We recently interviewed treasury expert Patrick Kunz, who’s been working in treasury all his life. As he mentioned himself during the webinar, “Treasury is basically all I know.”
Patrick has worked independently for the past 11 years. He founded his own company, Pecunia Treasury and Finance, and works with various companies, from scale-ups to large enterprises and anything in-between.
Patrick provided interesting insights into what treasurers should prioritize during the first 180 days of a new job because of his longstanding experience and the many temporary assignments he’s had.
In this article, we’ll discuss some of the main things we also covered during a recent webinar. These are the main topics that Patrick deems crucial during the first 180 days of starting a new job in treasury:
- Starting with planning and prioritizing
- Identifying main internal and external stakeholders
- Achieving cash visibility and strategizing for excess cash or shortages
- Developing cash flow forecasts
- Considering how to hedge
- Tackling your treasury policies
- Managing counterparty risk and the selection of core banks
- Setting up the treasury organization, should it be central or regional?
Let’s dive deeper into each one of these topics.
1. Starting with planning and prioritizing
How planning and prioritizing is done in your first 180 days is highly dependent on each company. Suppose it’s a longstanding company with hardly any volatility. In that case, your priorities are different compared to an organization without a treasury department, where it has to be built from scratch, for example. Of course, these are both extremes, and many organizations have characteristics somewhere in between.
In an established treasury department, every treasurer has their own style, working methods, and priorities. If you start a new job in such a team, it doesn’t automatically mean you can simply continue what the former treasurer did. It’s most important to recognize where the company’s priorities are. If the company focuses more on forecasting, it will likely receive more attention and become a priority.
Patrick suggests that it’s really up to the treasurer together with the CFO and the company to prioritize where to start. He also stresses that this should preferably be clear before starting a new job and become even more apparent during the first month or two.
2. Identifying main internal and external stakeholders
Treasury can never work on its own. If you’re a stand-alone treasury, you’re doing something wrong. Treasury is at the company's heart and should closely collaborate with other stakeholders. On the one hand, it gets cash in from the business and allocates cash out to other businesses. On the other hand, it also ensures that working capital runs smoothly by guaranteeing that there is sufficient risk-free cash available.
Regarding internal stakeholders, Patrick mentioned that a crucial team to work with is procurement because they know how and when you will spend your money. In addition, sales are important because they generate your cash inflows, and any hick-ups in revenue will hurt your cash flows for the coming weeks. You should also always be in close contact with the CFO, who’s probably your boss (or FP&A depending on the organization). With these main internal stakeholders, you need to align at least every week.
Patrick also mentioned that other departments have the tendency to forget to invite treasury to a meeting or start involving them in a project at a later stage, which often brings in last-minute stress and dealing with tight deadlines. So, putting yourself on the map and explaining to stakeholders what treasury is all about is crucial to overcome such challenges.
Another main reason to keep other departments close is that there might be overlapping tasks or systems that other departments also benefit from. Therefore, aligning processes and systems to work most efficiently is critical.
External stakeholders often consist of banks, liquidity providers, and hedging counterparties. But this also depends on the company and how advanced its treasury operations are.
In the end, treasury sits on top of a lot of tasks but also needs to get away from the comfortable treasury chest and be out there as a business advisor. The business, in turn, should know what treasury does, where to find them, and for what purposes.
3. Achieving cash visibility and strategizing for excess cash or shortages
There are two questions that a treasurer should be able to answer:
- How much cash do you have now?
- How much cash do you have in 3, 6, or 9 months?
The latter is often a lot harder to answer. Interestingly, on the other hand, companies often don’t have any issues knowing how much profit they will make for the year. They know exact P&L figures and current cash at hand yet forecasting remains a challenge.
If you cannot answer both questions perfectly, you should be able to use some tools or techniques to get the response within at least an hour to half a day. In more straightforward treasury organizations, question one can be answered by accessing one, two, or three online banking portals. However, most multinationals have hundreds of banks because no bank can offer bank accounts anywhere in the world.
When treasury is more complex, answering how much cash you have or will have in the future becomes increasingly challenging. With today's technologies, however, 90 or 95 percent of cash visibility should be available with the push of a button. There are many tools where you can login to view at least end-of-day balances, but you should preferably be able to see intraday balances and real-time balances too.
