Five Steps to an Effective Treasury

Demands on the corporate treasurer are changing, and many are struggling to keep up. Here’s where to start.

November 2007 | Ms. Anna Sullivan

The rapid shift of economic activity from established markets in Europe and North America to developing ones in Africa, Asia, and Latin America has many CFOs asking treasurers to improve their performance. The pace of growth and regulation has left too many of them lagging behind on even core activities in their home markets: cash management, banking, debt and funding, investments, and risk management for currencies and interest rates. Such shortcomings are only magnified as companies expand into emerging markets, where even world-class treasury departments struggle to navigate varied banking protocols and diverse languages and customs—and often lack an operating model and infrastructure to connect their activities, portfolios, and risks.

The cost can be heavy. Companies pay incremental interest expenses when they overborrow as a result of inaccurate cash flow forecasting and often lose money when they don’t hedge exposures for currencies and for interest rates, commodity prices, or both. They pay unnecessary taxes when cash moves needlessly through tax-heavy regions. If inadequate controls or segregated financial responsibilities lead to fraud, companies face both financial losses and reputational damage. Those that miss their financial covenants with banks or fail to meet liquidity requirements can find themselves dealing with credit-rating downgrades, a loss of credit flexibility, or even bankruptcy.

Our experience working with treasurers, have led us to believe that organizations should focus on five moves to improve their global treasury function.

1. Centralize the treasury function globally

Historically, most companies have had a treasury department at their corporate headquarters, but it was “siloed,” managed only core activities, and often duplicated those of individual business units. As bank communications technology improved and treasury groups added new responsibilities, it made sense to consolidate functions that had been operating independently in different parts of the world.

2. Strengthen governance

Wherever there’s money moving around, fraud and mismanagement are risks. That’s particularly true in a company’s treasury department, where funds move in real time, using complicated financial instruments—and where an erroneous transaction can affect accounting, financial reporting, and internal controls. Add regional differences in protocols, governance, and oversight norms, and the problem can be a real headache for CFOs and treasurers alike, especially as their companies expand into some developing markets where governance is often weak or nonexistent.

3. Enhance treasury-management systems

The rapid pace of software development over the past 20 years has brought to market a range of sophisticated tools that facilitate the treasury function. The conundrum has been that the earliest tools—spreadsheet programs—have dramatically improved. Some CFOs are not convinced that advanced systems are worth the cost, which can run as high as $1 million or more for integrated treasury-management systems and enterprise-resource-planning (ERP) modules. In our survey, we found that nearly half of the companies with less than $10 billion in revenue still used spreadsheets as their primary treasury system.

4. Increase the accuracy of cash flow forecasting

Treasurers often admit that their global cash flow forecasts are poor or incomplete. The CFO of one international airline, for example, noted that when his company recently ordered new airplanes, it had no cash flow forecast—and no idea if it could pay when the time came. If it couldn’t, the airplane manufacturer would stop delivering planes, hobbling the airline’s growth. That’s an egregious example, to be sure. Yet in our survey, nearly one-half of the treasurers reported that their cash forecasting was less than 80 percent accurate.

5. Manage working capital in developing markets

The concept of working capital seems like a simple one: current assets minus current liabilities equals the capital that a company uses in its day-to-day operations. Yet managing working capital globally is a challenge, especially in developing markets, where the task can be complicated by differences in business culture. Payment terms, for example, may vary markedly—from the 30 days common in many developed markets to as much as 360 days in some South American and African countries. A lack of automated systems to process accounts payable and receivable introduces further complexity.

As companies assign new responsibilities to the corporate treasury function, treasurers must improve it with a global focus and streamline its performance. That may require an up-front investment, but the payback is worth it.


Executive Editor

Ms Anna Sullivan

Ms Anna Sullivan