Cash & Liquidity ManagementCash ManagementCash ForecastingHow Treasury can Balance Innovation and Risk

How Treasury can Balance Innovation and Risk

Formula One – Innovating to Manage Risk

Surprising as it may seem, treasury can learn a lot from Formula One about data analytics, process improvement, handling regulation and thriving despite risk.

Formula One’s business actually consists of 10 teams that executive Mark Gallagher describes as engineering companies that design, manufacture and produce a product – a Formula One racing machine. “We are looking to make a profit, we manage risk, and we want to have the agility to respond to all the disruptions that are in our businesses,” he says.

Formula One operates in a highly regulated environment. However, as Gallagher says, tight regulation doesn’t mean you cannot innovate.

While physical risks of accidents are obvious, Formula One also faces business risks of disruption, such as losing 70% of its sponsors – tobacco companies – when the firms had to stop advertising. “This is the reality of running a business where we are hit one time after another by factors that increase our business risk and cause us to rethink how we do the business,” he says.

One key shift has been in the usage of data. Formula One responded to the risk of accidents by “realizing that the thing that was giving us the biggest clue about how to prevent it recurring was data,” Gallagher says. “We took a negative outcome and used the IT revolution to begin to understand the benefits of using data. The really exciting point is that we have started to harness the power of those solutions by selling data analytics solutions to a wide range of industries,” from the automotive industry to consulting and hospitality.

Adds Gallagher: “We have also seen that this innovation-based culture can benefit human activities.” The duration of pit stops, where teamwork is extremely important – analogous to any business that has personal service – has been reduced from six seconds to 1.9 seconds. Employees spent six months with the management innovating, refining the solution.”

Taking Treasury’s Temperature

During a panel discussion, conference chair David Blair moderated held a poll that provided insights into treasury in the year ahead.

Confidence in business prospects were mixed, with 33% of respondents more confident and 41% less confident. Nokia is one of the confident ones, notes Antti Kyyro, head of regional treasury, Asia-Pacific and India. Richard Nield Asia-Pacific treasurer for Cargill, on the other hand, says that while long run fundamentals are strong and there are positive steps in the trade arena, there are also geopolitical risks that have the potential for trade disruption and debt-financed assets that have led to over-capacity.

Fully 62% of respondents believe cash visibility will improve this year while only 38% believe it will not. And 84% expect to spend more time on regulatory compliance than last year. Nield said everything from Dodd-Frank to the European Market Infrastructure Regulation (EMIR) to the Foreign Account Tax Compliance Act (FATCA) leads to that conclusion.

Despite the increased workload, only 25% of respondents expect their treasury department’s resource be measurably bigger this year. Nield says that his team is using shared services and technology to overcome the challenges.

Technology is apparently not a strong point for treasurers, however, as 83% of respondents said they are still learning about technology while only 11 percent described themselves as technology experts. Perhaps reflecting this lack of expertise, only 28% are looking at using cloud technology.

Dashboards to Use Information Flows

However, there are some treasury functions that are making strides with technology. In the first of several sessions devoted to sharing treasury expertise, Johnson Controls Director Mario Del Natale described how his company developed dashboards to enhance treasury management.

After implementing SWIFTNet across all divisions, Del Natale says, Johnson had a tremendous amount of data. The company decided to develop an in-house reporting tool and launched the first version in 2009, then has continuously improved its processes and reporting.

The company now has a multitude of dashboards, including a real-time daily cash management dashboard for funding, along with a real-time operating and non-operating cash flow dashboard and a currency dashboard. Johnson can also compare forecasts with actuals, by group, country or division. Cash managers around the world use proposals automatically calculated by the system to decide what has to be transferred.

“The approach we have taken is to provide the big picture first” for the C-level, says Del Natale. “We take a top-down approach. The CFO wants to see it in one shot, who’s doing what. After that you can drill down.”

The key to success is having a clear strategy and view of what you want to achieve, says Del Natale. “If you have your strategy, you can start structuring and modeling your data. While you are building your solution, you have to think about how to present the data. You have to have an understanding of the technicalities, and the data structure. Extracting the data requires clear and in-depth knowledge.”

Cash Flow Forecasting

Accurate cash flow forecasting is essential for treasury, and British American Tobacco (BAT) Regional Head of Treasury Russell Philips and BAT Regional Treasury Manager Jasmine Lee described how their firm has enhanced the process tremendously.

BAT operated in multiple jurisdictions that had different business, distribution and payments models, with payments that ranged from once a month electronically to very frequently via cash. BAT had multiple excel spreadsheets, which took a long time to consolidate, and the company had poor visibility into cash. The financial crisis was a catalyst for change, when it took days to respond to the CFO’s question about their risks.

The fundamental cash flow questions, Lee says, were what they needed the forecast for, how accurate it needed to be, and understanding where their risks originate.

BAT implemented a multicurrency rolling cash flow forecast, by legal entity and by currency, so that it could get accounting at the entity level. “It is a bottoms-up approach,” Lee says. “We are in the process of automating it.  We have designed a suite of reports, for the center, regions and end markets.”

Philips said there were three key learnings from the process. First, it is essential to establish clear ownership and accountability. Second, the company needed to start with a design, be committed, be open, and learn and adapt. And finally, it needed to foster a culture of continuous improvement.

“Cash flow forecasting is fundamental and underpins all of our treasury activity,” Philips said. To enhance the process, BAT engendered cash consciousness throughout the company, made process enhancements, and worked to future-proof treasury systems and automation.

The key takeaways, Philips says, are, “first, there is no perfect solution, so start the journey and be committed. Cash consciousness is very important, so start by embedding this into your business. And from the beginning, think about the system, and automate as much as possible.”


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