3 Ways Liquidity Planning Technology Improves Cash Flow Forecasting Results

03-01-2023 | treasuryXL | Kyriba | LinkedIn |

The treasurer and CFO are today more closely linked to strategic financial objectives for the CEO, ensuring finance teams provide informed guidance on navigating risks and opportunities. This year, a revolutionary practice area and innovative technology is transforming the value of short and long-term cash flow forecasting with more certainty and analytics, empowering finance with a strategic liquidity planning toolset.

By Brian Blihovde
Senior Direct, Product Marketing

Source

The treasurer and CFO are today more closely linked to strategic financial objectives for the CEO, ensuring finance teams provide informed guidance on navigating risks and opportunities. This year, a revolutionary practice area and innovative technology is transforming the value of short and long-term cash flow forecasting with more certainty and analytics, empowering finance with a strategic liquidity planning toolset.

Modern technology solutions are driving value across cash flow forecasting and strategic planning through inclusion of more information from different sources, using artificial intelligence (AI), machine learning and flexible scenario analysis. These user interfaces, reporting and analytics provide finance with better identification of free cash flow targets, improve EBITDA, and deliver views and analysis of total working capital levels.

Creating Engagement and Clarity in Liquidity Decisions

New technology solutions for liquidity management planning create forecasts and analyses on actuals and planned cash flows to include liquidity instruments from debt to working capital programs. When the combination of cash, planned or committed financial flows (AP, AR, treasury) are used as an integrative planning tool with analytics, decision-making for the CFO is more accurate and based on today’s and tomorrow’s reality. Forecasted transactions originating from purchase requisitions, orders and finally invoices are a much better source of forecasted flows than spreadsheet estimates.

Liquidity planning tools and features created as part of an advanced solution gives finance the ability to see exact components of working capital and cash flow forecasts further out to deliver clarity on whether debt or other sources of liquidity will be too expensive. Identification of the mix of liquidity needed and the availability of planned sources or uses further helps the treasurer plan the intersection of borrowing levels, cash flows and confidence parameters for various scenarios and comparisons. The ability to quickly adjust parameters within a planned liquidity model with established, accurate cash management baselines, makes the job easier and faster for not only treasury and FP&A, but gives the CFO quick strike decisioning on the planned mix of cash and debt to fund operations or strategic decisions.

Achieving Optimal Levels of Liquidity

Global economic volatility continues to impact multinationals across a variety of indices and continued strategies by central banks to slow inflation with interest rate increases translates into significantly increased costs of borrowing. For finance organizations that provide liquidity as a net short-term borrower, it is extremely important treasurers can assess the mix of debt and the most advantageous debt instruments, or working capital programs, available. Treasury teams can directly impact greater overall financial performance by optimizing the cost of liquidity and keeping the right levels of available debt and free cash for investments. Modern liquidity planning solutions create better long-range views of available debt vehicles in cadence with cash and other programs to help prescribe the correct mix of long and short-term borrowing. Identifying where short-term debt has carrying costs over other sources of liquidity while also reducing the number of overall debt instruments (facilities or other lines) reduces costs that affect net earnings. Liquidity tools that incorporate the complete set of debt vehicles coupled with cash and forecasted flows create more ability to lessen reliance on borrowing, reducing and optimizing debt levels – all significant contributors to a stronger EBITDA.

Expanding C-Suite Confidence with Future Analytics

In a recent cash forecasting webinar, 90% of attendees stated that they “lose confidence in their forecasts within three months.” Regardless of a static or rolling forecast scenario, lack of confidence in your firm’s future cash and liquidity levels hinders the ability to fund longer-term, accurate strategic decisions without having more of a backup in the form of higher credit limits available to shore up potential liquidity shortfalls.

The new cash forecasting features and capabilities available in new liquidity planning tools are creating better capabilities to manage longer-term liquidity questions:

As the economy continues to spiral, uncertainty will bring down the values of organizations who are incapable of managing the rate at which volatility impacts EBITDA – a consequence of legacy thinking and systems. CFOs and treasurers who are taking a new tact in leveraging liquidity across the enterprise, are finding success in minimizing impacts to their income statement and have an unobstructed vision for how they can unlock near and long-term growth.

 

A guide to conditional FX orders

27-12-2022 | treasuryXL | Kantox | LinkedIn |

In this article, we look closely at conditional FX orders, a powerful tool when executing your hedging strategy, and the unique role it plays in currency management — especially when it comes to delaying the execution of hedges.

