How Should CFOs Leverage Treasury in 2019?
As uncertainty grows in the global economy, finance chiefs need their treasury teams to optimize three core functions: cash management, working capital management, and risk management.
As we turn the corner on 2018, most CFOs are simultaneously focused on helping their chief executives exploit the opportunities that come with a booming economy and buffering their organization from a handful of risks that loom on the horizon. These include the possibilities that 2019 will bring economic deceleration, increased currency and/or interest rate volatility, and an ever-growing regulatory and compliance burden.
If global economic decline settles in, as some experts predict, uncertainty will only increase in the new year. The party certainly isn’t over yet for most businesses around the world, but economic indicators suggest some guests have already left. GDP growth in Europe is slowing, and some expect the world economy to follow suit. Global growth reached 3.1 percent in both 2017 and 2018, but the World Bank predicts that it will decelerate over the next two years due to the dissipation of global slack (unused economic resources) and tighter central bank monetary policies, among other constraints.
The U.S.–China trade war and Brexit compound the growing economic uncertainty. Geopolitical tensions are on the rise, reflected in sanctions against countries such as Iran and individuals and businesses in Russia. All these factors point to the strong possibility of choppy waters ahead.
That’s why, as 2019 dawns, CFOs are expecting their treasury team to provide both practical and strategic advice on managing financial risks. In fact, a recent survey sponsored by Kyriba found that CFOs want their treasurers to focus more on optimizing their function’s activities in three key areas: risk management, cash management, and working capital management.
Risk management. Among the 150-plus senior finance executives who participated in the research, 42.7 percent said their organization’s treasury function needs to do a much better job of supporting business objectives than it currently does. This is likely related to two macroeconomic trends that are increasing CFOs’ emphasis on risk management.
The first macro-level trend, the intensification of geopolitical tensions, may lead to volatility in the foreign exchange (FX) and commodity markets, as well as sudden shifts in trade flows. All these changes make it more important for organizations to have hedging strategies in place that mitigate currency and price fluctuations. Treasurers also need to make sure their company has access to capital markets so that if its trading volumes decline in one part of the world, it can secure funding to offset the lost revenue.
The second macro-level trend is rising inflation, which increases the likelihood that additional countries will follow the lead of the U.S. Federal Reserve and begin hiking up interest rates. If they do, funding will become more costly around the world, and companies will see their margins squeezed.
Ultimately, the combination of inflationary pressures and a more challenging environment for international trade could reverse the benign economic conditions we are enjoying today. Properly preparing for this possibility requires visibility into both financial and operational risks. Treasurers need to be able to see their organization’s vulnerabilities and whether their risk-mitigation techniques are working. In an uncertain world, CFOs should ensure their treasury teams have full transparency around FX exposures, sales trends, and funding options.
Cash management. One of the most surprising findings of the recent Kyriba survey was that 40 percent of the respondents believe treasury teams need to do a better job of cash management. In some organizations, it seems, cash management activities are not strategically aligned with business objectives. Rather, cash management appears to be treated as a side activity that takes place independently of whatever else may be happening in the organization.
One explanation of this finding is that some cash managers may simply be falling behind the accelerated pace of business today. For example, when the CFO asks for a cash forecast to support a merger or acquisition decision, the report should be ready in hours, not days. Treasury teams that still handle cash management and cash forecasting tasks through manual or spreadsheet-based processes may not be able to keep up with expectations of executives and line-of-business managers.
To ensure they have the support they need from treasury, CFOs need put a strategic lens on cash management in 2019. They also need to use all the levers at their disposal to maximize the availability of working capital.
Working capital management. Cash is the lifeblood of a company. In times of slowing economic growth, especially, organizations need to conserve cash to ensure they have the funds they need if revenue drops. Reducing days sales outstanding (DSO), while at the same time increasing days payables outstanding (DPO), is a popular means of corporate coping with geopolitical and financial-market uncertainty. However, 39 percent of respondents in the Kyriba survey said they think their treasury function needs to be much more strategic at working capital management.
The same visibility needs that underlie effective financial risk management and cash management also underpin working capital management. Treasury teams need accurate cash flow forecasts to make decisions around the value of extending payment terms, either as a buyer or a seller.
CFOs who want their treasury team to optimize working capital management need to focus on enhancing the quality of forecasting that takes place within their organizations. Our survey indicates that there is a significant amount of work to be done here, since 40 percent of respondents said unreliable cash visibility and forecasts are big concerns. Moreover, The Hackett Group’s “2018 U.S. Working Capital Survey” estimates that $1 trillion remains trapped on large companies’ balance sheets globally. This indicates that CFOs do not have the insights they need to confidently draw down their cash reserves in these uncertain times.
As we enter 2019, the time is right for CFOs to reconsider how their treasury teams complete fundamental activities around managing the organization’s cash, financial risks, and working capital. Does the treasurer have the information necessary to effectively inform business decision-making in a timely manner? Is visibility into cash exposures and idle cash adequate to give the CFO confidence to use treasury’s analyses to drive business strategy?
No one can predict the future with absolute accuracy—not even the World Bank. Perhaps global economic growth will hold up, or maybe it will slow more than anyone’s predicting.
Given the uncertainty that exists, a CFO’s best bet is to empower treasury with the tools they need to drive strategic decision support in real time. If the treasury organization is treated only as an isolated, back-office function, the company will not be prepared to navigate the evolving economic and financial-markets landscape of 2019.