In today’s uncertain environment – with trade wars, possible interest rate normalisation, digitisation and many new technology innovations, from robotics to real-time – treasurers have to conserve their energy for what really matters while keeping their focus on the most critical challenges. Consultant and former treasurer David Blair explains why clear goals matter

In turbulent times when distractions are abundant, it’s worth repeating that most treasurers’ broad goal is cost-effective risk reduction (CERR). Commercial enterprises are not in the business of taking financial risk, so in order to focus all their capital on core commercial risks they want to minimise financial risk. But risk reduction has cost limits, so enterprises want to balance cost and risk.

For example, most treasurers focus on liquidity risk (in the sense of not running out of cash). They could minimise liquidity risk by issuing mountains of equity and sitting on piles of cash; but shareholders would correctly object because such risk reduction is not cost-effective.

CERR also implies that treasury key performance indicators (KPIs) should be risk-adjusted – treasurers should not be encouraged to increase yield by extending tenor or duration, or lowering credit quality. Risk is often harder to measure (and understand), but risk assessment is a core treasury competence.

Treasurers need to be clear about their goals so that the treasury team understands the ‘whys’ of what they are doing. For example, harvesting cash from mainly cash-long subsidiaries for share buybacks might require very different cash concentration arrangements compared with optimal cash pooling between a mix of cash-long and cash-short subsidiaries. At a minimum, the tax implications will be very different.

"Clear priorities allow treasuries to set clear goals which, in turn, foster collaboration by aligning the treasury holistically"

In addition, treasurers need to have clear target cash levels, credit appetite and market price risk limits, as well as a good understanding of the enterprise’s goals and constraints, in order to align treasury effectively (see Figure 1). Clear priorities allow treasuries to set clear goals which, in turn, foster collaboration by aligning the treasury holistically.

Straight-through processing and liquidity management

To free up time for what really matters (maximising capital available for core business risks), treasurers need to rigorously apply the OHIO principle: only handle it once. Often this means doing holistic straight-through processing (STP). For example, many treasuries have STP between e-FX dealing platforms and a treasury management system (TMS) alongside manual Excel processes for forecasting and determining what hedges to do.

OHIO implies that data is handled only once – for example, at the sales or procurement frontline – and then flow untouched through enterprise research planning (ERP) or other forecasting systems to the TMS, which can automatically deduct the latest forecast from existing hedges to determine the adjusting forward deals required. The TMS can then feed required forwards into an e-FX platform for execution at best price and post the resulting forwards. Only exceptions require human intervention.

Many treasurers do not have the application programming interface (API) heaven that comes with current version ERPs and TMSs; that is a perfect use case for robotic process automation (RPA), which can be thought of as an API workaround to automate screen-based copy/paste type processes that are time-consuming and risk-prone (see Figure 2).

RPA helps with getting the most out of existing systems and using them effectively. Another way to save money – and the pain of selecting and implementing new solutions – is to make sure that existing TMSs and other solutions are fully utilised. It is common to rush to create a ‘quick fix’ in Excel without taking the time to explore whether existing systems can solve the problem. Such quick fixes seem great at first, but after daily runs for a couple of years they become false economies – not to mention the added risk from using Excel.

Excel is subject to many errors such as link and formula errors, macro programming errors, manual input and copy/paste errors. It does not have any access control nor business continuity through redundancy and backup; because of these operational risks, any key controls in Excel require expensive external audit verification.

Another area is balance management, in other words liquidity management. Many enterprises expend considerable effort on short-term cash-flow forecasting (‘cash positioning’) to ensure that operating accounts have adequate but not excessive funds. The importance of not leaving idle balances and avoiding bounced cheques leads to complex KPIs for cash forecast accuracy, and pain radiates from treasury throughout the finance organisation and beyond. There is no doubt that efficient balance management is critical. But there may be other ways to achieve minimal operating balances and just-in-time cash. Cash pooling arrangements such as sweeping and notional pooling achieve minimal idle balances and obviate short-term cash forecasting. The fees for such services certainly conform to CERR, especially because, as set out below, manual forecasting is subject to high operational risks.

Effective forecasting

Treasury is forward-looking and cannot function without forecasts. Yet many treasuries use highly manual, risky and inefficient forecasting processes, typically based on copying/pasting large Excel spreadsheets.

interest rate hikes from the Fed since December 2015
(Federal Reserve)

Statistical analysis and machine learning applied to historic cashflows – aided by some simple forward indicators, like sales forecasts – can outperform most Excel forecasting processes. They are also less risky and cheaper to run.

There are a plethora of dedicated forecasting solutions on the market in addition to the offerings of ERP and TMS providers. Forecasting is built into most ERP and TMS software and many vendors are upgrading their forecasting solutions, from basics, such as seasonality and regression, to statistical analysis and machine learning, which they often label ‘AI’ for marketing purposes. Treasurers who are squeezed for IT budget can turn to their banks, many of whom are applying the technology they have developed in anti-money laundering (AML) and fraud prevention to their clients’ needs. Offerings include, for example, payment screening services and short-term cash flow forecasting based on historic bank movements, as well as standalone cash- flow forecasting tools using statistical analysis and machine learning.


The current era of easy credit and ultra-low interest rates may not end quickly. The whiff of central bank hawkishness seems to have evaporated after the Federal Reserve raised interest rates nine times since December 2015, and with US$600bn due to come off its balance sheet in 2019. But it would be prudent for treasurers to arrange sustainable and well-gapped funding sooner rather than later.

Cash-rich enterprises (and even net debt ones regarding their investable cash) will need to review changing money market fund rules – most importantly, the move to variable net asset value (VNAV) from constant net asset value (CNAV), as well as redemption gates – and align with potential changes/normalisation in the interest rate environment.

