What information do you need to make good treasury management decisions?

Deploying technology to standardize and automate treasury activity is a critical part of attaining control and visibility to allow treasurers to manage cash and risk more effectively, create time to act more strategically and to create value for the business as a whole.

To realize these benefits, treasurers must identify the core risks that their businesses face. This requires a clear understanding of their business, the nature of the business cycle and the cash flows that result. The technology must be set up to capture the data that can be used to achieve this visibility. The question is, therefore, what information does a treasurer need at hand to make a good decision? And, following on from that, can a treasurer have too much information?

Context is key

As is often the case, the answer is, “it depends on the business.” What does the business do, where does it operate, and how competitive is the industry in which it operates?

The business’ activity is vital, as it will have a unique business cycle that will be reflected in its cash flows. For example, a subscription-based business, such as a cellphone provider, can forecast cash flows out for the terms of its customers’ contracts. A mining corporation has a much longer business cycle than a food retailer. These differences in business cycles and the cash flow patterns they generate expose each business to different risks.

Geography plays an important part too. The treasurer of a primarily domestic business will be much less concerned over managing foreign exchange risk than the treasurer of a multinational corporation. That said, a purely domestic business may still be exposed to foreign currency risk if part of its supply chain is located abroad.

Finally, the nature of the company’s competition will influence its approach to risk management. As an illustration, a global airline, operating in a number of highly competitive markets, is likely to need a much more active hedging policy than a global mining corporation, whose product is much less sensitive to competition.

In reality these three distinctions are all more nuanced. Most companies don’t operate at the extremes; even if their businesses are primarily domestically focused (earning most of their revenues in their home markets), they may be expanding internationally such that the international side of their business is becoming more important. For these types of businesses, identifying and monitoring the core risks is not straightforward.

This context is vital. Without it, treasurers may be monitoring the wrong exposures and, if so, they will be forced to continue to firefight when the core risks materialize. Just as importantly, a lack of focus will limit a treasurer’s ability to act strategically to add value to the business.

Identify the critical risks

Given that various risks arise from these differences in context, the treasurer needs to identify the key risks that need to be managed in their business. Whatever the company’s situation, the crucial question is the same: what are the specific exposures that need to be managed? This applies whether these are cash positions or exposures to particular currencies.

Whatever the company’s situation, the crucial question is the same: what are the specific exposures that need to be managed?

In addition, one needs to consider where key decisions are made within the organization. Are all decisions made centrally or are some decisions made at business unit level? In many organizations, the location of decision-making authority varies according to activity. Group risk management decisions may be centralized, but short-term cash investment decisions may be made at operating company level, albeit within centrally set guidelines. Providing the appropriate information to the different decision makers will require different data to be captured and stored. Keep in mind, too, that different people within the same organization will be monitoring and managing different risks.

Identify positions and exposures to be managed

For each critical risk, the treasurer has to identify the end data required to manage it. This will include an assessment of the degree of data accuracy required.

For a company subject to strict lenders’ covenants, it will be necessary to monitor cash positions and associated metrics to allow timely action to be taken to avoid the risk of breach. Depending on the nature of the company’s bank relationships, it may only be necessary to have detailed visibility over accounts held with its core relationship banks. Flows across smaller accounts will not affect whether the company breaches a particular covenant.

Similarly, for a global business operating in multiple jurisdictions, monitoring the core foreign exchange exposures with the largest balances at risk should be the priority. For a US-based multinational with sales in most European countries, this is likely to mean prioritizing the exposure to the EUR rather than to some of the smaller European currencies.

Company context is important again here. Getting a completely accurate and timely position can be very difficult and resource-consuming; it’s possible that getting 80%-90% accuracy will be good enough, while relying on estimates for the rest.

Capture, normalize and store data

Having identified the end data required to manage these critical risks, exposures and positions, the final stage is to work backwards to populate the dashboard or screen from which they are monitored. This will require building any necessary interfaces to capture raw data from the identified sources and then configuring that data so that it can be analyzed on a standardized basis by the treasury system. There are a number of key parts to this process:

• Set terminology. One of the biggest problems in a disparate organization is the differences in definitions that can emerge. For example, cash pooling means different things to different people, even in the same country. In organizations whose business language is English, there can be many core employees and business partners for whom English is not their first language, increasing the chances of miscommunication. Without a clear approach to the use of terminology, there is a very real risk that slightly different data will be captured by employees in different locations and business units, making accurate position or exposure calculations very difficult. Note that this is a particular risk during or after a merger or acquisition when two cultures are combined.
  Treasurers are spending increasing amounts of time visiting business units to explain treasury’s role, obtain buy-in for projects and to try to standardize processes and definitions.
• Understand what data is available. There are differences in the level and timeliness of information of data between providers. For instance, banks in Europe and North America provide information in different formats; it is important to understand what is, and can be, provided in each format. Most sources will provide data in a standard format. If another format is required, make a specific request, as it may be time-consuming to do so during implementation.

Companies cannot afford to have to rebuild an interface every time a bank (or other supplier) makes changes

• Select what data is needed. From the available data, treasurers must prioritize to avoid the risk of having too much information. As an example, reporting may be available in real time, during the day or at end of day; the treasurer will need to work out what is required for each report. If a decision is made at 10 AM each day, the data needed to make that decision does not need to be updated after that – the previous day’s position is likely to be enough. Or, when hedging group positions, aggregated data may be sufficient (although more granular data may be needed for other purposes).
• Establish secure and standardized connectivity with all data sources. This is critical to a scalable project. Companies cannot afford to have to rebuild an interface every time a bank (or other supplier) makes changes.
• Normalize the data across all sources. Once the various data inputs have been identified, recognize any differences in data presentation and try to tag and store it consistently. This will allow data to be interrogated in as many ways as necessary. Think carefully about how the data will be used so that data is stored appropriately.
• Configure the system dashboard so that users see information relevant to them. For example, does the dashboard allow each user to monitor what they need and to identify and track an appropriate hedge?

Finally, prioritize implementation. Look for outcomes that will provide significant early gains so that stakeholders can appreciate the benefits.

Conclusion

No two companies are the same, but every company has critical risk points within its business. Without a technology solution that can standardize processes and automate wherever possible, it will be very difficult to get visibility over these risks. Without visibility, it is impossible to manage these risks effectively and treasurers will spend unnecessary time responding to problems. With visibility, treasurers create the time to act strategically within both the treasury department and the business as a whole.

The challenge for the treasurer in each organization is to be able to identify those critical risk points clearly, so that the technology solution can be set up to support decision-making in that area. By identifying those risks and the information required to monitor and manage them, treasurers can work backwards to ensure appropriate data is captured, normalized and interrogated to provide the visibility required to make good decisions, enabling them, in turn, to focus more on adding value to the business.

Alankar Karol is managing director, EMEA at GTreasury and Alok Tyagi is chief product and technology officer at GTreasury.

GTreasury is the leading innovator of integrated SaaS treasury and risk management solutions for the digital treasurer. Developed using the latest technology, GTreasury helps empower organizations on their path to strategic treasury, by enabling total visibility into their cash, liquidity, payments and financial risk management. With enterprise clients spanning North America, EMEA and APAC, GTreasury is headquartered in Chicago with offices in London, Sydney and Manila.