Best Practice in Business-to-Treasury (B2T): Part 1 - Understanding the B2T Concept

In this three-part series of articles about business-to-treasury (B2T), we provide best practice guidelines for corporate treasuries who want to create value and reduce treasury risks at the corporate level. The articles will help treasurers understand how to undertake a simple development project in order to improve the quality of reporting and internal treasury operations, and decrease financial risks. This series will provide answers to the following questions:

1. Why do treasury policies fail?
2. Why don’t subsidiaries consider treasury’s needs as critical?
3. How does a treasury benefit from an efficient B2T process?
4. How does a business unit benefit from an efficient B2T process?
5. How do you recognise an efficient B2T process?
6. How do you recognise an inefficient B2T process?
7. How do you spread the expertise of your treasury department throughout the organisation?

If inaccurate and late cash-flow forecasts are commonplace in your organisation; if you feel that you have to keep repeating the same instructions to business units over and over again; if you constantly have to struggle with unhedged currency exposures that appear out of the blue; or if you simply feel that you cannot offer your business units an adequate service, then this series will provide you with some valuable advice. If you have reliable and timely information about financial risks readily available, we can only congratulate you: you belong to a small minority of corporates!

In recent years, increasingly demanding pressures have been placed on corporate treasury with ever growing responsibilities. Legal requirements, such as Sarbanes-Oxley (SOX) and International Accounting Standard (IAS) 39/Financial Accounting Standard (FAS) 133, and internal working capital management projects have added to the treasurer’s work load, while the efficiency demands made by management have contributed to treasury facing a constant shortage of resources.B2T Focus: Driving Factors

Information about the organisation’s cash flows and treasury exposures, which is the raw material for all treasury functions, should always be as accurate and readily available as possible. Yet in the majority of organisations, subsidiary reporting lacks both quality and reliability (read Survey Reveals High Levels of Inefficiency Within Internal Treasury Operations). Treasury can be easily tempted to blame the business units for their low motivation to report accurately but the truth, however, is that it is treasury’s responsibility to build a concept that enables high-quality B2T processes.

In order to succeed in building such a concept, treasury must put itself in the position of the subsidiary. The true expertise of treasury is measured in how well it can use its expertise for the benefit of the whole organisation. It must translate their workflows and objectives into simple terms and concepts that even people without subject matter expertise can understand and follow – subsidiary correspondents are rarely treasury professionals! This series describes how the efficiency of processes and transmission of data between business units and treasury can be optimised.

How Do You Recognise an Inefficient B2T Process?

An inefficient B2T process is characterised by rules and regulations that are open to interpretation and the lack of efficient communication and supporting systems. Treasury language is often incomprehensible for non-treasury specialists, and even active communication can be seen as poor from the subsidiary’s perspective. Complicated terminology and non-intuitive guidelines lead to misunderstandings and a decrease in motivation if subsidiaries cannot grasp why it is important to do things in a specific way. All too often, treasury uses terms, such as duration and forward points, which makes perfect sense to them but may be complete gibberish to the people working within the subsidiary. If there are 150 people working within the organisation’s financial processes on the subsidiary side and five people working with them on the treasury side, it should be quite obvious which side will learn the other’s terminology faster.

The rules and regulations concerning treasury activities are encapsulated in the corporate’s treasury policy. The policy may have been tweaked and honed for months on end in treasury risk committee meetings with each committee member leaving their individual stamp on it. This type of document will no doubt be comprehensive from a risk management point of view but it can also be extremely complicated – even for the people who wrote it, never mind the people working in the subsidiaries who are not treasury professionals. But it is those people who should be able to understand and follow the policy’s rules and regulations effortlessly.

The technology that treasuries offer subsidiaries tends to be based on the needs of treasury alone. Spreadsheets and TMS web interfaces meet the needs of treasury but offer subsidiaries a complicated interface for handling simple tasks.

The Consequences of an Inefficient B2T Process

Unhedged currency exposure

The treasury manager of a European corporation read a news story from Reuters in which it said that her corporation had received a US$60m order from South America. She was somewhat surprised since she was responsible for managing the corporation’s currency exposures but had not been aware of such a deal. She called the business unit and requested more information about the details of the deal. She found out that production was to happen in Europe with all expenses paid in euros, but the actual deal would be made in US$. Personnel in the business unit also promised to find out why the risk had not been hedged. She was later told that the person responsible for hedging had been on sick leave for the past month and that no one else had known how the process worked.

This actual event was caused by a complicated treasury policy where only the person in charge of hedging had the relevant knowledge within the business unit. Treasury had a reputation of communicating poorly and the back-up person did not want to call them and ask for advice, as he knew that he wouldn’t understand it anyway. This mistake cost the corporation over €1m in lost profit.