Conditional orders: a brief definition

A conditional FX order is an order to execute a spot or a forward transaction to buy or sell one currency against another—but only when a predetermined limit is reached.

Conditional orders include stop-loss (SL) and take-profit (TP) orders. While SL orders are aimed at avoiding losses beyond a certain limit, PT orders are designed to take advantage of favourable moves in currency markets.

Note two time-related aspects of conditional orders in forward markets:

(a) The tenor of the underlying forward contract is specified (it could be one month, six months, or a year)

(b) The validity of the order is specified too (it can be valid for two weeks, six months, or set on a  good-until-cancelled basis).

Conditional orders are usually set on an OCO basis: one-cancels-the-other, automatically to avoid the same exposure being hedged twice in the event of extraordinary market volatility. 

Note, too, that in the event of extraordinary market volatility, conditional orders can be executed at less favourable levels than desired. This limitation exists not only in FX but in all financial markets. 

A powerful tool for risk managers

The primary purpose of conditional orders is to provide a safety net around an FX rate that the treasury team wishes to defend.

It can be the rate used in setting prices —aka the campaign/budget rate—or a ‘worst case scenario’ FX rate.  

Say that you wish to defend the rate of EUR-USD = 1 on a spot basis while the market is trading at 1.08. In this case, it is prudent to set three SL orders, each covering a third of the exposure, at 1.02, 1.00 and 0.98, respectively.

Assuming that the three levels are hit, you are mathematically assured to defend your budget or worst-case scenario FX rate.

Time is on your side

In hedging programs designed to protect a budget FX rate, the ‘buffer’ set between the market rate towards the start of the campaign and the rate to be defended with SL orders provides risk managers with a critical resource: time. 

As long as the SL orders are not executed, the passing of time means that hedge execution is delayed while FX risk remains fully under control. This brings the following four systematic advantages:

(a) More time to update cash flow forecasts

(b) More savings in terms of the cost of carry when forward points are unfavourable

(c) No cash immediately needed for collateral requirements

(d) More netting opportunities

And it’s not over yet! With luck, your TP conditional orders can be hit as well. 

Backtesting conditional orders

We recently conducted a backtest of a hedging program designed to protect the budget rate of a UK-based exporter selling into emerging markets. Over a four-year period (2017-2020), the firm would have outperformed its budget rate in three of those years while equalling it in the remaining year. In one year alone, overperformance reached 5.8%.

Delaying hedge execution with risk under control allowed the treasury team to hedge on the back of firm commitments, providing a better hedge rate than the stop-loss orders. So there you have it: when managing currency risk, consider using conditional orders. Time will be on your side. And you’ll sleep well at night! 

P.S. If you’re drafting your upcoming budget, download our Budget Hedging report and find out how to use conditional orders.

Conditional orders

Three Reasons to Add Real-time Payments to Your B2B Payments Mix

15-12-2022 | treasuryXL | Kyriba | LinkedIn |

If you are reading this, you are likely already exposed to the hype surrounding real-time payments. Whether you believe in the hype or not, it is inevitable that real-time payments will become ubiquitous globally in the near term.

By Rishi Munjal
VP, Product Strategy, Payments

Source

The last two decades have shown that countries with a strong mandate for real-time payments tend to have robust adoption. For example, emerging economies like India and Brazil that have implemented central bank mandates are outpacing developed nations like the U.S in terms of customer adoption.

In 2017, The Clearing House launched the RTP® network, the U.S.’s first real-time payment infrastructure. However, the adoption of real-time payments in general remains low, currently representing 0.9% transaction volume and 0.5% spend, according to the ACI Prime Time for Real-Time report. Specifically, for B2B payments the adoption is even lower. In this blog, I will explore three simple reasons a corporation should consider real-time payments as part of its payment mix. I will stay away from industry-specific use cases, as these were covered in my previous blog.

1. Rebalance your payment mix towards lower-cost and comparable payment types.

While finance organizations strive to keep the costs of operations low, they often only consider direct costs of payments. This practice creates a distorted comparison that can become a reason for inaction. Thus, it is important to measure both direct costs (e.g., provider fees, card interchange, etc.) and indirect costs (e.g., labor, technology, and support costs).

Using industry benchmarks provides a good starting point. The 2022 AFP Payments Cost Benchmarking Survey indicates that the median cost range for sending and receiving RTP® is comparable to ACH and cheaper than wires. Replacing qualifying volume of wires with RTP® can save tens of thousands of dollars, if not more, on an annual basis. You can realize these cost savings without giving up on irrevocability—a key benefit of wires. Kyriba clients’ success stories show tangible cost and productivity gains from such a strategy. If you are receiving card payments, you can save on interchange, which can be as high as 2.5%. With real-time payments, you get instant access to good funds and avoid chargebacks.

