Corporate TreasuryTreasurers to rely on predictive, data driven analysis to navigate “new normal”

Treasurers to rely on predictive, data driven analysis to navigate “new normal”

The rising frequency of so-called Black Swan events is demanding new treasury competencies to deliver the forward-looking, data driven analysis required to navigate the treacherous terrain of the “new normal”

The pandemic was the third “Black Swan” event that Travelex was hit by in 2020. The first occurred on New Year’s Eve when the foreign exchange company was held ransom by hackers who had conducted a cyber-attack that brought down a large number of servers globally within a matter of hours, forcing the business to rely on pen and paper alone.

“It took the company several weeks to get back on its feet,” says Matt Cornwall, group treasurer at Travelex. “It was a massive shock that left your laptop about as useful as a frisbee.”

In February and March, the company was entangled in a corporate fraud scandal after its UAE-based parent company Finablr was found to have more than $1bn in undisclosed debts on its balance sheet, along with reports of unauthorised loans. This resulted in banks pulling credit lines, leaving Cornwall and his 17-person team to try and run a treasury function without all of the typical tools they needed to operate as effectively.

And just when things looked like they couldn’t get any worse, the pandemic arrived and, with Travelex’s business being so intertwined with the travel and tourism sectors, its revenues fell off a cliff.

“In the space of about three to four months it drastically shifted the business model,” says Cornwall. “We’d been hit with three hugely disruptive events that many group treasurer’s may not experience within an entire career.”

Like many, Travelex has had it tough since the coronavirus started to tear through markets. But the increased frequency of disruptive macroeconomic events shows little sign of easing, placing unprecedented demand on corporate treasury departments to focus even more predictive, proactive approaches to risk analysis.

“These Black Swan events that catch you completely off guard used to happen every 20 years – they were rare,” says Sam Robinson, deputy treasurer at Hitachi Capital UK. “But now they seem to happen every five years. That’s partly why interest rates are just going lower and lower and lower because central banks are trying to accommodate a world that has become so interconnected.”

However, the low-interest rate environment that has become yet another “new normal” represents a major challenge for corporate treasurers in a world where risk management requires treasury teams to focus on the future more than the past.

“Over the past seven years, there has been movement away from the idea that interest rates, despite sitting at historic lows, will eventually come back to equilibrium rates of around three percent,” says Robinson. “Because suddenly, some news always seems to break. Brexit comes along. Donald Trump enters the White House and then the global pandemic hits and you find that equilibrium rate keeps getting chipped away at.”

“We can’t base our assumptions on what they were like in the late 90s or early 2000s – it’s a different ballgame,’ he adds.

The idea that negative interest rates would become widespread throughout Europe seemed almost absurd until only recently. But a seemingly endless supply of macroeconomic shocks bookended by the 2008 financial crisis and the pandemic has caused global economic activity to lag so slowly it has forced central banks to intervene over and over again.

And while market intervention in the form of negative interest rates and quantitative easing can provide a reprieve from the economic impact of the pandemic by encouraging spending, lending and reducing market volatility, it can also create a dangerous and challenging landscape for treasurers to try and navigate.

“It is like driving a car uphill without any brakes, everything is fine until you start moving downhill,” says Todd Yoder, director of global corporate treasury at Fluor. “As we moved through 2020 and experienced the dislocation between economics and the financial markets – no one wanting to be on the wrong side of the Fed – it reinforced the importance of the risk intelligent decision-making treasurers bring to the business.

“We are seeing some enormous valuations (P/E ratios) and buying with both hands – some bubble vision. In a low interest rate environment, I think we will continue to see sharp moves in FX rates this year.”

Data-led decision making

To navigate this increasingly treacherous terrain, treasurers have relied on internal and external data to do more modelling, scenario building, cash forecasting and a re-forecasting of various scenarios than they would have prior to the pandemic.

“Under normal conditions, where you are trading to budget, none of that additional analysis was really required,” says Mark Hirst, group treasurer at William Hill. “But with the pandemic, the gloves are off – it’s all on the table.”

“I think businesses have changed over the years and see data as something of a valuable commodity,” he adds. “It is amazing the mistakes that can be made by not using the right data set… [but] with data that has good provenance; accessed easily and readily by people who know their way around the business’ internal systems and external sources of data it allows you to react faster.”

As a result, there is a rising recognition among treasurers of the value that data scientists and business analysts can offer their teams. In fact, Travelex has beefed up its cash forecasting and management resource within both its treasury and finance function by bringing on several data analysts, according to Cornwall.

“Given the current climate, cash forecasting is prevalent and the need for treasurers to really understand the businesses they work for is key because so many corporates have seen their revenue taps turned off, but they still have a cash burn of x million and must manage the situation,” he says. “I’ve been in treasury 20 years, and I’ve never seen this amount of scrutiny over cash forecasts and cash management.”

Empathy for technology

It is worth noting that this growing recognition of the value of data scientists is not pervasive across all corporate treasury departments and finance teams, according to Mike Richards, CEO of The Treasury Recruitment Company.  But one thing that is increasingly important to hiring managers is that treasurers have an empathy for technology.

“Treasury professionals are becoming more highly skilled and developed than they perhaps have ever been before,” says Richards. “[The rising frequency of disruptive events] is changing the composition of treasury teams. But it is a gradual shift, rather than a revolution.”

Treasury teams are also getting smaller due to technology, with two £40,000 per year treasury analysts often being replaced by one £60,000 treasury manager proficient with a treasury management system, “which isn’t exactly great for business,” he adds.

And while traditional accountancy skills remain core to the work that treasury’s do there is an evolution in terms of new competencies required by the modern treasurer due to the current climate, they find themselves in. One where, in the medium-term, those that utilise AI, data visualisation and robotic process automation within multi-national corporates to add value to the business will find themselves better equipped to navigate the challenges posed by an increasingly interconnected world.

“I would consider myself very much a treasurer, but given the times, we treasurers have to understand technology and the impact it is having and will have over the coming three years,” says Yoder. “I want to be in the group leading change and improvements, not the group watching them happen. Now is a time for treasurers to not only do what we have always done, but also continue learning about emerging technologies that are impacting the business model and how we can do treasury smarter to add more value, and data is a big part of the puzzle.”

His advice to the next generation of treasurers is to study data science, economics, mathematics and psychology, with those that utilise both the left (technical skill) and right (soft skill) brain most likely to come out on top.

“Diversity and inclusion is critical to future success – I do not know anyone who likes raw milk fat or eats pure sugar, but I know many people who love ice cream,” adds Yoder.

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