Source: KPMG Corporate Treasury News, Edition 44, June 2015
Admittedly, it is not always easy for parents with more than one child to give each the same amount of attention. This applies in early childhood as much as later on when the little rascals have fled the nest. For a parent with a degree in business administration it is perhaps easier to relate to a daughter who works in controlling than a son who has chosen to become a performing artist. It is more comfortable to deal with familiar things.
People do not like to leave their comfort zone, either privately or professionally. It is therefore not surprising that there also is a (comfort) hierarchy at the level of CFOs. Accounting is at the top, closely followed by controlling in second place. In third place we find procurement, IT and treasury, in equal measure.
Treasury has a special place in this trio. Even though it has gained in importance since the financial crisis, it is still a black box for many CFOs, not only because it remains difficult to judge what treasury does exactly, but also because treasury itself still does not contribute sufficiently to moving out of its comfort zone. There are many reasons for this situation, and they range from lack of pressure (nobody knows after all what potential value treasury could potentially add), a language barrier (do you speak treasury?) and the issue of who to communicate with outside of treasury within the company and how and on what subjects, to the highly interesting and complex issue that many of the tasks fulfilled well, or maybe not so well, by treasury are not immediately obvious from the balance sheet or income statement. The current position paper on treasury 'Out of the comfort zone' discusses the reasons and remedies in detail.
The 0.6% return on sales mentioned above refers to the difference between an 'adequate treasury' and a 'best-in-class treasury'. This may seem a lot, however will become clearer when looking at areas such as payments, currency and commodity risk management, liquidity planning or finance more closely. Let me give you a brief example (my favorite): currency exposure actually amounts to USD 1.1 billion and not USD 1 billion as assumed – experience has shown this to be the rule rather than the exception. This means that USD 100 million remains unrealized and therefore is not addressed by management. Volatilities of 10% over the course of a year are not uncommon anymore nowadays. Mitigating this potential risk alone more than covers the usual costs of treasury. Do you see what I am getting at? And the position paper does not even consider comprehensively incorporating treasury (procedurally and technically) into corporate processes (in this case supply chain processes) via the financial supply chain.
Technical developments in the area of treasury IT in the past three to five years have surely contributed considerably to making investments in the 'ideal' treasury world realizable without major difficulty with a positive 5-year ROI (frequently also a 2-year or 3-year ROI) nowadays, and this with maximum centralization, not only of regulatory expertise but also operations, including the necessary transparency. Treasury IT possibilities therefore increasingly are becoming a benchmark in themselves. And this trend is not at all over. Current developments reaching the final stage include highly sophisticated exception management, automation of complex financial risk management models including the related reporting, and technical/procedural integration of commodity risk management.
As compliance needs to be mentioned in nearly every article (from organic vegetables to cyber security), let us also say a few words on this subject. Non-compliance costs in the area of treasury and payments can bring companies close to ruin. While a well prepared treasury department alone does not protect against all eventualities, it provides a foundation for the precautions a company needs to take. For example, decentralized payment systems or decentralized bank account management present a major compliance risk – companies can quickly find themselves caught up in the American justice system for misusing an account in the US or at an American financial institution.
However, let us make one thing clear. The 0.6% additional return on sales does not come for free. It takes investments, but anyone with a degree in business administration knows that of course.
*) Position paper 'Corporate Treasury – out of the comfort zone' (English version will follow soon.)
Author: Carsten Jäkel, Partner, email@example.com
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