Treasury for Non-Treasurers: The Realities of Strategic Treasuries – Managing Complexity and Stakeholder Impact

Treasury for Non-Treasurers (3rd article, part 4)

Introduction

Building on our previous discussion, we now focus on the operational realities and stakeholder impacts of strategic treasuries.

Note: This article dives into the complexities of organisational structures and their impact on strategy and performance. If these topics are new to you, consider revisiting this article later when you've covered other foundational concepts. However, if you’re already working with strategic treasuries or are keen to talk to your treasury or help a client evolve to a strategic level, this deeper understanding will be key.

Operational Complexities in Strategic Treasuries

Strategic treasuries are inherently complex, requiring advanced systems, highly skilled personnel, and a nuanced understanding of both the organisation’s financial needs and the broader organisational context. This complexity introduces significant challenges:

• Operational Complexity: Managing a strategic treasury is akin to running a small business within a larger organisation. The treasury must balance various functions such as corporate finance, risk management, operations, and accounting, often in real-time. This demands not only sophisticated systems but also equally sophisticated policies, strategies, and processes that enable quick, informed decisions aligned with the organisation’s overall strategy. The complexity of this sophistication is obvious in a value-adding external-oriented treasury as it is a separate line of business, with separate legal entities and accounts. It’s less obvious in a company-oriented one. The key thing to look out for in the second one, apart from skilled personnel, systems, processes, and infrastructure, is an empowered risk management committee. This is a decision-making body that can convene quickly to adjust the parameters within which corporate finance and risk management functions can operate. In uncertain times, it could decide to restrict the functions’ freedom to operate. In calmer times, free them up. The committee typically includes the CFO, the Group Treasurer, heads of corporate finance and risk management, the head of controls, and other key stakeholders, depending on the company. It’s essential to remember that the four pillars [reminder: solvency management, profitability support, operational cost management and alignment with organisational strategy] are interconnected. As an organisation becomes more sophisticated in one area, a change in one pillar affects all others. For example, Ford Motor has a greater need for financing than profitability, while ADM must focus more on managing risks associated with agricultural commodities than solvency. Yet, one drives the other. Ford Motor Credit needs strong interest rate risk management, while ADM needs robust financing lines to provide ‘in case of unexpected loss’ capital reserves upfront.
• High Costs and Risk Management: Running a strategic treasury is costly, and the stakes are high. If mismanaged, a strategic treasury becomes a liability. For instance, Metallgesellschaft AG’s use of energy derivatives in the early 1990s led to potentially company-ending solvency issues when the market moved against them. This highlights the critical need for robust liquidity and risk management frameworks and expert oversight in strategic treasuries.

• Strategic Alignment and Autonomy: Strategic treasuries must operate with a degree of autonomy, allowing them to be agile and responsive to market changes. However, this autonomy must be carefully managed to prevent misalignment with the organisation’s core strategy. The example of ABB’s Financial Services division, which became so large and complex that many believed it lost touch with the core business, underscores the importance of maintaining alignment between the treasury and broader organisational objectives. This challenge arises not only because it operates as a distinct business but also because the operations have very different ways of thinking about time. Strange but true. We will be talking more about this in later articles. Anyway, financial markets change constantly, requiring people to adapt moment-by-moment, while selling cars and providing auto-financing operates at a slower pace, allowing sellers and buyers to have more time before needing to make decisions. Using the example above, making sure that Ford Motor Company, the core car selling company, and Ford Motor Credit, the financing arm, align and coalesce into a common culture with a common sense of urgency is challenging. Addressing that challenge is a key reason why strategic treasuries are organised the way they are —a topic we’ll explore further in a later article.

Strategic Treasuries and their relationship to Traditional Finance Functions

Strategic treasuries are results- rather than control-oriented. The implications of this are profound. Naturally, it's hard for CFOs and other stakeholders to adopt different mindsets when comparing treasury to other finance functions.

In control-oriented treasuries, cash forecasting is usually based on information sourced from finance functions or at least presented in an accounting format. This changes in strategic treasuries. All strategic treasuries focus on dynamic cash flow management rather than the end-of-month, -quarter or -year snapshot-oriented approach of accounting.

Value-adding external-oriented treasuries are more-or-less separate businesses, so the relationship and the data transferred between them and other finance functions is not a major issue.

Company-orientated ones, on the other hand, are normally still part of finance, which can be confusing for all parties, treasurers and non-treasurers alike. It’s difficult to know which lens to use, or whether to use both, when looking at or working with this kind of treasury.