Median cost range to pay and get paid

Source: AFP® Payments Cost Benchmarking Survey, 2022

2. Improve cash visibility and liquidity.

Complementing real-time payments with real-time balance and transaction reporting improves cash visibility. This can be especially important if you make a lot of contingent payments. This includes business activities that are dependent on treasury receiving funds. For example, treasury may want to wait until certain funds have been received before releasing a particular payment. Cash visibility can be beneficial if you are being charged intraday credit or your bank does not permit intraday overdrafts.

Wider businesses may also benefit by triggering business activities based on contingent payments. For example, a supply chain team may want to hold on to a shipment until payment is received, accelerating their logistics process. In scenarios that need cash advance or cash-on-delivery, the buyer can make a real-time payment after inspecting the goods. Both parties win. The buyer reduces operational risk, and the seller reduces inventory and improves their working capital position.

With real-time payments, you are no longer beholden to the cut-off times, weekends and holidays. This means that payments can be made as late as possible. So, companies can meet emergency payments to meet any shortfall, and keep lower precautionary balances.

3. Speed up payment digitization and get the most value from your investments in modernization.

Payment processes are complex, and digitizing payments takes time. There are multiple reasons for this. Payment processes for large organizations often involve many roles; initiating, authorizing, and reconciling payments are typically handled by different parties, thereby drawing things out. Approval workflows can also be very complex, involving globally distributed teams. Technology teams may still have direct ownership of managing payment formats and bank connectivity.

When it comes to payment digitization, the U.S. has been behind other countries. Paper checks still account for 42% of payments disbursed by organizations, according to AFP research. The ubiquity of checks, inertia, and in some cases, tradition, continue to hold U.S. B2B payments back.

During the COVID-19 pandemic, payment digitization became even more essential. And since B2B payments are moving away from paper checks, then it only makes sense to complete those transactions as quickly and cheaply as possible.

Real-time payments leverage modern technology, especially APIs, as they transmit data instantly without the need for file downloads. By complementing real-time payments with automated bank account validation and payment policy screening corporates can set aside suspicious transactions for review while all other payments travel seamlessly. The value of payments modernization, including embracing real-time payments, lies in the endless possibilities it will bring to your future business growth.

Conclusion

Don’t dismiss real-time payments simply because they are new. Kyriba offers the most comprehensive coverage of real-time payments globally and we have taken an API-first approach, allowing CFOs and treasurers to inject real-time data-driven decision making into all financial operations. Whether you are an existing customer seeking to introduce real-time payments into your payment mix or a prospective customer seeking to digitize payments and treasury operations, we are ready to assist you in your journey. Contact us today.

Status of Real-time Payments Globally

Status of Raal-time Payments Globally

Source: Prime Time for Real-Time ACT Worldwide,2022

Click here to view all blogs by Kyriba

Footnotes:

  1. Calculated total cost for issuing a paper check on a per Item Basis (in-house or outsourced)
  2. Calculated total cost for receiving a paper check on a per item basis
  3. Initiating and receiving ACH transaction (internal and external costs)
  4. The median transaction cost for initiating and receiving RTP payments on a per item basis
  5. Calculated cost for sending and receiving wire payments on a per-item basis
  6. Total calculated cost for outgoing payments made (including personnel, IT technology, compliance, audit, etc.) via a card (procurement, T&E, and virtual) per transaction
  7. The internal median cost range for receiving credit card transactions (including personnel, IT technology, file connectivity, encryption, audit, PCI DSS compliance, etc.)
  8. The external median cost range for receiving credit card transactions (including issuer/acquirer/processor interchange, assessment, monthly fees, etc.)

How to use pricing to create an effective hedging program

12-12-2022 | treasuryXL | Kantox | LinkedIn |

In this article, we explore the links between pricing and creating an effective currency hedging strategy. We reveal how a simple PEG framework —Pricing, Exposure, Goals— can allow CFOs and treasurers to correctly define their FX goals, the type of exposure they need to collect and process, and the best hedging program for their business.

Pricing as a hedging mechanism

Transactional currency risk, it is often said, occurs between the moment an FX-denominated transaction is agreed upon and the moment it is settled in cash.

