Corporate treasury function 101 (or what treasury really is)

Does every company understand what falls under the treasury function? 

Challenging events in the past made the value of the treasury function crystal clear to the business as a whole. However, we still see some companies without a cash culture in place, lacking key metrics and global visibility and/or still relying massively on spreadsheets and numerous bank accounts.  On top of that, some of them haven’t properly organised risk management activities.

Therefore, it’s fair to wonder, what is “treasury” or who is the treasurer nowadays.  

To some, it’s the professional dealing with the petty cash in a local association, while others may see treasurers as the right arm of the chief financial officer (CFO). But before digging deeper on the matter, let’s agree on an unbeatable fact: treasury is not only reserved to large corporations.

The treasury function or, simply, “treasury”, deals with cash, not only the existing but the future cash needed as well. A simple but good definition of the role of treasury could, then, be ensuring the right amount of cash, at the right time, at the right place and in the right currency under various scenarios.

Having a dedicated treasurer or treasury team and a budget that guarantees their operations is, today,  more than a “nice to have”. It is, indeed, the right time for less mature entities to build the case for their treasury function by aligning its objectives with their strategic plans. 

In this article, we’re going back to basics so every company, regardless of their size, gets right what treasury really is, a function rather than a department, due to its interactions with the broader business and the added value it can bring. 

A glimpse of the (intricate) treasury function

To really understand the importance and complexity of the treasury function, let’s put the shoes of a treasurer on. 

Dealing with even one single European entity’s cash can be quite complex if one takes into account relationships with several banks, client management and potential payment delays, investment activities and the supply chain to be funded, to mention only a few. 

One of the key treasury challenges, even in the simplified situation we just described, remains the same: predicting the cash needed or available in three weeks time, for instance.

Now, what happens when there isn’t one entity to handle but 20 of them in various jurisdictions with different currencies and different investments needs? The equation gets even more complex when the treasurer has to deal with various suppliers and customers that use various currencies as well. In such a case, calculating the total amount of cash available today and tomorrow takes, undeniably, a more complex dimension.

To all that, let’s add the use of derivatives to mitigate FX (Foreign Exchange) and interest or commodity price risk, without forgetting the unskippable regulatory matters: EMIR (European Market Infrastructure Regulation) reporting, market abuse, AML (Anti-Money Laundering), sanction screening and, certainly, all the accounting complexities that will arise.

Setting up the treasury function

With the scene set, let’s reflect on how the treasury function should be built up.

Whichever the business size, the first step is to define goals and operating models in line with the business strategy. 

That very first step should already encompass the treasurer’s key functions and be organised around them: cash and liquidity management, funding, risk management, bank relationships management, treasury accounting and investment. But, as the one-size-doesn’t-fit-all rule is common in business, the same goes to treasury: some of the treasury functions may be scattered over several business areas or, maybe, treasury has to also deal with additional key topics such as working capital and optimisation of the balance sheet structure. 

The next steps are linked to people and operations, namely, defining the team size, establishing optimal procedures to get the job done, choosing support tools and selecting the right partners to rely on. 

The selection of core banks as well as systems —full treasury management and/or niche products for FX risk, cash forecasts, to name some —isn’t an easy exercise, it needs to be done carefully because of their significant impact on operating models and automation levels. 

Definitely, setting up a treasury function is not something that can be done in one shot.  

A natural evolution of the treasury function

Every evolution has an underlying fact, it embraces change. The treasury function is meant to evolve since its inception, going from an operational focus to a more strategic and mature role. 

Let’s have a look at how this evolution occurs. 

It starts with “transactional treasury” that plays an execution role. This first stage enables the business to carry out transactions that are necessary, primarily impacting financial functions. It’s usually at this stage when a cash pooling strategy to balance the accounts of a group’s subsidiaries  can be envisaged, either notional, physical or hybrid.

A second stage is the “process efficient treasury” which provides excellence in execution. By integrating underlying finance processes and banking providers within the process, it ensures the optimal use of cash.  At that point, treasury can be organised as an “In-House-Bank” (IHB) to gather the cash and centralise both funding and risk management.

A third stage takes the function to what we call “value enhancing treasury”, that delivers quantifiable value for the whole business, optimising financial flexibility and efficiency and acting as an enabler to achieve strategic goals. We observe payment factories a flow tool to improve efficiency and control over payments and the development of solutions for working capital at this stage. 

Finally and ideally, the treasury function should aim at  reaching the “strategic treasury” stage, one that actively contributes to the strategic decisions of the whole business and provides financial leadership. 

An appropriate level of automation should be reached at this stage, allowing the treasury to spend more time on analysis and recommendations about post-merger harmonisation, share buyback programmes and/or financing mix in the development area acquisition or development in emerging countries for instance rather than processing only. 


Key considerations for the treasury function to move forward

Moving from one stage to another doesn’t happen randomly or follows a spontaneous-generation-type-of pattern. 

It requires, as you may have already anticipated, budget, time investment, processes and governance and people.  Certainly, the budget should be granted by the Chief Financial Officer (CFO) but, for that to happen, the treasury needs to “build its own case” in parallel, and demonstrate its strategic importance and value to the business. Automating certain treasury processes helps to optimise time when the team size is small or doesn’t grow even if the workload increases, however, an increase in headcount generally helps to better solve the people resource variable of the equation. 

The latter is a key concern for the treasury function. The rapidly changing environment from both an economic and technological standpoint and the growing interactions between treasury and the business, definitely require a pool of skillful workers.  

On the market, we see treasury teams not only seeking to hire professionals with a strong finance knowledge but also with strategic thinking skills, technological know-how and business partnering capabilities. 

We consider that the post-pandemic period —that’s arriving progressively but with very good footing— is an opportunity for the treasury function to build a strong business case and seek the CFO’s budget and support. Both are now increasingly aligned with the importance of cash and liquidity management. 

Whichever the treasury’s maturity level, key issues usually revolve around cash forecast and visibility, closely followed by FX risk management.  Nowadays, these old problems can be solved by means of a digital toolkit —robotic process automation (RPA), artificial intelligence (AI) and predictive analysis technology. By applying an adequate digital toolkit to the operating model, companies can even achieve operational excellence and reduce costs. Their pool of professionals then, can focus on value-added tasks, generating business insights that, in turn, can bring  a solid competitive advantage. 

Although, to many, the implementation of these solutions seems complex, expensive and far from achievable, there are varied emerging solutions that smaller corporations can tap into, as well. 

The strategic role of treasury

Businesses will have to upgrade their treasury practice, from an initial model that’s focused on processing transactions and reacting to new regulations to one that’s strategic : flexible, automated, standardised and well-planned in order to support the c-suite and the overall business’ corporate strategy.

This is reinforced by liquidity management that’s essential when planning for unexpected events and by the fact that cash is, more than ever, “king” in the current operating environment.

At the end of the day, the treasury function should be understood as an ecosystem where HR, finance, tax, technology and supply chain have to work in tandem, that’s why partnering with the business is crucial.  

To finish off, to deal with the variety of topics, treasurers can rely on local associations such ATEL in Luxembourg or on consulting services, banking and technology partners.

What we think
Philippe Förster, Director at PwC Luxembourg - IFRS and Treasury
Philippe Förster, Director at PwC Luxembourg – IFRS and Treasury

Ensuring the right amount of cash at the right time at the right place in the right currency in various scenarios can be a fair summary of the treasury function. Now that the crisis has demonstrated, once again, the importance of cash and liquidity management, we believe it’s time for the treasury to step up and demonstrate how it can support the business trust equation and bring sustainable outcomes to the broader business. However, does every company understand what falls under the treasury function?

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