From Reactive to Proactive Treasury

By Bob Stark August 7, 2015

Last week, Kyriba hosted a webinar where I was joined by my peers at Fluor, ZF TRW, and Bank of America Merrill Lynch to talk about how treasury can become more proactive, elevating the role of the treasurer to a strategic business partner. The webinar is recorded and the slides are available on our website; and I encourage any of you that want to become a more strategic business partner to review these. It is worth it!

At the same time, just to whet your appetite, I want to share a couple examples of the deep insight offered by our panelists. Below are four audience questions that Todd from Fluor and Guy from ZF TRW were kind enough to respond to offline, after the webinar.

Q: Does the treasury function at Fluor or ZF serve as an internal consultant to business units for managing working capital (e.g. AR, Inventory, A/P levers)? 

A: Guy Simons, ZF TRW–No, at ZF TRW it is a responsibility of the business unit finance groups to manage commercially. Discounting, factoring, etc. are used only at the behest of the CFO and Treasury. 

A: Todd Yoder, Fluor Corporation–Yes, Fluor does behave like a consulting resource for business units in that we advise business unit financial controllers on liquidity, working capital, fx risk, commodity price risk, and cash flow forecasting – among other areas related to treasury.  If a business unit needs more time intensive consulting we will bill the business unit or the project (some are joint ventures where Fluor owns less than 50%) for our time. 

Fluor Treasury is well known throughout the Company as a consulting resource for the business activities described herein.  On occasion Fluor Treasury will look for opportunities (initiate) to offer suggestions to controllers who may not realize the impacts they are creating for the Company as a whole. Ultimately the controllers and project directors are responsible for their subsidiaries and project performance – so they generally come to treasury for direction and ideas. 

Q: How do you find time to focus more on adding strategic value? We are a $1B newly public company with one dedicated treasury person reporting to someone who spends maybe five to  10% of time on treasury. Time is scarce to even complete day to day responsibilities. 

A: Guy Simons, ZF TRW–Yes, it can sometimes feel like trying to help steer a car while sitting under the hood. So, agree with your boss what is more and less important on his dashboard and what his risk-tolerance is. Align time spent with those priorities by automating, simplifying or setting thresholds for lower-value tasks. 

A: Todd Yoder, Fluor Corporation–C-level finance leaders are generally extremely busy – I think it is the responsibility of the treasury function to determine what is needed to run the treasury function in the most effective way.  I would recommend doing the research to determine what resources you need (people or technology) to run the function most effectively – create a business plan that outlines exactly where you are now, what resources and tools you have, where you want to go, what you need, and why it is a good investment (demonstrate ROI). Then, book some time with the CFO, or whoever is most appropriate, and present your plan. If you do not get the resources you need, at least you and executive mgmt will understand why you are where you are, and not where you want to be. You may also get some great advice or solutions you have not considered from the executive mgmt team.

You not only want to get “core treasury” right, you want to add strategic value to the organization. Since you are a newly public company, executive mgmt may not realize the value you can bring, and you may be surprised at how supportive they are and how they then begin to see you as a strategic business partner. You have to clearly articulate your business plan, though.

Q: Is a treasury system necessary to go from tactical to proactive? 

A: Guy Simons, ZF TRW–No and yes. Treasury has a lot of information needs in common with other business and corporate functions, and first learning to efficiently tap into the information that is already available, e.g. to forecast cash, gets you a long way, and will get you to a better understanding of what a treasury system could and would need to add, not only for Treasury, but also for the rest of the company. Then, look for a system which interfaces well with what is already there, meets current and will meet future needs, and can be implemented modularly, accordingly. In the meantime, use Excel and other omnipresent software as your prototyping tools. 

A: Todd Yoder, Fluor Corporation–This question aligns with the prior question – no outsider will be able to tell you “yes, you need a TMS” or “no, you do not need a TMS” unless they have spent time researching and understanding where you currently are. I think this is a responsibility of the treasury function to determine – you need to do the research to know what your symptoms are, and the root cause, and the why – then create the business plan as described in my answer to the prior question. You may find that your business plan reflects a TMS will add a great ROI, maybe not?  I think a company like Kyriba might offer a free analysis / assessment to help you better understand, but I am not sure.  At Fluor we hired a consultant, it was not cheap, but we are a Fortune200 and wanted to make sure we made the right decision on who we chose for our new TMS (which was Kyriba for many different reasons). Had we gone straight to Kyriba we could have saved hundreds or thousands – but we were willing to pay up to be able to confidently recommend our final decision and answer all of the “whys.” 

Q: How do you measure the effectiveness of an FX hedging program in a way that has meaning to management?

A: Guy Simons, ZF TRW–It depends what they are sensitive to, i.e. what is and what is not in the executive performance metrics. Many public companies give guidance to Wall Street, and missing earnings forecasts hurts executive pay, systematic rolling, layering hedging programs reduce volatility in earnings and margins, and bring forecasts into a narrower range. Private companies may be more sensitive to long-term economics, keen on finding natural offsets, and focus on protecting equity and the balance sheet, e.g. the value of cash held offshore. 

There is likely something management would like to see minimized, be it earnings volatility or the magnitude of monthly foreign currency revaluation gains and losses. And, analysis of past results will generally show it doesn’t all come out in the wash, contrary to popular belief. 

A: Todd Yoder, Fluor Corporation–I love Guy’s comments and completely agree that the notion from some CFOs that FX risk is like an ocean and it all “comes out in the wash” is scary – generally, it does not and there are certainly impacts showing up in different areas of the financial statements.  As an example, some may say that holding USD at a EUR functional naturally hedges the earnings translation fx risk from consolidating the EUR P&L – sounds great, but in reality it is very short term thinking, and the impacts show up in different areas of the financial statements.   

I think your first step is to divide Cash Flow FX risk from Remeasurement FX from Translation in Consolidation FX risk. Some companies hedge cash flow and remeasurement with one step (de-designating cash flow hedges and re-designating as fair value hedges), but I prefer looking at all three risk types separately.  One reason being that when I hedge remeasurement risk I like to consider all natural offsets from other subsidiaries, what the forward points are, what the volatilities are – and then create a remeasurement hedging “efficient frontier” that shows you how much volatility you can take out for what amount of cost (net forward points). I look at cash flow risk separately. I call cash flow risk “the silent killer” because it shows up in revenue or costs (and not as a separate line item like remeasurement risk does) – I have seen a lot of companies place more focus on remeasurement because it is so visible when cash flow risk can have more serious economic impacts.

If a company is good at cash flow risk, they know exactly how they are performing versus budget and year-over-year. I like layering programs but what most companies miss is that it is critical that they know how “sticky” or “non-sticky” their prices are and what their competition is doing – a great example of this is the airlines – in the 90’s, books were written about how Southwest was a company of geniuses, a lot coming from the fact they hedged oil (buying it forward) and as oil prices went up, Southwest had hedges way in the money allowing them to price more competitively and make more money because not all competitors had hedged – recently, with the unforeseen decline in oil prices, Southwest has had some major payouts to settle hedges (in 2014, I think they paid out just under $300mm and had negative MtMs of over $700mm) – those airlines that did not hedge now have a competitive advantage, so who is the genius? 

I personally do not like leaving all risk unhedged, but my point is that companies need to be aware of many different factors when determining their strategies and how to measure effectiveness. It is more complicated many times than what companies realize, so it is critical to fully understand all facets before creating your dashboard to monitor and measure your hedging strategy effectiveness.

Further Reading

eBook: Taking Treasury from Reactive to Proactive

Webinar: From Reactive to Proactive: Real-world Solutions for Becoming a Strategic Treasury

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