That’s OK, but what if the transaction was priced well before it was agreed, which is a realistic description of how things really work?

That’s why at Kantox, we developed the concept of pricing risk. pricing risk is the risk that between the moment an FX-driven price is set and the moment a transaction is agreed upon, a shift in the FX rate might impact budgeted profit margins.

Closely related to this is the idea that pricing is itself a hedging mechanism. Why? Because you can remove pricing risk by frequently updating your prices.

And that brings us to the topic of pricing parameters and hedging. 

Dynamic pricing

Let us start with dynamic pricing. There is a growing list of industries where dynamic pricing is becoming the norm: travel, chemical traders, hospitality, railways, entertainment, insurance, online advertisement, retail and even shipping.

This trend reflects the fall in transaction costs made possible by the availability of real-time data and the rise of geolocation services and payment apps.

Meanwhile, algorithms take into account supply and demand conditions, competitor pricing and other variables.

Two things need to be considered when it comes to dynamic pricing:

(a) prices are ‘FX-driven’; that is, an FX rate is systematically part of the pricing formula;

(b) prices are frequently updated, therefore leveraging the full capacity of pricing to act as a hedging mechanism. 

Other pricing models

Despite its growing popularity, dynamic pricing is not the only pricing mechanism out there. We can single out at least two other very significant models: 

1. Steady prices for individual campaigns/periods. Some businesses, like catalogue-based tour operators, keep prices stable for an entire campaign/budget period and set new prices at the start of the following period. Things to consider here:

(a) Prices are also FX-driven, just like in dynamic pricing.

(b) The pricing impact of the ‘cliff’, or a sharp FX rate fluctuation between two campaign/budget periods, is fully passed on to customers at the onset of a new period. Here too, pricing acts as a hedging mechanism, but not to the extent it does in dynamic pricing.

2. Steady prices for a set of campaigns/periods. Some firms need or simply desire to keep prices steady not only for one individual campaign/budget period but for a set of campaign/budget periods linked together. Things to consider:

(a) Prices are not FX-driven: the FX rate plays no role in pricing;

(b) The pricing impact of the ‘cliff’ cannot be passed on to customers at the onset of a new period. Pricing, quite obviously, is not a hedging mechanism in this case.

Putting it all together: the PEG framework: Pricing-Exposure-Goals

The PEG or Pricing – Exposure – Goals framework provides actionable clarity when discussing pricing and currency hedging in the context of cash flow hedging programs:

For firms with frequently updated FX-driven prices, the goal is to protect the dynamic pricing rate in all their transactions. The exposure to hedge is the company’s firm sales/purchase orders. The right program is a micro-hedging program for firm commitments.

For companies that keep steady prices during individual campaign/budget periods, the goal is to protect the campaign/budget rate. The exposure to hedge is the forecasted revenues and expenditures for that particular campaign. The right program is a combination of a static hedging program, conditional orders and a micro-hedging program for firm commitments. 

Finally, for firms that keep steady prices across a set of campaign/budget periods linked together, the goal is to smooth out the hedge rate over time. The exposure to hedge is a rolling forecast for a set of periods linked together. The right program is a layered hedging program. 

Currency Management Automation solutions allow you to reach all your goals, whatever the pricing parameters of your business.

Why you need to automate swap execution

22-11-2022 | treasuryXL | Kantox | LinkedIn |

Do you struggle with having a perfect match between your currency hedging position and the cash settlement of the underlying commercial exposure? We’ll let you in on a secret: most treasurers and finance teams do. But how can you simplify this time-consuming and resource-intensive task? In this article, we show why you need to automate swap execution and how you can do it.

We reveal why this is an essential issue for treasurers, how it’s typically handled, and why automated swap execution can help finance teams play a more strategic role in the business. 

Setting the scene

Treasurers know that it is practically impossible to have a perfect match between the firm’s currency hedging position and the cash settlement of the underlying commercial exposure. That’s especially the case if those hedges were taken long before. This is why swapping is so essential.

Let us briefly see an example. If you have a ‘long’ USD forward position with a given value date and you need, say, 10% of that amount in cash right now, a swap agreement allows you to perform that adjustment.

With the ‘near leg’ of the swap, you buy the required amount of USD in the spot market while simultaneously selling —with the ‘far leg’ of the swap— the same amount of USD at the value date of the forward contract. And that’s how you adjust your firm’s hedging position.

