Evolving Corporate Treasury: Transactional to Strategic

by May 23, 2018 0 comments

Transactional to StrategicAccording to the new strategic role, corporate treasurers have to alter their roles to become consultants or advisers to businesses on prospective economic risks that will directly influence the business value chain.

The role of the corporate treasury is evolving lately, metamorphosing from management of liquidity and financial risk to a more strategic role. Historically, the desire to reduce the cost led to a massive growth of the corporate treasury in large and mid-sized corporates. A corporate treasury department can be viewed as an in-house solution for managing funds of an organisation. Conventionally, the corporate treasury performs functions such as cash management, liquidity planning, procuring finance and managing risks for the business. Although the treasury has a concrete role in financial risk management, which is not likely to change in the near future, along with the traditional functions like funding long-term growth and financing working capital, worldwide it is expanding into newer horizons, like providing advisory to business units and managing credit relations. What are the business changes that are responsible for the transformation of corporate treasury management?

In a complex and fast changing business scenario, corporate treasuries have seen a gradual shift to capital structure management from debt management and have increased their focus on improving ROE (return on equity) by optimising leverage and managing investor relation to support long-term growth, in addition to raising long-term equity capital and aligning business cash flows with debt servicing obligations.

Financial risk management has also become the main concern for companies after the global financial crisis. The need for structured hedging programmes followed by monitoring by the boards has increased manifold with the focus of hedging programmes shifting towards business centricity and internal optimisation. Going forward, corporate treasurers need to focus on engaging with business to provide risk management solutions, optimising cost of hedging, effective netting of forex flows, accounting for hedging transactions and contract structuring to pass on forex risk.

Placing engaging with business to provide risk management solutions as one of the most important internal focus areas signals a greater involvement of the treasury function in understanding the inherent risks in the business model. Most global organisations believe that their diverse risk exposure across geographies make it important to have a global treasury setup and setting up a global treasury centre has numerous benefits like increased range of hedging instruments, access to deeper financial markets, reduced cost of working capital financing and reduced regulatory and documentation requirements.

However, Indian companies still do not visualise a central set-up and financial risk management continues to be largely India-centric. With rapid globalisation and increased internationalisation of businesses, the role of corporate treasury in cross-border activities has increased and a smooth flow of information from different business units will help manage global cash flows.

Variability in forex and commodity prices pose a big challenge and are one of the reasons for difficulties in management of cash flows. While volatility makes forecasting and, therefore, management of working capital requirements difficult, the ability to evaluate the extent of impact from volatility on a continuous basis through use of forecasting and decision support tools is critical. Managing liquidity risk arising from market volatility is becoming an increasing focus area of corporate treasurers. Corporate treasurers should also focus on improving return by utilising idle surpluses by pooling cash across geographies and entities, diversifying current short-term instrument mix and increased monitoring of idle cash.

According to a survey by Deloitte, about 65 per cent of the companies invest their cash surplus for a period less than six months and the main criteria for short-term investment is the liquidity risk followed by credit and market risk with focus on return from these investments being relatively low.

With businesses going global, there is a significant evolution of treasury management and companies need to decide whether to position the treasury as a centralised or decentralised department. In a centralised set-up, a particular team takes the key decisions and functions on behalf of all the group companies located at a different locations. In such cases, there is a central handling of functions, like risk management and fund management for the entire group.  In contrast, a decentralised structure entrusts the decision-making power to smaller units, located geographically apart, with cash management done locally. Since local management has various benefits, like familiarity with business, customs, language and culture, companies benefit from decentralised control when it comes to their treasury operations.

However, the benefits of decentralised operations are out weighed by the advantages of centralised operations. Centralised treasury operations can help in cost reduction for services and increase in professional treasury knowledge. Although a fully centralised environment may appear to be the most suitable structure for multinational corporations, in reality, not many companies, especially in India, take this route. Because of practical reasons, many companies end up with a hybrid or decentralised arrangement.

With expanding scopes, there are certain challenges, both internal and external, that corporate treasurers need to resolve to meet increased expectations. Lack of clear view on exposures and inadequate control over working capital utilisation are the main internal challenges for corporate treasurers and quality talent crunch in the marketplace and laws affecting cash pooling along with unmanageable volatility in financial markets are their biggest concerns.  In addition, since price discovery continues to be a key concern for corporate treasurers, covenant management and matching cash flows and servicing obligations are also key operational challenges. So how can these challenges be addressed?

Technology is the answer and investments in automation of treasury processes implementation of treasury performance management systems and development of decision support tools and risk models will go a long way in developing robust treasury frameworks which will be critical and would make corporate treasurers ready for the new role. In addition, putting in place clear and measurable treasury performance metrics at each tier of the treasury structure and monitoring the metrics is another way of meeting the expectations.

The future of corporate treasury management is set to transform into more of a strategic role for organisations, in addition to managing financial risk management and maintenance of liquidity. Future corporate treasury is expected to function under a three-tiered structure:  First, the strategic role where the key focus will be enhancement of shareholder value by long-term funding and strategic investments in surpluses to the increase the overall ROE, maintaining relationships with different stakeholders like investors and institutions; second the management role which is further divided into financial risk management including currency, interest rate, credit, counter-party risk management; and  and financial supply chain management which comprises of cash and liquidity management and finally the operational role which includes the treasury operations. In their new strategic role, corporate treasurers have to brace themselves to transform their roles to become advisors to business on the potential economic risks, that in turn can impact business value chain. In India, organisations are regrouping themselves to meet the global best practices by making decision-making more central and using more complex ecosystems like technology platforms and using a seamless interface for managing transactions and reporting requirements.

(The writer is Assistant Professor, Amity University)

Writer: Pioneer

Courtesy: The Pioneer

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