Moreover, as a treasurer, you should always be forward-looking. There’s always a cash starting position available from which you can calculate how much cash you need next week, for example, and whether the cash position goes up or down. Then you can take it one step further and do the same for a month. By analyzing shifts in cash positions over time, you can also determine whether there’s a financing need.
If you are in need of financing, you may need to talk to your bank. But can they provide financing quick enough? Or do you already have a credit facility that you can use? Depending on the economic circumstances, it can be hard to get a loan if you don't have a facility, especially when interest rates are higher and there is less cash in the market.
On the contrary, if you notice that there will be cash surpluses, they are just sitting idle. And when interest rates are high, it means losing money on cash sitting in the account. Beyond doubt, it’s wise to have buffers, but if you have more cash than required as a buffer, you need to start examining other possibilities, such as investing it.
Most companies view the treasury department as a cost center, not a profit center. This means that treasury should minimize costs, not focus on maximizing profits while investing. Most companies that embrace this mindset avoid aggressive investments that are high-risk.
Ultimately, of course, depending on the type of business, Patrick Kunz recommends having at least cash visibility for a few months ahead. Typically, it’s 13 weeks because it involves a quarter-end, which is when you need to report and publish polished figures.
Patrick also mentioned that he’s seen a major shift; ten years ago, it was still pioneering to have cash or treasury management solution in place, whereas nowadays, many tools are available at competitive prices, and they are much easier to implement. So, it's considered quite ancient when treasury reaches a certain size and still uses spreadsheets or logs into different banking platforms.
Manual banking is still widespread
Patrick mentioned that he still runs into surprising many companies that work manually in each banking portal but notes that they are primarily non-established companies. Especially companies that have seen a lot of growth over a few years can suddenly have 200 to 500 million balance sheets and struggle with their treasury because they have five banks, are active in different parts of the world, and have exploding Excel sheets.
There was one case in particular that Patrick remembered well where a CFO had a little travel pocket bag with all his bank tokens because he needed to access all banks from anywhere. Without them, the CFO wasn’t able to make any payments. These limitations were then quickly tackled by implementing a payment hub and a TMS.
4. Developing cash flow forecasts
Cash flow forecasting is a challenge because it always depends on different stakeholders' input to some extent. The trick is to try and automate as much as possible because there’s already a surprising amount of data available in your ERP system that can be used. For example, if you have payment terms of 30 days, your cash outflows should be fixed accordingly. The first month or so forecast can easily be based on receivables and payables as long as all stakeholders are expected to pay on time.
Taxes and salaries are also predictable. It’s easy to estimate how much salaries cost monthly and whether bonuses or seasonality exist. Some companies also need to pay hefty sums of taxes. Then it's crucial to communicate with the tax department to see when they pay taxes so there is enough cash available according to such forecasts.
More challenging is creating long-term forecasts. They usually include some healthy guesstimate work. For forecasts of two to six months, it’s good to talk to the FP&A department, and examine the ongoing projects, when billing goes out, or when invoices come in. Then it’s also good practice to talk to local managers, controllers, and finance managers, who must manually fill out their estimates. Tools can still help streamline this process. But since the information comes from people, their input must be accurate. Garbage in means garbage out. If the input isn't precise, neither will your forecast be. So, it’s always recommended to have a critical eye on the data provided. Ask questions, be in touch with vendors, contact the big cash flow drivers, perhaps ignore smaller entities, and be aware of more significant entity cash flow changes.
Sometimes it’s also challenging to have people report on time before specific deadlines. In such situations, it can be good to include a decision-maker and make cash flow forecasting a company-wide priority (if relevant) so that all stakeholders feel the need to comply.
5. Considering how to hedge
Regarding hedging approaches, it’s essential to ask the CFO what the risk appetite is related to the different risks, such as FX and interest rates. Some companies don’t hedge a 100%, while others do aim to achieve that. A good example of why you don’t always fully hedge: take a company that operates in 50 different currencies but only has 15 that truly impact the business. They will likely only hedge against risk of 15 currencies rather than all 50.
If you’re starting a new job in treasury, you can easily track how successful the company has been in hedging by checking realized or unrealized FX gains or losses in P&L reports. If there are repeating volatile numbers, it means that the company is not hedging properly. As a result, you probably need to drill down further to find out what the underlying reasons are.