Cash management

Cash management comprises balance management and flow management; both are experiencing interrelated flux. Basel III and global re-regulation has affected balance management and created now-resolved uncertainty about notional pooling. Through the net stable funding ratio (NSFR) and the liquidity coverage ratio (LCR), regulation has been driving new kinds of pricing of deposits.

On top of this, market infrastructures have upgraded to current technology (bringing 24/7 instant payments) and, together with regulation such as PSD2 (forcing banks to implement APIs and open banking),1 this is radically changing flow management.

Balance management requires clear goals; for example, is the objective cash concentration or subsidiary funding? After a decade of doubts about the regulatory viability of notional pooling, the dust has settled and it is back. Treasurers who may have opted for physical sweeping rather than notional pooling because of regulatory uncertainty may want to use this opportunity to review their choices.

For many treasuries, the advent of 24/7 instant payments may have bigger implications for balance management than for flow management. For most business-to-business transactions, same-day value settlement is sufficient (whereas instant payments will disrupt cards in retail, for example). But what happens to balance management when there are no cut-off times and no nightly closing balance?

Many treasuries are still struggling with next-day cash visibility. How will they handle real-time balance management?2 This is not yet an immediate problem. Indeed, corporate treasurers can probably wait until banks have figured this out for themselves.

As suggested above, treasuries that are spending a lot of effort on cash positioning might want to investigate pooling arrangements as an alternative way to achieve these balance management goals.

In flow management, the first priority for saving time and reducing risk has to be paper to electronic migration. Even basic automated clearing house (ACH) type payments are much more efficient and reliable than cheques. The move to 24/7 instant payment systems is probably more relevant to retail, but all businesses will benefit from lower pricing, greater transparency and better remittance information. In this context, treasuries that are still wasting effort on manual reconciliation will benefit from the new market infrastructures and increasingly capable reconciliation engines that leverage statistical analysis and machine learning to dramatically improve auto reconciliation rates.

"Cross-border flows are undergoing rapid change, to the benefit of treasurers"

Cross-border flows are undergoing rapid change, to the benefit of treasurers. SWIFT gpi and Ripple promise faster settlement, with transparent pricing and better data payloads for remittance details.3 SWIFT gpi will be mandatory across the SWIFT network in 2020, so all treasurers will benefit – not just the pioneers. Competition from Ripple and other payment service providers will probably bring down the cost of cross-border payments; however, for treasuries with large volumes of costs but no time-sensitive cross-border payments, cross-border ACH provides immediate benefits.

Risk management

Increasing volatility is already apparent in emerging currencies, and global uncertainty provides fertile ground for major currency surprises as well. Treasurers will need to maximise available bandwidth to handle what the coming year might bring. This implies, first, maximising the operational efficiency of risk management processes by using technology to apply the OHIO principle, and second, having very clear policies to apply when complex and uncomfortable situations arise.

It is (relatively) straightforward to follow a 90% hedging policy when interest rate differentials are small, but several emerging markets (for example, Turkey, Mexico, India, Indonesia and the Philippines) have been dramatically raising interest rates to counter capital flight, creating uncomfortably wide interest rate differentials. In these circumstances, hedging can wipe out gross margins – but not hedging may be even worse. Such conundrums are better thought through in advance.

According to Reuters, emerging central banks (for example, Turkey, Mexico, India, Indonesia and the Philippines) have now recorded the longest monthly run of net interest rate hikes since 2010, with June 2018 numbers showing the biggest tilt towards monetary tightening in seven years.4

Operationally, many risk management processes expend great effort on collecting the forecasts that constitute the underlying risk, consolidating them, and manually determining appropriate hedging action. STP from e-FX platforms back to TMS and ERP is reasonably standard in modern treasuries. Treasuries should apply STP in determining the underlying and the basic hedge actions as well. Operational forecasts can either be loaded directly into the TMS or passed through corporate standard reporting tools to the TMS without manual intervention. Only exceptions – both in the underlying positions and in the market data – require human intervention.

Embedding compliance

Compliance is a hot industry after the global financial crisis, and the regulatory tsunami shows no sign of abating. Corporate treasurers are devoting increasing effort and resources to regulatory compliance. This runs the risk of sucking resources away from customer-focussed activities that generate more value. Of course, compliance is not optional – but neither is it healthy for compliance to top a treasury’s agenda.

Although it is sometimes hard to see ways out in the early days of new regulatory hurdles, technology provides a framework to ‘set and forget’ compliance. Treasuries must automate regulatory reporting and limit monitoring from the start to avoid the time wasted and risks taken in trying to comply manually. Even early solutions that may be only partial can save a lot of time and increase the reliability of compliance.

"It would be prudent for treasurers to arrange sustainable and well-gapped funding sooner rather than later"

Applying the 80/20 rule, many treasurers have made big gains with simple know your customer (KYC) platforms that cover most of the requirements of most of their banks; as KYC review frequencies increase, the benefits compound. And these are minimal-integration, low-effort implementations.

Meeting objectives

Treasury faces exciting and challenging times. Boards expect more strategic input, markets and ecosystems are volatile, yet budgets remain tight. Treasurers need focus to sort through the noise and concentrate their efforts on what really matters for their enterprises. Automating the routine processes in treasury, together with strong exception handling, frees up time for higher-value-added work. Clarity on goals and rigorous KPIs help treasury teams to pull together to meet the enterprise’s objectives.

David Blair is Managing Director of Acarate Consulting. He was formerly Vice-President Treasury at Huawei, where he drove a treasury transformation for this fast-growing Chinese infocomm equipment supplier. Before that he was Group Treasurer of Nokia, and he has previous experience with ABB, PwC and Cargill



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