Cash & Liquidity ManagementCash ManagementPracticePeople, Partners and Processes: Three Must-haves When Aiming for Best Practice

People, Partners and Processes: Three Must-haves When Aiming for Best Practice

It was Benjamin Franklin who suggested that the only certainties in life were death and taxes. Everything else, it was implied, is subject to change and to flux.

In the world of corporate treasury, this sentiment rings true. There are very few absolutes and the idea of a single standard operating model, a defined set of rules or an ideal best practice for cash management is one of these ever-evolving concepts.

The ultimate objective for any treasurer or cash manager is to support the business they serve, as the ambitions and priorities of that business develop. This means that best practice is a moving point in time, something that treasurers can define today and seek to attain, but which could look very different in a month, year or decade’s time as the business grows and changes.

This article will look at what best practice in cash management has been historically, and offer some tips on how corporate treasuries can put a framework in place that will enable them to operate as effectively as possible in the future.

Quicker, Faster, Cheaper

If you look back just five years ago, the climate for UK business was markedly different to today. In 2007, real UK gross domestic product (GDP) growth stood at 3.5%, with the UK base rate ending the year at 5.5%, and global growth was being forecast at 3.4% for 2008. Many businesses were optimistic about the future and were prioritising expansion plans, programmes focused on growing margins and profits, and even merger and acquisition (M&A) activity.

As a result, the treasurer’s role was to support this growth, and the mantra for cash management became ‘quicker, faster, cheaper’. Corporate treasuries had to ensure that payments could be made and received as quickly and cost-effectively as possible, particularly those from new markets and segments as companies expanded. This often led to the centralisation of payments and the building of shared service centres (SSCs) with the aim of achieving greater cost efficiencies and accessing the latest technology. Ireland was a key beneficiary of this trend as many companies, particularly in the pharmaceutical and technology sectors, set up in the country and used it as a European hub.

For a business to grow, it usually requires financing. Cash management began to align more closely with transaction banking as securing financing at a competitive rate became a key corporate priority. A company’s choice of banking partner was often linked to their willingness and ability to provide such lines of credit, and many companies elected to work with one global bank or only a small number of banks.

The Return of Risk

The global economic crisis changed the playing field for business, and in turn, best practice for treasurers has evolved to meet corporates’ new requirements. Risk has moved to the top of board agendas, and the effective management of risk has become a much greater part of a corporate treasury’s mission.

Cash managers are required, and have been empowered, to take a more holistic view of their companies than ever before. Best practice means creating an accurate map of end-to-end cash flows in order to understand where cash is at any one time, be that in bank accounts, on cards or in foreign exchange (FX) products and derivatives. Increased awareness of the impact of counterparty risk after the Lehman Brothers’ collapse means that the pendulum has swung back to having a larger panel of banks in place than in the past, in order to diversify counterparty exposure.

There is also a growing awareness that it is not enough simply to know your direct suppliers, and to ensure that they are stable and solvent and can meet their obligations to the business. It is now highly valuable for treasuries to build an understanding of those that are supplying their suppliers, as this builds a picture of the robustness of the entire supply chain and allows risk to be identified and mitigated accordingly. For example, recently the global automobile industry had to convene an emergency summit when an explosion at a German chemical factory compromised the global supply of cyclododecatriene. This chemical is used to produce a nylon found in coatings involved in fuel injection and braking systems. Although the material comprised just a small part of the overall supply chain, the potential for significant disruption warranted serious and high level talks.

Although centralisation is largely on pause, technology never stands still. Higher standards of automation and interoperability are possible, and indeed expected, today. Technological advances also mean that accurate and timely data on cash positions is more readily available, enabling treasurers to provide more detailed reporting to their boards and to take more informed decisions.

Top Tips for Corporate Treasuries

Looking at recent history, it is clear that what constitutes best practice in cash management has changed throughout time, informed by the evolving needs of the business. But while it is difficult to define, it is possible for corporate treasuries to establish a framework that will enable them to adapt to business priorities successfully. Good people, strong and experienced partners and robust processes are the three key elements to this.

Tip 1: Hire good people

Having knowledgeable staff within the treasury team is an essential starting point. Experienced practitioners will be able to help define and drive best practice on an ongoing basis. Association of Corporate Treasurers (ACT) qualifications and their international equivalents are certainly needed, but they should be married with hands-on experience within the corporate sector too.

Unfortunately, it is increasingly evident that the talent pool in the UK market is stretched, and skilled treasurers are in high demand. One way that this might be solved is for corporate treasuries to hire practitioners from bank providers to a greater extent. This has happened in a couple of large FTSE 100 companies, but remains the exception rather than the rule, and could address the challenges of attracting and retaining true talent.

Tip 2: Select your partners wisely

Choosing the right banking partner is a considerable undertaking for corporate treasurers. However, current request for proposal (RFP) processes can place more emphasis on ticking boxes than on getting to know the potential provider team. The best bank providers will be those with the experience to give trusted and honest advice, backed up by technical nous, with whom treasurers can build a strong rapport.

Corporate treasurers can assist this process by investing time in the relationship themselves. If they are open about the challenges they face, banks can provide more effective advice because it is tailored to the true issues at stake. Many banks will also be able to help fill skill and knowledge gaps where treasury teams are either under-resourced or stretched.

Tip 3: Ensure your processes are sound

The next big challenge for treasurers will centre on information, and how it can be gathered accurately and in a timely way. The ability to manage risk is based on having an accurate picture of where the business stands at any one time. Increasingly, we are seeing the development of technology solutions which aim to offer a holistic view of a corporate’s cash position, across trade products and cards and across multiple markets, on a single electronic banking (e-banking) platform. It is clearly still a time of constrained budgets, but having the technology and processes in place that enable treasurers to make decisions in a fully informed way is key to preparing for what best practice will look like in the future.

Best Practice: Is it Possible to Define and Achieve?

Cash management is now more closely aligned to the health of the company than to transactions and financing. The world is moving ever faster, however, and what is best practice today may be different next year. All corporates will face the same type of challenges whatever their size and focus, whether that is trading with and settling payments from ten UK suppliers once a month, or with a thousand global suppliers every week. The key is to accept that best practice will shift according to the wider business’ priorities, and to put in place a framework that will ensure the treasury function can evolve with this.

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