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

SWIFT and CBDC projects: successful experiments

14-11-2022 | Carlo de Meijer | treasuryXL | LinkedIn |

Early October SWIFT launched two publications describing the results of two important experiments, one on interoperability and the other on tokenization. In these publications SWIFT has aid out its blueprint for a global central bank digital currency (CBDC) network following an 8-month experiment on different technologies and currencies.

By Carlo de Meijer

SWIFT thereby said that it had solved “one of the thorniest” problems central bank digital currency (CBDC) developers have been wrestling with: How to use them for cross-border transactions and how to create interoperability between different networks. The idea is that once scaled-up, via SWIFT’s interoperability  solution banks may need only one main global connection, rather than thousands if they were to set up connections with each counterpart individually.

“We see inclusivity and interoperability as central pillars of the financial ecosystem, and our innovation is a major step towards unlocking the potential of the digital future”, Tom Zschach, Chief Innovation Officer SWIFT.

Let us have a deeper look!

Present CBDC projects: the interoperability issue

As told in my last blog the emergence of CBDCs is gathering speed with a growing number of central banks worldwide building, studying or considering digital versions of their national currencies thereby starting to seriously map out the massive, costly infrastructure required to roll out digital currencies backed by countries.  .

Globally, nine out of 10 central banks are. now actively exploring into digital currencies, often using different technologies. However with a primary focus on domestic use.

Many Central Banks are thereby struggling with its technological complexities including the issues of interoperability and standardisation. Few of the roughly 100 countries are working on making them interoperable via technical standards and those that are, are generally doing so in small groups with neighbouring countries and trading partners, such as in the EU.

But with multiple players building different solutions, on different technology platforms, the danger is that it will result in a future digital financial ecosystem consisting of ‘digital islands’ that can’t interact with one another,  which may limit large scale adoption.

For the potential of CBDCs to be fully realised across borders, these digital currencies need to overcome inherent differences to interact with each other, as well as with traditional fiat currencies. That potential however can only be accomplished if the various methodologies that are being explored could unite and work together.

That is why the attention of a growing number of those central bank experiments, is rapidly turning to how the CBDCs of different countries could interact when using different networks. Making CBDCs interoperable is however difficult.

Two SWIFT Publications

Early October SWIFT launched  two publications outlining how CBDCs could work in the real world, with a particular focus on cross-border payments. They thereby explored the use of a blockchain system to connect these different blockchains, something that has not been achieved in the crypto space:

SWIFT views inclusivity and interoperability as central pillars of the future financial network/ecosystem. They have been looking at ways to make CBDCs work globally, making them compatible with regular currencies.

In these publications SWIFT described the findings from two separate experiments that started in December 2021, demonstrating how to successfully transact between different CBDC blockchains networks as well as with traditional payment networks.

 

Two Experiments

SWIFT conducted two separate experiments to prove its cross-border transaction feasibility and interconnection capabilities. In the last eight months SWIFT worked with different technologies and currencies thereby cooperating with Central Banks and financial institutions worldwide.

These experiments bridged assets between different distributed ledger technology (DLT) networks and existing payment systems, which allowed digital currencies and assets to flow smoothly alongside, and interact with, their traditional counterparts.

These experiments are part of the company’s wide-ranging and extensive innovation agenda to provision their strategic focus on enabling instant, frictionless, and interoperable cross-border transactions for the advantage of the SWIFT community.

Aims of the two separate experiments were

a) solving the significant challenge of interoperability in cross-border transactions by bridging between different distributed ledger technology (DLT) networks and existing payment systems, allowing digital currencies and assets to flow smoothly alongside, and interact with, their traditional counterparts.

b) as well as provide interoperability between different tokenisation platforms and existing account-based infrastructures.

Ultimate aim of the two trials was to create a blueprint for CBDC usage across borders.

 

First trial: Interoperability

In the first publication SWIFT released the results of the first experiment, that was  aimed at looking how CBDCs could be used internationally and even converted into fiat money if needed. This in order to overcome the difficulties encountered of interoperability between different blockchains.

How was the first trial set up?

In this first trial SWIFT narrowly collaborated with Capgemini. They thereby carried out CBDC-to-CBDC transactions between different DLT networks, as well as fiat-to-CBDC flows between these networks and instant real-time gross settlement system. SWIFT therefor built two simulated CBDC networks, one implemented on R3 Corda, and another on Quorum, a permissioned Proof of Authority (PoA) version of Ethereum.

