year, resolving these issues will be the priority for all stakeholders.
2. Fasters Payments in the UK
In May, the Faster Payments initiative was rolled out in the UK, which, for the first time, allows customers to make phone and Internet same-day payments on any day and at any time, enabling them to be processed within a few hours rather than three days. According to APACS, it is forecasted that over the next few years Faster Payments will help to push volumes of interbank online, phone and standing order payments from the 2007 figure of 472 million to 622 million in 2017.
3. Next Phase of SWIFT Corporate Connectivity
In September, SWIFT, the Brussels-based financial messaging consortium, launched Alliance Lite, at its annual user conference, SIBOS. Aimed at corporates and smaller financial institutions that send and receive less than 200 messages per day, the €10,000 price tag to connect was hailed as a step forward for corporates in accessing SWIFT by overcoming the hurdle of traditionally prohibitive cost models. A group of 20 pilots – a 50/50 mix of financial institutions and corporates and a roughly similar split between the US and Europe – began at the beginning of the year, one of which was the SWIFT treasury itself. In the next few months, it will be interesting to see whether SWIFT achieves its ambition to encourage more corporates to access the network through the launch of Alliance Lite.
4. New Chairmen at FSA and EACT
In June, Lord Adair Turner was appointed as the new chairman of the UK’s Financial Services Authority (FSA) for a period of five years. Lord Turner began his appointment in July when the outgoing chairman, Sir Callum McCarthy, stepped down. In addition, Richard Raeburn took up his new position as chairman of the European Association of Corporate Treasurers (EACT) at the beginning of October. He is currently chief executive of the UK’s Association of Corporate Treasurers (ACT) and will be retiring from that role at the end of 2008. One of Raeburn’s key interests is in responding to the needs and concerns of the treasury professionals in the fast developing ‘new Europe’ countries, such as Hungary, Slovakia, Czech Republic and Poland. Raeburn took over the chairmanship from Olivier Brissaud, president of ATEB, the Belgium treasury association, who will remain as the EACT board member for European affairs.
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