Treasury for Non-Treasurers: A Tale of two Operational Treasuries (Basic and Control-Oriented)

Treasury for Non-Treasurers (3rd article, part 2)

A case study: Building a Control-Oriented Treasury out of a Basic One

Background: "You want to reduce the chances of losses due to foreign exchange movements; First you need to set up a controlled treasury environment"

Once upon a time, I was fortunate enough to have a senior Treasury position in a fast-growing company. My first contact with the company was as a consultant, advising on foreign exchange risk management, part of the pillar we've called profitability support (see the 1st article - link below). As the company had become more international, the possibility of significant losses due to foreign exchange rate movements had increased to an uncomfortably high level for management.

My advice as a consultant was ‘Fine, you can do this. It makes sense. Treasury functions tend to start when the company has about $ 200 M in sales, and you have that. But having a more active treasury will increase the number and value of financial transactions and associated high-value payments to be done. Your current setup and processes are not well controlled. Frauds and material errors are possible and could become more likely. You first need to change this”. Saying yes would turn their basic treasury into a control-oriented one. They did agree, and I was appointed to set that better treasury up.

What did the basic treasury look like?

The situation was unsatisfactory both from solvency and profitability support perspectives.

When I first arrived, the Treasury function had one employee. He would manage head office’s borrowing and lending needs and provide cash to or from subsidiaries based on monthly reports prepared by the operations (cash forecasts) or as requested. The forecasts were not normally challenged, and it was clear to me from the subsidiaries’ accounts they were sitting on a lot of cash. This was happening at the same time as the company had significant borrowings at the parent level, where the cash could be used to reduce debt, and where the cash was providing no return to offset the inefficient borrowing. The situation was unsatisfactory both from solvency and profitability support perspectives.

Everything was seen through the lens of accounting

It was also clear that the current Group Treasurer (by title) lacked significant treasury skills and could not influence the CFO to do the basics. One example was that when funds were provided to the companies, no repayment date was set. Borrowings and loans were treated the same way as non-repayable payments and collections (accounts payable and receivable.) Since no date for repayment was set, no foreign-exchange hedging could take place (a specific date for the return cashflow is needed to protect the company against FX risk). But management was fine with this because the accounting treatment on accounts payable and receivable was that they were long-term in nature, not planned to be repaid, and therefore not regularly revalued. Therefore not causing a volatile foreign exchange gain or loss. This was acceptable from an accountant’s point of view. From a treasury perspective, it was not. Providing money at one exchange rate and receiving it back at another would cause a real economic exchange gain or loss. It was a risk that was not tracked and would not show up until it was too late to be managed.

We’ll discuss this difference between treasurers and accountants more in a later article. Unlike in this case study, most Treasury and Accounting departments get on well together. However, in my experience, both frequently struggle to explain WHY they are different. It’s important both for accountants and CFOs directly to understand this difference better (CFOs usually come from an accounting background.) It's equally important for non-Treasurers to understand the differences so that they can get most out of their interactions with each.

Note that neither is right or wrong; they are just different, like someone who is Japanese and another American. Nobody should confuse one for the other.

Productivity and management strategy impacts were immaterial

All of this was typical in a basic treasury. Accounting was understood, while treasury was not. Solvency was not optimised, profitability not supported and productivity and management strategy impacts immaterial.

Building the Control-Oriented Treasury

How did it go?

It was difficult

I’d love to tell you that the transition was smooth, but it was not. This highlights why moving to even a ‘simple’ controlled treasury operation is not a no-brainer or easy to implement. It is difficult and helps explain why moving even further from an operational to a strategic treasury is so hard and, therefore, happens so rarely.

What went right?

People with experience were recruited and efficiently tasked

People with experience were recruited. One became the expert in cash management (payments and receipts, borrowing and investing), another in risk management (mostly foreign exchange), a third in interfacing with the subsidiaries over their cash needs and availability, the last with supporting long-term financing needs and internal controls.

We selected a global banking partner

I managed the team and worked on getting a common bank in place, to achieve automatic visibility over global cash balances, reduced banking costs and a controlled environment. Banks with the right capabilities were asked to present, and one was selected as the global provider. The implementation of transferring accounts from other banks to this one was started.

A specialist treasury management system would be bought once the basics were in place

It was accepted that a specialist treasury management system would be purchased when we started getting more sophisticated in our FX risk management, the strategic end-goal, by which point automation would be needed to make the function productive more productive and better controlled. Note, in passing, this was in the days when treasury management systems were significantly more expensive than they are now. These days, one of these systems would be co-equal on the shopping list as a global bank.

What went wrong?

The company culture

Showing figures that were different from the accountants’ was taken as an attack on their previously unchallenged dominant position. Several acts of internal sabotage were reported. The CFO, an accountant by training, wanted a monthly explanation of the accounting foreign exchange gains and losses from treasury – something as difficult to achieve without powerful systems as translating Japanese to American English fluently! Treasury staff time began to be taken up not on putting the basics in place but in firefighting instead. The remainder of their time was dedicated to implementing the new bank.

Management impatience

Over time, management forgot that I, as a consultant, had explained to them their long-term objective couldn’t be reached without controlled basics being in place. Unacceptable foreign exchange gains and losses continued to occur, and not enough progress was made. In addition, one the banks being replaced by the new bank was a favourite of at least one of the members of the C-suite. They had been ruled out as the global bank because, at that time, their system could be hacked by editing a text file to find the names of users and their current passwords – an unacceptable situation for a control-oriented treasury. Nevertheless, the C-suite manager didn’t care; it was not his problem.