Pain points: a resource-intensive activity

Swapping can be extremely time-consuming and resource-intensive, particularly if many transactions, currencies and liquidity providers are involved. We recently saw how a large European food producer was struggling mightily with manual swap execution, a dreadful situation faced by many, if not most, companies.

Among the most common pain points, we can cite the following three:

  • Operational risk. Many tasks are manually executed: retrieving incoming payments, selecting liquidity providers and confirming trades. The entire workflow relies on emails that circulate back and forth with spreadsheets carrying potential data input errors, copy & paste errors, formatting errors, and formula errors.
  • Lack of traceability. Lack of proper traceability hinders the process of assessing hedging performance, as swap legs are manually traced back to the corresponding forward contracts.
  • Risk of unethical behaviour. Understood as the risk that early mistakes that are not immediately reported may lead to severe losses down the road, it is prevalent throughout.

Traceability and automated swap execution

Traceability is when each element along the journey from FX-denominated entry to position to operation to payment has its own unique reference number. But how can we apply this concept to solve the problem of manual swap execution?

The answer is automated swap execution, a solution that is embedded in Currency Management Automation software. It relies on the perfect end-to-end traceability between the different ‘legs’ of a swap agreement and the original forward contract. Meanwhile, FX gains/losses and swap points are automatically calculated. It’s dead simple!

Swap automation is a powerful tool for the treasury team. At the company level, it opens the way to:

  • According to recent surveys, increasing the efficiency of treasury operations is the No. 1 expectation in tech for CFOs.
  • Using more currencies in the business to take advantage of the profit-margin enhancing possibilities of ‘embracing currencies’.
  • Taking a concrete step toward the ‘digital treasury’ is a concern voiced by many CFOs and treasurers.

At a personal level, in terms of the daily workload of members of the treasury team, automated swap execution means:

  • More time to concentrate on high-value-adding tasks such as fine-tuning and improving cash flow forecasts.
  • Reduced stress levels.
  • Increased productivity at work.

And that’s no small achievement! 

Currency Impact Report October 2022

15-11-2022 | treasuryXL | Kyriba | LinkedIn |

According to a recent Kyriba report, the earnings of North American firms will suffer a shocking $34 billion fall in Q2 2022 as a result of headwinds. When compared to previous quarters, headwinds rose by 3583% since Q3 2021 and by 134% from the prior quarter.

Source

Currency Impact Report

The average earnings per share (EPS) impact from currency volatility reported by North American companies increased from $0.03 to $0.10.

The USD is at a 20-year high, and when combined with volatility and interest rate changes, many corporations have seen their currency risk double or triple, as well as their hedging expenses double.

Kyriba’s Currency Impact Report (CIR)

Kyriba’s Currency Impact Report (CIR), a comprehensive quarterly report which details the impacts of foreign exchange (FX) exposures among 1,200 multinational companies based in North America and Europe with at least 15 percent of their revenue coming from overseas, sustained $49.09 billion in total impacts to earnings from currency volatility.

The combined pool of corporations reported $11.82 billion in tailwinds and $37.27 billion in headwinds in the second quarter of 2022.

Highlights:

  • The average earnings per share (EPS) impact from currency volatility reported by North American companies in Q2 2022 increased to $0.10.
  • North American companies reported $34.25 billion in headwinds in Q2 2022, a 134% increase compared to the previous quarter, and 3,583% increase since Q3 2021.
  • European companies reported a 68% percent increase in negative currency impacts, with companies reporting $3.02 billion in FX-related headwinds.
Download the Report

Ask the treasuryXL expert #5 What is Factoring in Trade Finance?

03-11-2022 | treasuryXL | Wim Kok | LinkedIn |

treasuryXL is the community platform for everyone with a treasury question or answer! A common question asked by treasurers is what Factoring means in Trade Finance. In today’s article Ask the treasuryXL Expert, Wim Kok defines factoring in trade finance for us.

Factoring in Trade Finance

Question:  “What is Factoring in Trade Finance?”

Answer provided by Wim

What is Factoring in Trade Finance?

Well, there is a pretty good definition included in the Standard Definitions for Techniques of Supply Chain Finance, prepared by the Global Supply Chain Finance Forum and published by the ICC in 2016. It is currently being updated, but the definition is still alright.

There they give the definition of factoring in trade finance as: Factoring is a form of Receivables Purchase, in which sellers of goods and services sell their receivables (represented by outstanding invoices) at a discount to a finance provider (commonly known as the ‘factor’). A key differentiator of Factoring is that typically the finance provider becomes responsible for managing the debtor portfolio and collecting the payment of the underlying receivables.