CBDC network regulators thereby run and governed a ‘trusted DLT node’ created as part of Swift’s solution. This allowed them to have a view on transactions within the permissioned blockchain as well as its messages to the Connection Gateway. In this SWIFT implementation they lock the assets in an escrow, tell the SWIFT system it is locked, and then receive the funds from the other party.

Next Steps: CBDC Sandbox

The tests are followed by additional and more advanced testing environment by almost 20 commercial en central banks over the upcoming year 2023, including Banque de France, the Deutsche Bundesbank, HSBC, Intesa Sanpaolo, NatWest, SMBC, Standard Chartered, UBS and Wells Fargo

SWIFT has deployed the infrastructure into a running CBDC sandbox and visual interface where blockchain based central bank digital currencies (CBDC) can connect to each other globally through SWIFT, as well as connect their blockchain system to SWIFT’s more traditional ‘fiat’ system.

They are now collaborating in the more advanced testing environment, thereby further experimenting with CBDCs using real time variables, to explore how its platform could interact with the cross-border use of CBDCs, assess potential use cases and wider CBDC operability, build the solution further and accelerate the path to full scale deployment of the interoperability solution.

SWIFT will seek feedback through to late 2022.

 

Second trial: tokenization

A separated second experiment was carried out in collaboration with several  financial institutions and other technology partners such as Citi, Clearstream, Northern Trust, and technology partner SE.

This trial involved tokenization, a measure used to secure sensitive information. The test aimed to use tokenised assets to trade property like stocks and bonds.

This trial was aimed to evaluate how their existing infrastructure could be used as a single access point to multiple tokenization platforms

Under the experiment, the team explored 70 scenarios simulating real-time market issuance and secondary market transfers of tokenised bonds, equities and cash. This to mirror real-world market transfers of tokenized bonds and equities.

 

Importance of tokenization

Digital currencies and tokens have huge potential to alter he way we will all pay and invest in the future. Though tokenisation is a relatively nascent market, the World Economic Forum has estimated it could reach $24tn by 2027.

Especially when it comes to strengthening liquidity in markets and expands access to investment opportunities. The potential benefits include improved market liquidity and fractionalisation, which could increase investment opportunities for retail investors, and enable institutional investors to build stronger portfolios.

But that potential can only be unleashed if the different approaches that are being explored have the ability to connect and work together. SWIFT’s existing infrastructure can ensure these benefits can be realised at the earliest opportunity, by as many people as possible.

Single Connector Gateway

SWIFT explored the use of a blockchain system to connect these different blockchains to facilitate cross border payments, something that has not been achieved in the crypto space.

The test teams build a simulation of SWIFT’s enhanced platform and combined that  with a Connector Gateway to link different CBDC and traditional payment networks at the technical level with the aim of establishing network interoperability.

SWIFT’s new CBDC interlink solution will enable CBDC network operators at central banks to connect their own networks simply and directly not only with each other but all existing payment networks in the world through a single gateway, facilitating CBDC cross-border payments thereby ensuring the instant and smooth/seamless and scalable flow of cross-border payments.

 

Main Findings

SWIFT has confirmed that the two experiments conducted in recent months have yielded positive results. The results of the trial showed:

  • promise for cross-border interoperability among countries with varying and emerging digital ecosystems..
  • it may solve the challenges of cross border transaction by combining different DLT networks and current payment systems. It also showed the possibility of interoperability of multiple tokenized platforms.
  • it also showed that SWIFT’s existing infrastructure could be used to interconnect various CBDC blockchain networks around the world directly for cross border transactions, not only with each other but with existing payments platform systems via a single gateway.
  • SWIFT thereby successfully facilitated cross-platform transactions using CBDCs through both a fiat-to-CBDC payment network and different distributed ledger technologies.
  • these experiments also showed that it  was possible for digital currencies and tokenized assets to flow smoothly alongside, and interact with, their traditional counterparts on existing legacy financial infrastructure, guaranteeing instant and effortless cross border payments.
  • it proved that this tokenized network infrastructure could create and transfer tokens and update the balance in multiple wallets.