Reverse deal

A representative from a Swiss business unit called treasury and said, “Please sell US$5m for us against CHF.” The treasury sold the business unit US$5m and bought CHF. Three months later, when the deal was executed, the same representative called treasury and angrily said: “I was not buying US$, I was selling. I clearly requested you to sell US$5m to the markets on my behalf.”

The same mistake was repeated again but this time treasury knew what the representative wanted to do. Again, the source of the problem was their inefficient B2T process because no clear instructions existed about how the deal should be made and communicated. The representative of the business unit had worked in a bank earlier and knew that treasury worked with banks. What the representative hadn’t understood was that treasury first made an internal deal with the business unit, which it then covered with an external deal with a bank. A confirmation of the internal deal was provided to the subsidiary as always, but the confirmation message was extremely complicated, and thus the mistake had not been discovered. The mistake cost the corporation almost CHF500,000 when the external cover deal was called off. It is irrelevant whether it was treasury or the subsidiary that took the loss – the corporation lost money.

Ad-hoc report to management

At the outset of the Asian financial crisis in the late 1990s, a corporate CFO wanted to know about all open currency exposures in South East Asian countries. The treasury did not have the information readily available, so it had to go through each and every business unit that it suspected might have financial risks in those countries. Gathering all the information took two weeks and, even then, the gathered information was not reliable.

This problem was caused by the lack of a B2T system. The corporation’s TMS contained information concerning all the currency deals made between treasury and business units, but since most of the deals in the south-east Asian markets were made directly between the business units and the local banks, the TMS lacked information about those deals. Knowing about all previously made deals would have made the work of treasury much easier, but the real need was to find out what kind of risks the corporation had in its price lists and order backlogs, etc. Regardless of the process, the TMS would not have helped with such information anyway because it manages financial instruments rather than gathering information from business processes.

Breakdown of B2T Processes

Unfortunately, some treasury representatives still believe that inefficiencies are caused by people in subsidiaries who are either unable to understand simple rules or too lazy to be bothered to follow them. But it is hard to believe that any corporation would have personnel that would not understand written text or would intentionally refrain from following the company’s rules. One can thus safely trust that the problems are not caused by laziness, stupidity or intent.

You can actually reverse the argument, however, and claim that the problems are actually caused by treasury. That is, the lack of resources and foresight to develop a B2T process that all subsidiaries can understand and the practical tools to make that process work effectively.

The lack of a system to support B2T processes is mostly due to the fact that traditional treasury applications do not yield to the demands of B2T process management. As a result, corporations have been forced to find alternative, often Excel-based, tools for this purpose. In recent years, solutions have emerged that focus on acquiring and managing information from the business front line, and the largest TMS vendors have developed web interfaces into their own applications in order to help corporations with their internal treasury processes. A number of banks also currently offer applications that focus on B2T processes as part of their e-commerce solutions designed for corporations.

How Do You Recognise an Efficient B2T Process?

Let’s assume that your organisation makes a significant acquisition and with it 50 new business units join your treasury processes. The people responsible for the treasury processes in the new business units are used to handling things according to the previous owner’s model, which significantly differs from that used in your corporation. How fast do you think the new business units will be able to learn your corporation’s working model and offer reliable and timely forecasts without confusion? If it is within days, then your B2T processes are in order.

On the treasury side, a similar situation might occur if the entire treasury personnel is replaced at the same time. For instance, a treasurer might accept a position at another company and take his or her entire team to go with them. A new team of professionals would be hired in their place but none of them would have experience of the existing internal processes. Would the new team be up to speed with managing your cash flows and risks, efficiently serving business units, without a significant introduction time? If yes, then your B2T processes are in order.

The characteristic of an efficient B2T process is that the corporation’s treasury processes have been productised as concepts. The policies and work instructions are clear and easy to understand and the systems designed for process management support both the needs of the business units and treasury.

By using efficient B2T processes, the problems described in the examples above could have been avoided if:

• The corporation’s treasury manual had clear role-based instructions for practical situations in treasury related transactions whereby a substitute or stand-in could handle various tasks effortlessly in case of absence;
• In the corporation’s B2T system, all hedges were made against the risks of the business unit, where reverse deals could not occur; and
• The corporation’s B2T system enabled constant availability of the information needed by management.

Conclusion

Getting reliable and timely forecasts and reports from business units is essential for efficient treasury management in all corporations. In the majority of organisations, however, these processes lack both quality and reliability. The reason for this is the combination of unnecessarily complicated treasury policy, the lack of clear treasury work instructions and a poor internal treasury processing system.

The true expertise of treasury is measured in how well it can use its expertise for the benefit of the whole organisation by creating a treasury concept that all business units can understand and follow.