The ultimate goal is to determine the company’s exposure. If the exposure cause is known, you can choose the appropriate instruments to hedge against it. For example, you can use a committed derivative for committed exposure, future expected cash flows, AP & AR, and company loans.
Also, if you plan and know there will be exposure in 3 months, you can use a three-month forward to tackle it. Doing one-month forwards wouldn't create a perfect hedge in such cases. The key is identifying what to hedge against and selecting the most logical hedging instrument.
On the other hand, there are also more unexpected exposures like future M&A deals, expected profits, and expected balance sheet positions. Hedging against these exposures using derivatives would be uncommon, but you might use FX options or internal ways to offset them instead.
6. Tackling your treasury policies
Treasury policies are there to love and hate. They can limit how treasury operates and become an obstacle if done wrong. On the other hand, they’re an easy way to show what to do in different situations, for example, financing needs, exposures, and who to contact regarding specific topics. Treasury policies should be written in such a way that they are more of a tool that different stakeholders can easily use.
Your policies should be changed and reviewed at least every year. According to Patrick, if the policy consists of more than twenty pages, you’re doing it wrong, and if it’s shorter than two pages, it’s also wrong. Patrick mentions that you shouldn’t be too detailed in your policies and write them in such a manner that they are easy to understand for non-treasurers—that way, they can easily be distributed to anyone and actually be helpful.
7. Managing counterparty risk and the selection of core banks
Counterparty risk is always a relevant topic, especially now that some banks are failing again. Treasury needs to see how much cash they have at certain banks and how much risk can be taken, and the exposure per bank should also be defined in the treasury policies. The acceptable amount of acceptable risk differs and comes down to the risk appetite of each company. For example, having a total of 5 billion in cash and only 50 million at a particular bank can feel like low counterparty risk. On the other hand, for another corporate, 50 million at a specific bank can be a substantial amount of money and would be perceived as high risk.
When starting a job, you should determine the risk you're willing to take with other internal stakeholders. You can, for example, also consider counterparty ratings. Even if there are examples like Lehman brothers collapsing with A ratings and Credit Suisse with a triple B rating, they still provide a better picture of the counterparty's risk. That said, it’s also vital to be cautious and analyze market dynamics. Small things like rumors in the market can easily affect your risk; if the market decides they don’t trust a bank, it can go down in no time.
Your treasury policies should tackle limits with certain banks and banking groups. It's wise to minimize counterparty risk to at least three to five core banks to be safe and not overexposed.
Monitoring risk doesn't need to be done daily but rather monthly or quarterly. Some cash-rich companies can do it every week if they have 12 core banks, for example. In the end, you need to determine the risk appetite, and if you have too much cash at a bank, you should wonder why that’s the case and why you are not investing it instead. You could be investing it in bonds or money market funds that are very low-risk.
8. Setting up the treasury organization, should it be central or regional?
Whether you build a more central or regional treasury highly depends on the company, company size, type of company, and type of cash flows. Usually, there’s no 100% central or regional treasury, but something in-between. The good thing about regional treasury is that you’re always in control of your cash in the time zone and specific moment of that region.
With central treasury, the challenge can be that you work in different time zones. When the Asian market is closing, the US market is just waking up. In such cases, you must balance and see that there’s money at HQ and enough from region to region.
A hybrid model can often be the solution where the HQ treasury in Europe receives support from regional treasury centers in Asia, Latin America, and North America. Local presence can be the key to success because of different regional details, products, or other region-specific nuances. For example, it can be especially difficult having treasury operations in countries like China, where there are many regulations. It often requires regional managers with local language skills, knowledge, and connections to the different stakeholders.
Many companies also tackle multiple regions with an ‘around the world’ approach in which Asia sends money to Europe, Europe to the US, and then it's sent back to Asia again. As a result, the company uses the same money all the time, anytime, in different regions.
Approaches may differ depending on the context
There’s no one silver bullet to what you should be doing during your first 180 days in a new treasury job to make a success out of it. It all depends on the context of the company you start working for. Still, this is the advice of an expert that has worked for a significant number of companies, and it can often be applied in various contexts. Feel free to share your thoughts and comments with us as well!