Would you add anything to this definition? 

There are a number of things I would add to this to explain the terminology and make it more clear:

  • The term “factoring” is sometimes used as an umbrella term for all forms of invoice financing, including confidential invoice discounting. Strictly speaking, “factoring” refers to both debt management and debt purchase.
  • In the UK, factoring is usually communicated to the debtor, as the collection procedures are carried out by the funding provider (the “factor”).
  • Non-public factoring is usually more popular than full factoring. In this case, the customer retains control over the collection of the receivable.
  • In some markets, disclosure is required by law. Some even require the debt to be formally acknowledged before purchase.
  • In the UK, the standard practice is for the factor to purchase all debt – known as “whole turnover” – even if not all debt is eligible for financing. This gives the factor leeway to absorb any dilution or non-payment of individual invoices. Banks also take secondary security in the form of an “all-asset debenture”. This is registered at Companies House and notifies other potential lenders that debts have been transferred.
  • A subtle but important point is that a debt assignment can serve two purposes: it can mean that the debt has been bought or that the debt has been taken as security for a loan.
  • Many Fintechs offer single invoice/selected invoice/selected debtor solutions, but these are inherently riskier than whole turnover solutions. Large bank providers are generally reluctant to follow suit.
  • Factoring can be done with or without recourse. Even arrangements without recourse include provisions allowing the factor to require the customer to buy back the invoice under certain conditions (e.g. contractual dispute).
  • Factoring can possibly be “wrapped” in credit insurance.
  • In the UK, major finance providers tend to operate an “availability model” in factoring rather than funding individual invoices. The “availability” changes in real time as new eligible debts are purchased (within agreed counterparty limits etc) and existing debts are settled, defaulted or become ineligible. The customer can then draw down to “availability” at any time. This is similar to a “borrowing base” approach, albeit with frequent increases and decreases within the day. This model, combined with the “whole turnover” mandate, provides the factor with a secure source of repayment even if some invoices remain unpaid.

I trust this will be helpful and give more insight into this subject.

Wim Kok


Do you also have a question for one of the treasuryXL experts? Feel free to leave your question on our treasuryXL Panel. The panel members are willing to answer your question, free of charge, with no commitment.

Optimising cash and liquidity through currency management

31-10-2022 | treasuryXL | Kantox | LinkedIn |

Can you improve cash and liquidity management with the help of more effective currency management? The answer is: yes, you can! In this article, we see how currency management and cash management are, in effect, joined at the hip.


Five important touchpoints

There are at least five crucial, yet sometimes unduly neglected, touchpoints between FX risk management and cash or liquidity management. Let me briefly set the stage first. Then I will discuss their interactions.

(1) Swapping. Adjusting the company’s hedging position to the cash settlement of the underlying commercial exposure requires a lot of swapping.

(2) Collateral. In a world of shifting interest rates, treasurers need solutions that allow them to optimise collateral management.

(3) Working capital management. Solutions to improve working capital and liquidity are rarely mentioned in the context of FX risk management. Yet, they exist!

(4) Netting. Netting allows companies to generate savings in trading costs and in terms of the cash balances needed to satisfy collateral requirements.

(5) Cash flow forecasting. According to a recent survey by HSBC, more than half of treasurers worldwide say that cash flow forecasting is the most important task in treasury.

How and when currency management meets liquidity management

Take the case of a hedging program designed to protect the FX budget rate. It includes stop-loss orders to protect the FX rate used in pricing or a ‘worst-case scenario’ FX rate. It can also include profit-taking orders to lock in more favourable exchange rates.

As long as the stop-loss orders are not hit, hedge execution is postponed. This means that the cash required for collateral requirements can be set aside at a later date. It also means that treasurers have more time to improve their cash flow forecasts.

And it’s not over yet! Hedging incoming firm sales/purchase orders or invoices leads to very precise currency hedging. This means that purchasing managers are in a position to buy confidently in the currency of their suppliers. These, in turn, will be more inclined to grant extended paying terms.

With the perfect end-to-end traceability that comes with automated programs, managers can safely aggregate exposures without fear of losing the benefits of data granularity. This can create more netting opportunities, again reducing the need to set aside cash in terms of collateral.

Finally, swapping can be easily automated.

And voilà!

Feedback effects

That’s how effective FX risk management ends up improving liquidity management. Note that the process feeds on itself. Let me give you an example. Because swap automation releases valuable treasury resources, treasurers can take advantage of the benefits of using more currencies. Automated swap execution, therefore, improves not only the cash management part of the FX workflow but also —indirectly— working capital management.