·??????? Cash Flow-Based Control vs. Accounting Control Mechanisms:

Accounting’s primary use is to show and explain past performance. Strategic treasuries look forward. They manage cash in real-time to ensure long-term solvency and support profitability. To do this, they use controls based on today’s value of future cashflows (i.e., what an external bank would pay or receive to take over these future cashflows, theoretically). They do not use an offset of future assets and liabilities sourced from monthly and longer accounting time-buckets. Assets and liabilities are approximations for cashflows, not actual cashflows, so the first method is more accurate. In complex strategic environments, lower levels of treasury personnel are typically controlled using these present-value-of-future-cashflow measures, while higher levels are controlled both by these and by accounting-based measures. This, by the way, is one of our tells: If the normal language used by everyone in the treasury is ‘value at risk’ or variations of this such as ‘risk-adjusted value at risk’, or ‘variance analysis’, the treasury is more likely to be a strategic treasury. But, warning, some companies produce reports with value at risk and variance analysis figures and then don’t use them. It is their everyday use that tells you whether the treasury is a strategic one or not, not whether they are in a report.

·??????? Integration within Finance:

Accountants – and most CFOs who started as accountants – are trained to value prudence over a balanced-view early on in their careers. This can be a double-edged sword. For example, as we mentioned in the previous article, Tesco used its consistent cash surplus to create a banking line of business, offering customer loans and banking services that drove more business back to its core retail operations. In contrast, Morrisons, another UK supermarket chain, took a more conservative approach, using its cash surplus to buy out property leases, a move that reduced costs but didn’t provide the same financial advantages as Tesco’s strategy. This difference made Morrisons a target for private equity restructuring, ultimately leading to its sale to a private equity firm in 2021. Those of you who are accountants wanting to understand and work with treasury must internalise and accept this difference, and treasury must do the same, for both sides to work effectively together. Prudent CFOs should ask, “Am I getting the best results possible from the core company’s financial advantages and my treasury function?” You have the hard job. You need to view Treasury through both lenses – the balanced-view and the prudent one. This is especially challenging in large and complex operations.

Summary of Benefits

Many companies with over 2 bn$ in sales can financially justify having a strategic treasury. Others have to have one anyway. Structured and run properly, they provide material value-add to organisations including to non-treasury stakeholders. More importantly, they make the organisation resilient, ready for black swan events which all companies eventually face.

The benefits of strategic treasuries—enhanced profitability, improved risk management, and increased organisational flexibility, especially during times of crisis —were explained in the previous article. They are substantial but they do come with the challenges outlined above. Still, if you have roughly over 2 bn$ in sales, less if there is a strategic imperative, in my opinion, it’s worth moving towards becoming a strategic treasury. If you feel put off by the complexities, re-review the benefits listed in the last article. The benefits are existentially worthwhile. Every company will eventually face a black-swan event. Only a strategic treasury can buy management enough time to sort the problem out.

Impact on External Stakeholders

Strategic treasuries impact external stakeholders as well, including but not limited to those of you who are suppliers, customers, and financial partners. Unlike the internal benefits discussed before, the impacts on you are different:

• Supplier Relationships: Suppliers, particularly banks and financial service providers, find strategic treasuries attractive due to the high volume and value of transactions they generate. However, servicing these strategic treasuries is demanding. All suppliers want their business, so strategic treasuries can demand high levels of service, value-added offerings as well as competitive pricing. Staying competitive is a challenge.
• Customer Impact: Company- and external-focused treasuries providing products and services are in the reverse position of having to provide good service, pricing, value-added offerings and, more generally, customer satisfaction. Maintaining strong relationships with customers is more challenging than that of a standalone business, as perceived failures impact not only the treasury but also the parent organisation’s profitability and reputation as well.
• Broader Financial Ecosystem: Strategic treasuries influence market dynamics through their activities, affecting not just their own organisation but the wider financial community. Their decisions on hedging, investment, and liquidity management can have ripple effects across markets. GMAC, the customer financing arm of GM, was affected by GM’s credit-rating reduction, which led to higher borrowing costs. It ultimately needed a bailout by the US Government, who separated GMAC into a separate company now called Ally Financial.

Conclusion

Strategic treasuries are complex, more like independent businesses than traditional finance functions. Accepting this and being willing to take on the associated complexities is difficult. Despite this, those organisations who do find them to be existentially worthwhile, materially valuable and, in best case situations, strategic differentiators. Non-treasurers need to look at these functions differently from operational treasuries to understand and make the most out of them.

Strategic treasuries are complex functions that can significantly enhance an organisation’s performance, but they come with their own set of challenges. From managing high operational costs to maintaining alignment with broader strategies, the stakes are high. Knowing about this complexity and dealing with it holistically enables all of you internal- and external-non-Treasurers to get involved in more effective collaboration and achieve win-win successes. Being aware of this complexity and the fact that treasury really starts diverging from the rest of finance at these higher levels of sophistication is also key for the rest of you non-Treasurers, those who have as yet no direct contact with them, if you want to understand what they are and how they work, whatever your motive for doing so.

In the next article, we’ll explore tactical treasuries - the transition organisations between operational and strategic treasuries as they move up the sophistication ladder. In particular, you’ll learn about ‘the Chasm’, the hole in which many companies fall, many never to come out again.

Till next time.