 

SWIFT’s future role

In collaboration with the community, SWIFT intends to explore its role further – both as a carrier of authenticated information about CBDC transactions, as it does today for fiat currencies, and as a carrier of actual CBDC value in whatever form it is issued.

Given SWIFT’s current infrastructure, all above mentioned advantages can be realized as soon as possible. The companies scale thereby adds weight to its blueprint. SWIFT has an existing network used in over 200 countries and connects more than 11,500 banks and funds.

By creating a global monetary authority digital currency network, SWIFT could thereby act as central hub and serve as a single access point to different blockchains while its infrastructure could be used to create and trade tokens across tokenization platforms.

SWIFT’s new transaction management capabilities could handle all inter-network communication. At scale such a single point of contact would more efficiently facilitate global transactions.

 

Forward looking

To become really utilitarian for cross-border payments, CBDCs and tokens will need to interoperate with the existing financial system infrastructure, which is why it is encouraging that SWIFT was able to show progress here. Solving the interoperability issue is a great step forward.

SWIFTs ground-breaking new innovation lays a path for digital currencies and tokenised assets to integrate seamlessly with the world’s existing financial ecosystem. By solving interoperability challenges the experiments may pave the way for deploying CCDC’s globally.

If successful and once scaled up banks may need only one main global connection, if they were to set up connections with each counterpart individually. This important step forward built on SWIFT’s core capabilities means that as CBDCs and tokens develop, they can be rapidly deployed at scale to facilitate trade and investment between more than 200 countries worldwide.

However for a massive use of CBDCs this also asks for tackling remaining issues. CBDCs have raised issues regarding surveillance and privacy that also should be solved. The SWIFT trials however have shown that their these results may be seen a s a great breakthrough

 

Carlo de Meijer

Economist and researcher

 

 

Only one week left! Live Panel Discussion: Treasury Trends for 2023

10-11-2022 | treasuryXL | Nomentia | LinkedIn |

A friendly reminder that next week at 11 AM CET (November 17th), we’ll be collaborating with Nomentia.

Participate in our live panel discussion regarding 2023’s predicted treasury trends. We invited industry experts to join us and have an open debate about the issues that treasurers would need to think about in 2023. Additionally, there is the option to ask questions.

Date & Time: November 17, 2022, at 11 AM CET | Duration 45 minutes

Some of the topics we’ll cover:

  • Market and FX Risk management in current times of uncertainty.
  • Top treasury technologies to consider for 2023.
  • Will APIs deliver their promises?
  • Building the bridge between Ecommerce and treasury.
  • The rapidly changing role of treasury to facilitate business success
  • Treasury technology visions beyond 2023.p

 

SIGN UP TODAY

November 17 | 11 am CET | 45 minutes

Panel discussion members:

Pieter de Kiewit, Owner of Treasurer Search (Moderator)
Patrick Kunz, Independent Treasury Expert (Panel member)
Niki van Zanten, Independent Treasury Expert (Panel member)
Huub Wevers, Head of Sales at Nomentia (Panel member)

 

 

 

 

 

The Impact of Rising Interest Rates on Working Capital

07-11-2022 | treasuryXL | ComplexCountries | LinkedIn |

No apologies for the second report on working capital and interest rate rises in a short period: we are seeing significant changes in the business environment, and treasurers are being challenged.

Source

This call focused primarily on the higher interest rate environment. One participant was mostly concerned about how to invest excess cash – the others are grappling with rapidly increasing working capital, driven by the need to keep bigger buffers, due to COVID and the Russia/Ukraine war, and the long delays in logistics circuits.

Funding challenges:

  • One participant manages treasury for South America, where there have been significant rises in interest rates, and, in some countries, funding shortages, with banks unable to provide cash and prioritising local companies. The challenges have been manageable, and they have not had to resort to drawing down all their lines to make sure they are available. This behaviour, which is akin to the rush on toilet paper in supermarkets, has been an issue in many markets, including more developed ones. However, there has been some, limited, pre-funding around significant events.
  • This has led to an increase in the number of banks in the funding panel.
  • One participant prefers their subsidiaries to fund themselves locally – but the cost of higher interest rates (for example, 35% in Turkey) is dissuasive, even if, economically, they are significantly below the inflation rate (>80%).
  • There is an increased focus on being more efficient in the use of cash within the company, so more pressure on cross-border pooling, accessing trapped cash, intercompany netting, etc.
  • Some participants are using the situation to selectively get higher discounts for pre-paying suppliers: this can be an effective way to increase the return on cash
  • Generally, the participants are at the point where these challenges cause additional work, but none of them is particularly serious.

