Best Practices for a Resilient Treasury Function

  • By AFP Staff
  • Published: 2/28/2023
Stacked Blocks

Treasurers play an important role in supporting the organization in achieving its business objectives and strategy. One of the main goals of treasury is to manage an organization’s cash and related financial assets (and liabilities) effectively and efficiently. As such, treasury has a responsibility to ensure that the company has access to sufficient cash and liquidity at all times, regardless of the current state of the economy.

Make sure you’re prepared to take on whatever challenge comes your way by equipping yourself with these best practices for a more resilient treasury function.

Improve the visibility of cash and enhance the quality of cash forecasts so you can make more informed decisions on the levels of cash to hold.

Integrate technology.

Treasury professionals rely on data to make sound decisions for their organizations. As such, treasury has become the banking clearinghouse for information from all other operational areas, including accounting, payables, receivables and finance.

Connecting these sources and systems successfully is best done through a treasury management system (TMS), making the management of technology an integral part of the role of treasury managers. A TMS can provide you with automated and customized reports for bank balances, payments and audits. Consolidating multiple reports into a dashboard allows you to get an overview of treasury operations in a simple-to-follow format.

Incorporate automation.

A TMS may also come with features that can help you improve the efficiency and accuracy of your cash forecasts. For example, instead of using a spreadsheet to forecast cash flow, you can automate the forecast through the TMS or incorporate solutions that forecast cash with artificial intelligence.

Consolidate bank accounts.

Closing unnecessary accounts will improve your visibility over cash and ease the cash forecasting process. Other ways to consolidate your view of cash include:

  • Implementing an in-house bank (IHB). Most often utilized by multinational companies with complex banking systems, an IHB allows a company to use its resources for financing to consolidate all of its treasury functions into one central entity, rather than having each subsidiary work through a local bank. The benefits are transparency, efficiency, and the centralization of all your banking, currency risk, payments and collections.
  • Implementing virtual accounts, which can streamline and rationalize your bank structure by thereby enabling you to pay on behalf of, or receive on behalf of, as part of an IHB or independent of an IHB, which streamlines and rationalizes your bank structure. Virtual accounts create a single, consolidated view of cash. They allow you to access granular data, such as payments by business unit, in real time.

Find opportunities to manage working capital more efficiently in order to maintain access to short-term financing.

Manage the cash conversion cycle (CCC) more effectively.

Focus on internal processes to unlock working capital “trapped” in the CCC, which can then be recycled back into the business and influence the bottom line. Treasury can scope out inefficiencies in two important ways:

  1. Introduce more efficient ways of processing data and payments associated with the supply chain.
  2. Help other departments to understand the financial implications of the decisions they make.

Watch for economic conditions that could impact your supply chain.

Monitoring general Days Sales Outstanding (DSO) levels can alert you to potential deterioration of incoming cash flow, allowing you to manage any associated liquidity risks. This is particularly helpful to companies with a smaller number of key customer accounts as it highlights any potential problems, giving you time to get out ahead of any issues.

Help business units understand how market conditions can affect their operations.

Treasurers understand cash flows and risk, and therefore how sensitive each part of the business is to changing market conditions. By engaging with the business at the decision-making level, treasurers can employ their understanding and knowledge to improve the management of working capital and liquidity and reduce exposure to market volatility for the organization as a whole.

Have a clearly defined risk management policy that identifies types of exposures and mitigation techniques.

Develop a comprehensive business continuity plan.

A comprehensive business continuity plan is crucial to ensuring that treasury is agile, adaptable and trained to deal with the next unexpected event.

Developing a successful plan includes five steps:

  1. Identifying mission-critical functions. How do you know it’s mission-critical? It’s critical if an interruption creates significant disruptions in your business.
  2. Assess the potential risks that could disrupt these functions. Determine both the likelihood that something could go wrong and the consequences that would then occur.
  3. Evaluate contingency measures to deal with the problem, which includes understanding and cataloging the measures already in place and evaluating their effectiveness.
  4. Determine the appropriate actions to take in the case of specific problems. Prioritize those actions based on their impact on the organization and the previously determined level of risk.
  5. Create a communication plan that includes essential phone numbers and contingency instructions for all staff.

When creating procedures, make sure to provide an appropriate level of detail so new team members — and interim management, as needed — are able to learn how to perform the necessary tasks. Update the documents regularly so the information remains accurate.

Consider financial risks.

Having an effective financial risk management policy, together with management support to act when appropriate, is considered a best practice. The alternative can result in higher costs of doing business, which would ultimately reduce both revenues and profits.

Financial risks to keep in mind include:

  • Interest rate risk, i.e., changes in investment values and borrowing costs. Treasurers are in the best position to negotiate the spreads applied by the company’s lenders.
  • Foreign exchange risk. FX rates fluctuate, which can impact the overall firm value as it relates to any transactions, assets and liabilities denominated in a foreign currency.
  • Commodity price risk. Commodities that are traded in markets where the supply is concentrated in the hands of a few suppliers can significantly inflate price volatility.

One way to assess vulnerabilities is to run a series of analyses. Two common types include:

  • Sensitivity analysis, also referred to as a “what-if” analysis, is used to determine how diverse values of an independent variable affect a specific dependent variable within a distinct set of assumptions. This analysis helps identify the variables that have the greatest influence on the financial model, then classifies them as either uncontrollable or somewhat controllable. Treasurers can monitor the uncontrollable variables, so they’re prepared to adjust operations as needed when unfavorable movement is detected.
  • Scenario analysis, typically used in response to an unfavorable event, allows you to estimate the expected value of a portfolio following a particular change in the values of key factors. It is similar to sensitivity analysis, except that more than one variable is altered at a time. This is a great tool for assessing vulnerabilities, as it allows you to model outcomes in different combinations of market conditions.

Consider operational risks.

Mitigate potential losses resulting from inadequate systems, management failure, faulty controls, fraud and human error, and other related issues.

Operational risks to keep in mind include:

  • Process risk: Regularly review processes to identify bottlenecks and unnecessary manual interventions. There may be tasks you can automate, which can help reduce the incidence of error and fraud and free up time for more strategic tasks.
  • Counterparty risk: Different customers and suppliers will react differently to changing interest and foreign exchange rates. As a result, some may run into difficulties, and you may encounter the risk of the other party not performing as promised.
How TIS Enables Accurate Cash Forecasting During Uncertain Times
In the modern business environment, cash forecasting is an essential treasury activity. However, during periods of uncertainty – whether due to a recession, a pandemic, or geopolitical instability – the forecasting process becomes even more important.
Read the full article.

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