What Corporate Treasurers Should Be Focusing on in the Years Ahead

By Andrew Burns | 9 August 2016

The skies are darkening and the distant rumble of thunder can be heard. Should treasurers be reaching for their umbrellas and rain coats or just battening down the hatches? 

The global economy has seen growth since the days of the credit crisis but it remains fragile. Brexit has exposed that fragility and the continuing uncertainty has led to volatile markets. Even the recent minutes of the ECB show the expectation that the effect on the single market’s economy could be ‘significant’ and ‘difficult to anticipate’.

In addition, many organisations that are struggling with low growth or flat lining revenues have focused on tidying up internal affairs in order to reduce costs and improve the bottom line.

Lastly, regulatory pressures are starting to be felt, particularly from Basel III as well as new ones like Section 385, which threatens to disrupt US corporations’ intercompany financing.

So what do treasurers need to focus on in the coming years?

To start, it goes without saying that treasury is a support function and should always be looking to contribute to the overall strategic objectives of the organisation. However, the environment now exists where there is a perfect opportunity for treasury to bring fresh ideas and leadership. 

There are four main areas that treasurers should be prioritising:

1.     Cash Management

Negative interest rates have been newsworthy but had not affected corporate deposits until very recently. General expectations are that negative interest rates are set to stay until 2019, which means banks are now starting to push the costs onto corporate deposits. The impact of this goes to the heart of one of Treasury’s core objectives: preserve capital.

Those companies with cash deposits will now need to start looking into alternatives to avoid capital erosion due to negative interest rates.

2.     Regulation

As Basel III comes into play, the liquidity coverage ratio will start to push up the costs of services like overlay pooling structures. This, combined with the possible impact of section 385 on the ability to finance intercompany lending through debt rather than equity, means treasurers should look at their overall banking structure. Would it make sense to leverage or even establish local banking as a cheaper form of financing?

A strong banking relationship is also vital to keeping up with how legislation affects accounts and processes. It can also aid in discovering the best tools available to manage the latest legal requirements.

3.     Technology

Moore’s law, or the observation that the power of computing will double every two years, means that technology is constantly evolving. With that evolution comes change. Industries of all types are seeing disruption brought about through new technologies, whether it be taxis, hotels or the banking sector—and it happens fast.

With emerging technologies like Blockchain, corporate treasury will find itself being fundamentally changed. The ability to securely and transparently transfer the value of anything digital will have wide ranging implications on organisations. It will also affect how treasury can support organisations with regards to funding, payments, working capital, cash management and FX.

Although the practical application of this technology currently seems to be far off, we will soon undoubtedly be talking about the antiquated days before Blockchain.

4.     Supply Chain

Suppliers are not typically the first area of concern for treasurers, nor even on the radar much of the time. Yet the supply chain represents both an enormous opportunity as well as a risk and therefore deserves to be a key focal point.

The opportunity exists for both balance sheet and P&L benefits with a combination of supply chain finance and dynamic discounting. Bank SCF enables the generation of cheap cash whilst dynamic discounting represents an excellent risk-free investment opportunity with returns averaging 5-7%, which has been unheard of in the world of treasury for many years.

This last point should be of particular interest to treasurers whose cash rests in one of the five currencies with negative rates. The fact that dynamic discounting also allows discounts to be offset against COGS means that treasurers now have the ability to contribute significantly to cost reduction targets. Best of all, the without affecting headcount and can cover their running costs quite comfortably.

The risk comes in the form of financial risk gradually building up in the supply chain as suppliers are increasingly impacted by tough economic times. The companies in your supply chain face diminishing sources of financing as well as more expensive financing. This means buyers are exposed to the danger of financial risk over-spilling into physical delivery and impacting the business.

In the past, financial risk concerns focused on strategic suppliers, but the effect of even a 5% bankruptcy of non-strategic suppliers could have the same impact as the loss of a strategic supplier. Dynamic discounting is a simple fix to this as it allows suppliers to not only gain access to cash flow but also enables them to take cost out of their existing financing.

The future for Treasury

Treasurers who can establish a sound cash management strategy in the face of what is sure to be ever more complicated regulation will have a good buffer against the storms to come. Those who also seeks out innovation and value in the supply chain while mitigating risk should see sunlight through the clouds even sooner.

By Andrew Burns, Business Development Director, C2FO.

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