Working Capital Management

  • Typically, treasurers have to fund working capital, but they do not manage it.
  • In all cases, there is a dialogue with the business about how much working capital the business can support, and how it can be reduced.
  • Higher interest rates are resulting in increased expense. Depending on the company, this may, or may not, be reflected in the measurements of the business units.
  • The participants all agreed with the business need to hold more inventory, but a dialogue is required to make sure this doesn’t get out of control. One participant works with the business on resisting calls to change payment terms, while another helps arrange pre-funding for suppliers, when needed.

Contributors:

This report was produced by Monie Lindsey based on a Treasury Peer Call chaired by Damian Glendinning

To access this report:

Access to the full report is available to Premium Subscribers of ComplexCountries. Please log in on the website of ComplexCountries to access the download.
Please contact ComplexCountries to find out about their subscription packages.

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

 

 

Understanding the Importance of Working Capital for Treasury

27-10-2022 | treasuryXL | TIS | LinkedIn |

Working capital is a critical consideration for any business – particularly in an uncertain economic environment. If a company’s working capital is not managed effectively, the company may struggle to meet its obligations, secure the right level of funding, or invest in growth. But for many companies, gaining full visibility over working capital is often a difficult task – especially given how it is an activity that spans many different parts of the business.

Going a step further, recent economic and geopolitical events from the past couple of years have presented even more challenges to working capital management. In fact, PwC’s Working Capital Study 21/22 found that net working capital days reached a five-year high in 2020, “driven by the shock and uncertainty of the COVID 19 pandemic.” More recently, the 2022 AFP Strategic Role of Treasury Survey identified working capital improvements as one of the two most challenging tasks faced by treasury professionals today.

In order to manage working capital effectively, companies first need to understand it – you can’t manage what you can’t measure, as the saying goes. With this in mind, let’s dive a bit deeper into the core dynamics of working capital and the subsequent implications for treasury and finance.

What is Working Capital Anyway?

Simply put, working capital is the cash that businesses can use to meet their day-to-day financial obligations, such as for paying rent, employee salaries, and supplier invoices. Calculated as the difference between a firm’s current assets and its current liabilities, a strong working capital position is essential to the smooth running of any company. For this reason, working capital is often described as the lifeblood of a business.

Working capital can be measured using a variety of metrics. The following concepts are key when it comes to understanding the component parts of the working capital cycle:

 

 

  1. Days Sales Outstanding (DSO) measures how long it takes a company to collect cash from customers and clients (i.e. accounts receivable).
  2. Days Payables Outstanding (DPO) measures how long the company takes to pay its suppliers (i.e. accounts payable).
  3. Days Inventory Outstanding (DIO) measures how quickly the company sells its inventory.
  4. Cash Conversion Cycle (CCC) measures how long the company takes to convert the cash spent on raw materials into sales. This is calculated as follows: CCC = DSO + DIO – DPO.

As a rule of thumb, the shorter a company’s cash conversion cycle, the more efficiently it is using its working capital – although typical cash conversion cycle times can vary considerably between different industries, world regions, and company sizes. Any company’s cash conversion cycle can also be adjusted by optimizing one or more of the above components: companies can speed up customer collections, delay/expedite payments to suppliers, and/or alter the timeframe that cash is tied up in inventory.

You might also like: What is Working Capital Management, examples of typical acitivties and frequently asked questions; Explained by treasuryXL experts

How Does Working Capital Impact Treasury & Finance?

Treasury and finance teams have an important role to play in optimizing their company’s working capital.  Working capital is critical to a company’s financial health: if the business doesn’t have enough cash readily available, it may struggle to pay its obligations on time. It may also seek more external financing than is really needed or may lack the funds needed to invest in innovation or business growth.

In order to effectively manage these cash inflows and outflows, treasury must not only have an accurate and timely view of their “current” working capital status, but they must also have a grip on future cash flows as well. This means that treasury must be proactive in developing cash forecasts that reflect anticipated changes in working capital, including deviations in supplier invoicing or payment behavior, as well as changes to the level of planned spend by procurement and other internal departments.

