Three Keys to Treasury Optimization

  • By AFP Staff
  • Published: 10/20/2022
Abstract illustration of big data

Understanding where you are on the treasury team maturity spectrum is key to unlocking efficiency. Foundational teams are a bit more tactical and reactive than a typical organization, whereas Strategic/Optimized teams are much more proactive and strategic.

In a recent webinar, which was a companion to the AFP 2022 Executive Guide: A Treasurer’s Guide to Centralization: Cost Control, Operational Efficiency and Digitalization, underwritten by Standard Chartered, we explored the three keys to treasury optimization, which contributes significantly to a team’s effectiveness as a strategic business partner to its organization, C-suite and board of directors. Here we provide you with some basic tenets of each key, as well as some practical examples of how these keys were implemented.

Key 1: Controlling costs

Are you being asked to control costs more and more in treasury? “Yes, the answer is yes, for sure,” said one treasury manager.

There are three different approaches treasury practitioners can use to identify ways to reduce and control operational costs, which include:

  • Cutting unnecessary costs to make the most of your spend and get more out of your investment.
  • Ensuring existing processes are adopted correctly.
  • Automating to lower risk, especially cyber.

What is it in treasury that you can measure and manage? It’s typically the tangible costs, but you should also think about your employees’ time. What are they working on? Their time is a cost.

Oftentimes it’s one of the synergies of implementation, of different tools and techniques. If there’s an unnecessary cost around a process being performed, maybe it's something that could be automated. It’s also important to ensure that processes are correctly adopted, whether it’s a longstanding process, new treasury solution or software you’ve recently implemented.

Treasury’s role in risk management has expanded in recent years. This means you’ll want to revise and revisit processes that fall under emergency procedures and business continuity as well. While you may only use them once or twice a year, making sure they’re running as efficiently as possible is important — when you do need them, time will be of the essence.

Additionally, be sure to consider new innovations. Maybe there’s a new tool that would lessen the time you spend on KYC, for example.

A treasury manager of a global food company spoke to the automation of some of the processes that lower risk and cut down on unnecessary costs. They described one of the pain points of treasury managers as being the lack of full visibility on bank fees. To solve this challenge, the team automated the bank fee reporting so that the treasury management system automatically receives bank fee reports from the banks.

The most time-intensive part of the process was the back and forth with bankers to standardize the codes, which took a couple of years. They also managed to standardize the bank fees across the banks and the region, across multiple countries, using the AFP Service Codes.

When your organization is global, keeping track of bank fees without automation can be daunting. The bank fees are charged to the bank account, requiring you to have to manually reconcile it. With the solution that the treasury team implemented, they were able to see a detailed breakdown of the types of fees that they paid, how much, and whether they were overpaying. Through this process, the company has saved between 25 and 30% annually.

From a banking perspective, Tarek El-Yafi, managing director, Americas Cash Management, head of sales and acting head of trade sales, Standard Chartered offered this: “This is something we've seen more and more of our clients move towards over the last few years. As everybody knows, information is power. Once you have the data, then you can actually do something about it, but only if that data is in a standardized form. Ask your banks if they have the capability. If they don't, make sure they have a game plan to get there. You also want your banks to have consistency between countries so that the billing code for a wire in one country is the same as another. So often, banks may say that they have this, but in fact, when you look under the covers, they may not.”

Key 2: Optimize operational processes

From a treasury perspective, any project should be designed to achieve one or more of these objectives:

  • Improve visibility over cash and risk.
  • Manage liquidity effectively.
  • Manage supply chain effectively.
  • Support the business as a partner.

One of the main focuses of this key is to have visibility over your cash and risk, knowing where you might have exposures and seeing if there is a mandate from the business drivers. Is the CFO saying we need to have cash at all times because that's going to drive the outcome of managing liquidity effectively? Are you able to use your working capital internally, maybe from different subsidiaries that you don't have to go outside the company for?

Formalization of processes is also part of the optimization process. This means asking questions such as, what are we doing? Why are we doing this? And what can we do differently so that time can be reallocated to other things?

A treasury manager of a global cosmetics company shared their experience joining the company when there was no formalized treasury team. As a first step, they had to explain to their colleagues what treasury is and what it means to the organization.

Supporting the business as a partner is about being a strategic support to the organization overall. It involves a lot of process re-engineering. For example, maybe you partner with procurement to look at the RFP process, or maybe there's a way your analytical mindset can really benefit the organization across all different levels.

The network treasurers work with is immense — everyone from local finance teams to external shareholders, regulators to senior management. How do you make sense of it? You start by asking yourself, what's the position of treasury in an organization?

Start by mapping everything you do, and understanding exactly, clearly what your treasury structure is. This includes how and how often you measure your cash performance, matching treasury to accounting, the procure-to-pay process, delegation of authority, external and internal funding, liquidity structure, third-party management, mitigating fraud, trade finance — these are all processes you have to map and understand. From there, you can look for areas to optimize.

The next process the treasury manager of the global cosmetics company tackled was optimizing the company’s liquidity structure. To do this, they implemented two things: automated cash pulling and intercompany funding agreements. With these two things in place, liquidity was able to move in a faster and more efficient way.

The final piece of optimization was finding ways to be a strong business partner. In the case of this particular global cosmetics company, working capital is a big deal, while for supply chain business operations, it is not. As a result, the treasury manager needed to educate and raise awareness around the importance of working capital on inventory planning.

Bringing the banking perspective back into this, El-Yafi recommends that at every step, you ask your banking partners: What can you do to help me? What capabilities do you have? When you're implementing a liquidity structure in a multi-country system, start with one country. Optimize in that country, and bring it to a regional level. If your company is global, bring it to a global level. And find out if your bank has the capability to help you at the local, regional and global levels.

If you’re using a global or regional banking partner, do they have the ability to automate regionally/locally, regionally/country? What tools can the bank provide you?

You’ll also want to figure out if you want your treasury system to be the main architect or the main system. In some cases, the bank can run the processes, such as automated sweeping; who's triggering those sweeps? Is the bank triggering it automatically based on pre-defined metrics, or is your treasury system going to be executing wires to automate a transaction?

Use your bank relationships to optimize your working capital so you don't have to bring your liquidity down to a zero balance every day. Or if you do, you can be more confident about it using bank lines.

Key 3: Digitalization

With any potential strategic change, including potential digitalization within treasury, there are a number of key questions to be considered including:

  • What opportunities are there?
  • How can solutions be designed?
  • What are the expectations?
  • What are the potential benefits of adoption, or costs of non-adoption?

Today, banks want to be strategic partners with their clients, just like treasurers want to be strategic partners with the commercial side of the house. And what that means is, from a digitalization perspective, it's not just about helping clients automate, going from manual to automated, taking away paper, using some electronic payments as opposed to checks or cash. Digitalization is about a lot more. For banks, it means helping your clients become more competitive.

Intentional treasury

“Treasurers need to make every decision with intention,” said Todd Yoder, managing director of global strategic finance and treasury, Fluor Corporation. “We're looking at the landscape as we're building out the maps for treasury, systems, architecture, and connectivity. What we have to constantly consider the unintended consequences of our decisions.”

“In the current markets, treasurers are bubbling right back up to the top again as critical to the business,” said Yoder. “We make the smart decisions when markets are calm, because when markets get volatile it’s too late.  Who does everyone call when volatility sets in? They call treasury.”

Want to learn more about treasury optimization? Check out the AFP 2022 Executive Guide: A Treasurer’s Guide to Centralization: Cost Control, Operational Efficiency and Digitalization, underwritten by Standard Chartered.

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