There was no happy ending

Relationships became increasingly strained. The new structure wasn’t going to happen. It was time to leave.

What had we achieved?

Improved solvency management

We had achieved control over external cash management, reduced the number of global bank accounts and centralised a lot of cash. Improved solvency management - tick ??

Improved profitability management

We had improved FX risk management, reducing head office’s risk and improving the understanding of global risk, in preparation for doing something about it. We had achieved up to $ 2 M in annual savings through better banking costs and reduced borrowing rates. Improved profitability support – tick ??

Improved (controlled) productivity

We had improved operational management in the head office and several global locations using strong electronic banking systems, including enhanced internal controls. Improved productivity – tick ??

?? Considering this and the 80:20 rule, we could say we set up a control-oriented treasury. However, being honest with ourselves, we hadn’t. Our achievements would likely not pass the test of time.

What hadn’t we achieved - and what were the lessons to be learned?

?? We had not achieved alignment with strategic objectives.

Improved solvency wasn't a priority

Improving control over cash was not seen as a priority. The company was borrowing mostly to fund acquisitions, not fund subsidiaries. It’s high growth figures meant there were no issues borrowing more. Solvency didn’t need to be controlled better. It wasn’t at risk. ?

Supporting profitability wasn't a priority

Profitability wasn’t at risk either. The company was, or was fast becoming, the global leader in its business. The amounts being saved were small compared to the overall profits of the company. In addition, existing and future borrowing capabilities were based on accounting profit before interest expense. Earnings before interest, tax, depreciation and amortisation, to be precise. Interest savings were therefore considered less valuable. Profitability didn’t need to be supported by Treasury. ?

Productivity improvements were seen as immaterial

Treasury was still a small function. No fraud had happened in the past, so why should one in the future? Treasury’s controlled productivity was trivial to management. ?

Strategic improvement of FX was wanted; We had delivered only tactical benefits

The failure – mine if you like, or mine plus the CFO’s if you believe in mentoring and collaboration - lay in the lack of alignment with the strategic objectives. In retrospect, implementing immediate and more detailed reporting on FX gains and losses and proposing how to address these would have been a better strategy, irrespective of other potentially more damaging issues. As in other situations, perception was what mattered. Successes that management cared about should have been achieved first before spending significant amounts of time elsewhere. This was the lesson I learned.

What lesson can a non-Treasurer learn?

All non-Treasurers

• The four objectives of solvency management, profitability support, productivity enhancement and strategic alignment are not separate. They interact with each other.
• No treasury above the basic treasury level is successful without having some strength in all four pillars. None of them are optional.
• Aligning with management strategy is the most important objective. Successes as perceived by management frees up time, resources and budget. Without these, success in other areas is impossible.
• Accounting and Treasury may both be part of the finance function, but they are very different from each other. But note, the two can and usually do get on.
• Treasury staff are often provided with training on technical skills and get examined and certified. Skills such as cash management, risk management, corporate finance, economics, tax and accounting. However, soft skills such as communication, prioritisation, collaboration, conflict resolution, influencing and more are as important as technical treasury skills. They should be taught everywhere in the company and to all levels but, currently, sadly, they are not. They are usually learned on the job. Treasury is a small function that deals with often bigger functions and senior personnel. To be effective you should seek as much training on soft skills as soon as possible and self-learn if the company won’t pay.
• It is critical to understand the context of the company, meaning it’s fit in the outside world but also the fit of different stakeholder functions and even individuals within the company itself. It’s also key to know the culture of the company and functions - accountancy-figures driven and distrusting (evidenced by sabotage and lack of senior management support) in this case.

Non-treasurer colleagues in other functions and at more senior levels:

• You, the non-treasurer colleagues and senior management need to know that, although it is possible to implement actions to deal with just one or a few problems, the four pillars are closely intertwined and not addressing one or more of the pillars is creating a problem for the future. I recommend you take the initiative to talk with your treasury specialists to understand what the unintended consequences of a change wanted might be. Risks can be accepted by management, but they should be first understood and explicitly accepted. If management decides they are not acceptable, more time should be given to Treasury to change more to manage these consequences as well as deliver on the desired outcome.
• You can and should support treasury colleagues in understanding what management’s strategy is at all levels and how treasury might be failing to support this. It is probably unintentional. Treasury, on the other hand, needs to listen.
• Human resource colleagues should, if practical, ensure soft skills are taught within companies. Not just one course but ongoing and ever-more detailed education that grows with the trainees’ rising seniority. This will become critically important when transitioning from a control-oriented treasury into a strategic one. So important that we will cover it in a later article covering these treasuries in transit – the Tactical Treasuries.

I hope you found this real-life case-study interesting and related it back to the previous articles. Do contact me on LinkedIn if anything's not clear.

Next article: The next article will be on “How does Treasury impact business performance? (Part 2: Strategic Treasuries)”

Previous Articles in this Series:

1st article – What is Treasury?

2nd article – Is Treasury a Strategic Function?

3rd article - What’s Treasury’s impact on business performance? (Part 1: Operational Treasuries)