That’s what I call a win-win situation!

Brush up on your treasury knowledge? Get our eBook: What is Treasury?

27-10-2022 | treasuryXL | LinkedIn |

How can you fast brush up on your treasury expertise, Treasurers, CFOs, Cash Managers, Controllers, and other Finance Addicts? Or how would you describe “What Treasury is” to family and friends? Well, there is an easy solution for it. Download our free eBook here: What is Treasury?

This eBook compiled by treasury describers all aspects of the treasury function. This comprehensive book covers relevant topics such as Treasury, Corporate Finance, Cash Management, Risk Management, Working Capital Management.

This eBook was prepared by treasuryXL based on the most useful best practices offered by Treasury professionals throughout the previous years. We compiled the most crucial information for you and wrote clear, concise articles about the key topics in the World of Treasury.

We took a deeper dive into each of the above-mentioned treasury functions and highlight:

  • The purpose of each named Treasury function (What is?)
  • What specialists do
  • Examples of Activities
  • Summary of Frequently Asked Questions and answers
  • Conclusion

How to receive the eBook ‘What is Treasury’ for Free?

We simply giveaway two presents for you! By signing up for our newsletter you will automatically receive the following in your inbox:

  1. On Fridays, our Coffee Break weekly newsletter will land in your inbox. In this weekly newsletter, we will highlight the whole week full of the latest treasury news within our community.
  2. The 41 pages eBook, What is Treasury?
Subscribe and Download

 

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Welcome to our community and have fun reading!

 

 

Kendra Keydeniers

Director, Community & Partners at treasuryXL

 

 

Crisis After Crisis, Treasury Steps into the Advisor Role

24-10-2022 | treasuryXL | Kyriba | LinkedIn |

From the 2008 global financial crisis to the ongoing COVID-19 pandemic, treasury departments have served as strategic advisors regarding capital structure, liquidity and finance operations. Without the guidance and leadership of treasury management in these critical moments, many organizations would not have survived. But it begs the question—what can companies do on an ongoing basis to best position themselves for when the next crisis happens?

By Andrew Deichler
 Content Manager, Strategic Marketing

Source

The Company Vaccine

Treasury is often viewed as a bit of a niche area. Even though virtually every company has some semblance of a treasury department and the function has been around for a long time, many departments outside of finance don’t really know what treasury does. That’s essential for understanding the value of the function.

But as Lee-Ann Perkins, CTP, FCT, assistant treasurer for Specialized Bicycle Components, explained, they suddenly have a wake-up call when a crisis occurs. “During COVID and the financial crisis, treasury became that department that had a chance to shine,” she said. “I think, myself and other treasury folks, used that opportunity to really raise the profile of the treasury department.”

In the case of the pandemic specifically, companies relied on treasury to immediately get them into a better liquidity position and procure PPP loans if needed. “Treasury was the department that ran with those projects,” Perkins said. “We have the relationships with the banks, and we understand the importance of covering liquidity and covering covenants.”

Much of what treasury does is forward-looking—constantly future-proofing the organization. And in crises like the pandemic or the current supply chain shortage where cash is paramount, the C-suite looks to treasury to make sure the company can withstand future shocks. “I think, along with the heads of accounting, finance and tax, treasury has become known as our own department that can provide useful answers to the C-suite,” Perkins said. “During COVID, I made this analogy that the treasury department should really be the ‘prevention’ department. We want to be the vaccine that’s out there to prevent you from needing the medicine in the first place.”

But for the vaccine analogy to really be accurate, shouldn’t treasury already have that voice as an advisor? There will always be another crisis around the corner, but if companies are already listening closely to what treasury has to say, they might be able to weather those events much more efficiently than if they were asking for treasury’s advice at the last minute.

Building Strategic Relationships

Perhaps the most important relationship a treasurer can have in an organization is with the CFO. The CFO is typically the one that represents finance (and treasury by extension) in meetings with the CEO and the board. But if a treasurer has a good relationship with the CFO, that CFO may bring the treasurer into those conversations, explained Jim Gilligan, former assistant treasurer for Evergy and currently senior vice president of MFR Securities. “If you have a CFO that recognizes the strategic value of treasury in those executive discussions, then that goes a long way towards becoming a strategic partner,” he said.

