How Should CFOs Leverage Treasury in 2019?

By Alex Wolff December 27, 2018

As we turn the corner on 2018, most CFOs will be focused on the simultaneous tasks of helping their chief executives to exploit the opportunities that come with a booming economy, while also buffering their organizations from the risk of potential economic deceleration, increased FX and interest rate volatility, and an ever growing regulatory and compliance burden. As a result, CFOs will inevitably expect their treasury functions to provide practical and strategic advice to help with all of these elements.

So how can CFOs better leverage treasury to make sure their organizations are able to adjust to whatever the new year brings?

The uncertainty of 2019 will only increase if global economic decline settles in as some experts predict. While the party isn’t yet over for businesses globally, the indicators are that some of the guests have already left. Global growth reached 3.1 percent in both 2017 and 2018, but the World Bank predicts that it will decelerate over the next two years due to the dissipation of global slack (unused economic resources) and tighter central bank monetary policies, among other constraints.

In addition, the US and China are engaged in a trade war, European GDP growth is slowing, and the economic impact of “Brexit” is still not yet clear, and geopolitical tensions and sanctions against countries such as Iran and individuals and businesses in Russia among other places are on the rise. It all points to the strong possibility of choppy waters ahead.

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Improving risk, cash and working capital management

With the global economic outlook uncertain, there is clearly a case for corporate treasuries to be more strategic. In fact, Kyriba’s recent survey with CFO Publishing, 3 Key Areas Where CFOs Say Treasurers Need To Be More Strategic, found that CFOs want their treasurers to focus more on optimizing risk management, cash management and working capital. It’s not hard to see why.

Looking first at risk management, 42.7 percent of those surveyed (out of a total of 150+ participants) said that their organization’s treasury function needs to do a much better job of supporting business objectives than it does currently. This is likely related to two macro-trends that are increasing the importance of risk management for CFOs today.

The first macro-trend, geopolitical tensions, can lead to volatility in the FX and commodity markets and sudden shifts in trade flows. These, in turn, make it more important for organizations to have hedging strategies in place that mitigate currency and price fluctuations. Organizations also need access to the capital markets so that they can secure funding to offset any declines in trading volumes. In an uncertain world, it is critical that organizations have full transparency around the financial and operational risks they face – something that can usually be achieved through technology solutions with extensive and seamless global bank connectivity.   

The second macro trend, rising inflation, could result in more countries hiking up their interest rates in the same way that the US has already done, and will likely continue. Funding will become more costly and companies will see their margins squeezed. Ultimately, the combination of inflationary pressure and a more challenging international trade environment could lead to a reversal of the benign economic conditions we are enjoying today. This would have the effect of limiting the availability of liquidity, reducing corporate profits, increasing FX volatility, and further heightening the need for better risk management.

Cash management is another area where improvement can be made. One of the most surprising findings of the Kyriba survey was that 40 percent of the respondents – all of whom were senior financial executives across multiple industries in North America – believed that treasury needs to do a better job at cash management in order to support business objectives. Because cash management is such a key part of treasury, this finding suggests that in some organizations cash management may not be strategically aligned with business objectives. Rather, it appears to be treated as a side-activity that takes place independently of what else is happening in the business. Alternatively, cash managers may not have the ability to keep pace with the accelerated rate of business transactions today. When the CFO asks for a cash forecast to support a decision for an acquisition, the report should be ready in hours not days.

In 2019, CFOs and their treasurers need put a strategic lens on their cash management. They also need to use all the levers at their disposal to maximize the availability of working capital, optimize return on investments, and mitigate the risk of fraud.

Working capital is always vital. Cash is the lifeblood of a company. It is even more vital in a world of slowing growth that is increasingly defined by populism, protectionism, and jittery markets. Not surprisingly then, the Kyriba survey found that 39 percent of respondents thought that their treasury function needed to be much more strategic at working capital management.

Accurate cash flow forecasts underpin working capital management. So CFOs who want optimal working capital management need to focus on enhancing the quality of forecasting that takes place within their organizations. It appears there is a significant amount of work to do here, since the survey found that unreliable cash visibility and forecasts are of big concern for 40 percent of CFOs.

Managing investor expectations underlines the importance of cash visibility. In 2018, a few large companies returned cash to shareholders by buying back their shares, and a number of mergers and acquisitions were executed. However, the estimated $1 trillion that remains trapped on large corporate balance sheets globally indicates that CFOs do not have the insights they need to confidently draw down their cash reserves.

The power of technology

Modern treasury management solutions (TMS) with global connectivity and integrated business intelligence provide the cash visibility and data visualizations that companies need to make critical business decisions. Yet the Kyriba survey found that just 60 percent of companies use a dedicated TMS. CFOs should question what is stalling technology adoption within their finance organization.  

Every sizeable company in the world today needs a system that it can use to manage its liquidity performance – a single source of truth to allow the company to optimize its cash through automated investments, working capital and risk management programs. In addition, the system should have the necessary data visualization capabilities to analyse the company’s cash position in multiple what if scenarios. With clarity into cash exposures and idle cash, a CFO has the confidence to use the analyses from treasury to drive growth for the business.

No one can predict the future with absolute accuracy – not even the World Bank. Perhaps global economic growth will hold up or it will slow down more than expected. Given the uncertainty that exists, CFOs can only plan for different scenarios. Ultimately, CFOs should look to empower their treasury in 2019 with modern technologies that will help drive strategic decision support in real-time. If the primary function of your treasury organization is treated as a back office, or unrelated function, you are not prepared to successfully navigate the evolving trade landscape and thrive amid all the rapid change that we see in the world today.

 

A version of this blog first appeared in Treasury & Risk: How Should CFOs Leverage Treasury in 2019?

 

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