By working with other departments such as procurement, AP, and AR, the treasury team is well placed to drive improvements to the cash conversion cycle and unlock the company’s working capital. Because treasury typically seeks to maintain global visibility and control over cash positions, payments activity, and general financial workflows, they are in the perfect position to evaluate and influence high-level working capital decisions. For this reason, treasury is sometimes referred to as the “steward” of working capital internally.

However, there are a variety of hurdles that can negatively impact treasury’s view of, and control over, working capital.

 

Challenges in Managing Working Capital

While the importance of effective working capital management is clear, there are a number of reasons why this can be a challenge:

 

 

Disparate Data Sources: By its nature, managing working capital means optimizing activities that span different departments within the organization, including accounts payable (AP), accounts receivable (AR) and procurement, as well as treasury and finance. Working capital needs to be managed holistically, with access to data from these different parts of the business – but this can be constrained by siloes and disparate systems and data sources.

Lack of Alignment & Communication: Effective working capital management can be held back by a lack of awareness or competing priorities across different parts of the business. Because there are a range of departments that need to be on the same page in order to drive working capital optimization, it can be difficult to align the KPIs and drivers of each department to achieve a cohesive strategy. For this reason, a strong focus on working capital is needed from senior management in order to ensure a consistent approach across the organization.

Global Operational Complexity: Payment practices, vendor or customer behavior, and internal business models can vary considerably across different countries and regions, which can make it difficult to manage working capital consistently at a global level.

Supply Chain Relationships: The relationship a company maintains with its vendors and suppliers within the supply chain can have a massive impact on working capital. For example, companies frequently adjust their working capital position by either reducing or extending the time they take to pay invoices to suppliers. However, these strategies can have an adverse impact on vendor relationships, especially if companies choose to delay payment as long as possible. As such, working capital strategies that focus on altering vendor invoicing or payment terms should always be treated carefully.

 

How Does TIS Help Treasury Manage Working Capital?

In order to drive improvements to working capital, treasury teams first need full visibility over their company’s global cash, payments, and invoicing activity. As noted above, obtaining this data in an accurate and timely manner presents a major challenge for most companies, as does the task of effectively analyzing and leveraging it.

In order to simplify these tasks for treasury, TIS recently launched a new solution, TIS Working Capital Insights, which provides companies with 360-degree visibility over their core working capital metrics and KPIs.

 

 

With this suite of capabilities, organizations can seamlessly integrate their ERPs and corresponding AP and AR data with our solution in order to review payment terms and behavior for vendors and customers, analyze invoice and billing activity, and measure all elements related to their net working capital status and cash conversion cycle.

As TIS enables clients to aggregate and classify their data, users can evaluate their metrics globally or granularly according to specific entities, regions, or customers and suppliers. Users can also leverage TIS’ visual dashboards for intuitive reporting and refine their analyses by any timeframe to view activity and cash flows through customizable and flexible parameters.

By leveraging these tools in conjunction with TIS’ other liquidity and payment management solutions, organizations can access all data and information related to their global cash balances, payment statuses, and broader working capital operations for the entire company. The result is total visibility and control over working capital, and a much easier workflow for identifying the best strategies to optimize it.

For more information about TIS Working Capital solutions, download the full factsheet or request to speak with one of our experts!

Live Panel Discussion: Treasury Trends for 2023

25-10-2022 | treasuryXL | Nomentia | LinkedIn |

 

Join us on our live panel discussion about treasury trends for 2023. Together with Nomentia we invited industry experts who will have an open discussion on the things you need to consider as a treasurer in the year 2023. There’s the possibility to ask questions as well.

 

 

Some of the topics we’ll cover:

  • Market and FX Risk management in current times of uncertainty.
  • Top treasury technologies to consider for 2023.
  • Will APIs deliver their promises?
  • Building the bridge between Ecommerce and treasury.
  • The rapidly changing role of treasury to facilitate business success
  • Treasury technology visions beyond 2023.p

 

SIGN UP TODAY

November 17 | 11 am CET | 45 minutes

Panel discussion members:

Pieter de Kiewit, Owner of Treasurer Search (Moderator)
Patrick Kunz, Independent Treasury Expert (Panel member)
Niki van Zanten, Independent Treasury Expert (Panel member)
Huub Wevers, Head of Sales at Nomentia (Panel member)

 

 

 

 

 

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

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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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