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I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.

Saturday, 4 August 2012

Cash Management, Operational Risk and Working Capital: Most Important Areas for Treasury

24 July 2012

Since the financial crisis in 2008, the treasury role has changed and become more strategic. The importance of treasury to the organisation has increased, with much more emphasis on cash management and forecasting, working capital management and above all operational risk management.

Treasurers are reporting an increased importance to all their functions - an ‘urgency of now’, according to the gtnews 2012 The Expanding Role of Treasurers Survey, sponsored by Bank of America Merrill Lynch (BofA Merrill). Across nearly all questions, they tend to rate the importance of the function, its threats and opportunities higher today than 12 months ago.

While the importance of treasury to the organisation might have increased, the relative importance or ranking, of core treasury functions has not changed. Corporate treasurers think that the three areas of greatest importance to their organisation in 2012 are:

  •     Cash management and forecasting.
  •     Operational risk management (ORM).
  •     Working capital management (WCM).

Ninety-one percent of respondents believe that cash management and forecasting is “important” or “very important” this year, compared with 73% who believed that this was the case a year ago. More than eight out of 10 (82%) view operational risk management as important, whereas 79% think that working capital management is a key discipline.

Other areas ranking in the top five services of treasury include banking relationships (counterparty risk analysis), which was chosen by 76%, and financial and capital allocation (68%).

Single euro payments area (SEPA) solutions and treasury outsourcing are viewed as the least important areas this year. Interestingly, even today treasurers do not believe that eurozone breakup contingency planning is of great importance to their organisation, with only 17% believing that it is “very important” and 16% thinking it “important”. It is, nonetheless, more than the 9% who thought it was an important or very important issue 12 months ago.

Breaking down the results by region, financial and capital allocation makes it into the top three areas of importance for corporates based in Asia-Pacific (chosen by 78% of respondents), while North American corporates are more interested in supply chain management (SCM) and new technology and systems than corporates in other regions.

The results suggest that treasury’s role in new technology and systems may be more important to organisations with annual revenue below US$1bn. And more respondents at smaller organisations also see treasury activity/service in banking relationships (counterparty risk) as more important.

Despite the fact that outside challenges are increasing, as well as the importance of services to the organisation, the portfolio of treasurer/treasury responsibilities has remained largely unchanged over the past 12 months. The similar percentages of respondents indicate treasury has ownership, both today and 12 months ago, for, in descending order:

  •     IT/systems in treasury.
  •     Capital markets/investment.
  •     Credit risk management/mitigation.
  •     WCM.

Next-level responsibilities also appear unchanged over the past 12 months.

This may indicate that, while the role of the treasurer expanded quickly in the aftermath of the financial crisis, treasurers are now working to cope with the new remit without a corresponding increase in staffing levels. A mantra voiced throughout treasury across all industrial sectors is “doing more with less”.

There may be some differences in responsibilities between western Europe and North America. For example, 63% of North Americans indicate that treasury has ownership for WCM versus 35% of western European respondents. Two-thirds in North America have responsibility (own or monitor) insurance versus about one third of western Europeans. Fifty-eight percent of western Europeans, in turn, own trade finance, compared with 30% of North American respondents.

Treasury Success Factors and Areas of Improvement

Success factors for the treasury function align with core organisational needs. The most importance success factors are:

  •     Risk management effectiveness.
  •     Liquidity targets.
  •     Improving working capital efficiency.

Western European respondents view risk management effectiveness as the most important success factor, whereas improving working capital efficiency is first for North America-based respondents, of whom 88% provide a top two rating versus 57% for western Europeans.

Reduced borrowing costs, the third most important service 12 months ago, dropped to fourth place. This area remains higher in the rank order for western European respondents (third) than for North American respondents (sixth), despite treasurers in both regions selecting it about equally.