The treasurer’s personality and skill set are also important factors in this regard; treasurers shouldn’t just hope the CFO notices them. “If you have a personality that allows you to interject yourself in those sorts of strategic discussions, then that could help to get you a seat at table,” Gilligan added. “If you’re not that type of personality or your CFO does not necessarily recognize that specific skill set, then you’ve got to find a way to get yourself noticed.”

Getting noticed by the CFO and senior leadership isn’t easy. Treasury professionals can establish themselves by adding value in other areas of the business that they may not typically have much interaction with. For example, payment processing is handled through customer service at many companies. Customer service representatives may not be aware of some of the new payment rails and capabilities that have cropped up in recent years, like real-time payments. By getting involved and helping customer service adopt some of these new payment methods, treasury can show a lot of value, Gilligan explained.

Treasury can also better establish itself by developing relationships with the operational teams and inserting itself in the annual budget process, explained John Dourdis, CTP, a corporate treasurer most recently with Conair. “Say, ‘I want to be part of that.’ Because I think that gets a lot of attention with regard to CEOs and COOs,” he said. “That’s important to give yourself that visibility that treasury isn’t always going to have.”

Dourdis noted that, whatever the company’s business might be, treasury is not going be top of mind for operations. But operations and the C-suite might look to treasury sooner if it inserts itself in the budget process. And that can lead to treasury being involved in other areas, like the forecast update process.

Treasury would also be wise to get involved in 12-18-month strategic cash flow forecasting. CFOs have been prioritizing this area in recent years but have mostly relied on FP&A to do so, while leaving treasury to handle short-term forecasts. Treasury departments should reach out to FP&A to see how they can help in the process. With treasury’s overall proven track record of developing accurate forecasts, both FP&A and the CFO may welcome their input.

Treasury departments can also help companies with large debt burdens as interest rates begin to rise. With the era of inexpensive debt coming to a close, organizations could face strict enforcement of loan covenants. Treasury’s knowledge of covenant compliance and forecasting should help immensely in this regard; a bank may agree to amend a loan and add new covenants if financial projections are strong.

Strategy and Technology

Technology can play a key role in helping the treasury department establish itself further. With the latest treasury management software, team members can spend less time doing manual work and more time contributing strategically.

Easton Dickson, vice president and global treasurer for Bain & Co., believes that technology can improve the situation drastically. He has observed treasury teams spending copious amounts of time reacting to daily operations. And with a company as big as Bain that operates in over 40 countries, that means that any day of the week, treasury may have to resolve a mini-crisis in any part of the world, while maintaining its ongoing M&A activities, due diligence, etc.

“Operationally you’re bogged down,” he said. “And so, I think whatever we can do to streamline and automate processes will make it so much easier because it’s freeing up time.”

Those times of crisis typically shine a light on areas where companies need to sharpen their edges. “Maybe you’re underinvesting in technology and relying too heavily on manual processes,” explained Dana Laidhold, treasurer for Nasdaq. “You realize, now we need to move faster, and we’ve got tons and tons of people running manual processes that could be automated.”

But often in those chaotic moments, it can be too late to course correct. A treasury department that suddenly needs to provide liquidity positions to senior leadership on a weekly or even daily basis is going to be sufficiently challenged if they are relying solely on Excel. And at that point, there’s also no bandwidth to begin a treasury management system implementation project.

“I hope finance leaders have learned, having gone through the Great Recession and the pandemic, that it’s really important to think ahead,” Laidhold said. “It’s so much harder to backpedal than it is to build smartly along the way.”

It’s therefore incumbent on the treasury team to communicate to senior leadership what insights it needs to deliver and the right technology that can make that information more accessible and accurate. Treasury should vocalize the problems that it may need to solve in the future and whether it will need greater capabilities to do so.

Laidhold hypothesized that there might be a question that doesn’t need to be answered currently, but somewhere down the line it could become important. And there’s a type of analysis that treasury would need to do, but it doesn’t have the data or technology to do it yet. “So how do we plan today to be in the position to be able to do that? I think it’s myopic to assume that whatever situation you’re in now you’re going to be in forever,” she said.

Taking Action

The treasury department needs to be proactive if it wants to be seen as a strategic partner outside of times of crisis. That means adding value wherever possible, establishing strong relationships with senior leadership and other departments, and making the business case for technology that will improve its efficiency. Crises are happening more rapidly. Companies will be in much better shape for the next one if treasury is already at the table, providing necessary insights.

Learn More:

  1. AFP Treasury in Practice Guide: Treasury Opportunities in Strategic Cash Forecasting
  2. eBook: Perfecting the Cash Forecast
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