Interestingly, ORM is rated as one of the three most important treasury activities/services to the organisation and risk management effectiveness is rated as the leading success factor for treasury. However, operational risk appears to fall lower among treasury responsibilities, with treasury playing more of a monitoring role (as it does with merger and acquisition (M&A)) than an ownership role: only 21% say that they “own” this process, while over half (56%) say they “monitor” this activity. From this result one could conclude that the treasury function would like more ownership of operational risk, to meet organisational expectations or to increase its business impact.

The highest-rated opportunity for treasury to enhance performance in the financial supply chain is by improving operations through automation (77% of respondents cited this option). For at least three quarters of all respondents, the five most important opportunities to increase automation are in areas of:

  •     Cash management with 89% ranking this within the top two ratings of importance.
  •     Cash forecasting (83%).
  •     Account reconciliations (82%).
  •     Payments processing (75%).
  •     Liquidity management (75%).

Treasurers see that the negotiation of commercial and payment terms represents a second major opportunity to enhance performance (69%) by targeting the financial supply chain, particularly in North America.

Treasurers See Limited Regulatory Impact

Regulations/directives appear to have a fairly limited impact on organisations’ business, with the exception of International Financial Reporting Standards (IFRS), which significantly affects about three in five. Less than a third of respondents report a great impact to their organisation’s business from SEPA, Basel III and the Payment Services Directive (PSD). Even fewer organisations have seen a great impact from other major regulations/directives. There has not been a significant change in perception from 12 months ago.

As expected, SEPA and the PSD have a greater impact on western European companies, with 46% and 41% of respondents respectively ranking these regulations within the top two categories.

Potential Threats to Business

Negative economic growth/recession remains the greatest threat to treasury business, according to 73% of respondents who chose this option within the top two rating categories, along with stability of the banking system. Slow economic growth is ranked third as a potential. Interestingly the ratings are higher today than 12 months ago, possibly reflecting heightened risk/uncertainty.

Exchange rate volatility, the third most important threat in the last 12 months, is fourth today overall, although it remains in third place for western European respondents.

Overall, the euro crisis/contagion threat has increased in importance today versus 12 months ago. While emerging in Europe, the euro crisis/contagion appears to be as much of, or possibly more important, a threat to North Americans (70% of North America-based treasurers rank this within the top two rating categories versus 56% of their western European peers). Just 24% of North Americans indicate the euro crisis/contagion was an important threat 12 months ago.


Although the treasurer’s role has undergone enormous change as a result of the 2008 financial crisis, this year has seen more stability in the role and its remit. Treasurers are reporting an increased importance to all their functions, but the relative importance (rank order) of core treasury functions has not changed, nor has the portfolio of treasurer/treasury responsibilities. The constrained resources in treasury may mean that treasurers are not looking for extra responsibility to take on.

That said, risk management is an area that treasurers are concerned about and would like more ownership of. ORM is rated as one of the three most important treasury activities/services to the organisation and risk management effectiveness is rated as the leading success factor for treasury. However, operational risk appears to fall lower among treasury responsibilities, with treasury playing more of a monitoring role to date.

Looking at potential challenges for treasury, negative economic growth/recession remains the greatest perceived threat to treasury business. Stability of the banking system and slow economic growth are also at the top of the worry list, whereas exchange rate volatility is less of a concern today as it was last year. The euro crisis/contagion fear has increased in importance and is spreading well beyond Europe, which may well be an indication of things to come.

The gtnews Expanding Role of Treasurers Survey was conducted from 16 March to 5 April 2012. The total number of respondents was 137, predominantly from western Europe (43%) and North America (30%), with 10% from Asia-Pacific and the remainder 17% from Latin America, Middle East/Africa and central and eastern Europe. Corporates with annual revenue between US$1bn and US$9.9bn made up 34% of the respondent profile, 29% came from smaller corporates with revenue under US$250m and 20% from corporates with revenue between US$250m and US$999.9m. The largest corporates, those with revenue of more than US$10bn, made up 17% of the respondents.

First published on www.gtnews.com

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