Mid-market sprints to maturity, but how about Treasury?
The mid-market, consisting of companies with turnover between EUR 200 million and 2 billion, has flourished considerably in recent years. This growth often creates pressure on the finance function, which is given additional tasks that usually belong to treasury. No resourcing is yet available to support treasury activities such as hedging, cash flow forecasting and FX trading. An important aspect of your company’s growth strategy is determining its treasury maturity using Zanders Treasury Risk Maturity Model (ZTRMM). The ZTRMM supports with assessing the treasury maturity and defining applicable measures to mitigate financial and operational risk.
Factors that made the mid-market flourish
Just like their larger counterparts, the multinationals (MNCs), the mid-market companies position themselves internationally. The mid-market segment is flourishing, driven by a number of factors.
First and foremost, companies active in the European single market experience improved business opportunities and easier access to the comprehensive European market. International expansion of mid-market companies is facilitated by the open banking environment, i.e. Payment Services Directive 2 (PSD2) and Single Euro Payments Area (SEPA). PSD2 allows Payment Service Providers (PSPs) to operate across the EU and to compete with other regulated players, such as banks. This results in a more level playing field with cheaper solutions for payments1. In addition, it allows so-called one-leg transactions with countries outside the EU when only one of the PSPs is located within the EU. These PSPs act as facilitator for mid-market companies to move abroad more easily. Moreover, SEPA harmonizes electronic euro payments with several payment schemes, which works in 27 EU member states plus the UK, Iceland, Norway, Liechtenstein, Switzerland, Monaco, and San Marino2.
Secondly, international banks like JP Morgan, HSBC, Deutsche Bank, BNP Paribas, and Citi have increased focusing on the commercial banking segment, thereby supporting the mid-market. Therefore, both banking infrastructure and credit become more readily available for mid-market companies. This effect is enforced by the renewed focus of international banks on their domestic markets.
Thirdly, the entire development in technology, driven by Fintechs, supports mid-market companies to thrive. Solutions such as alternative finance (supply chain financing, crowd funding/P2P lending, asset finance), artificial intelligence, and RPA3, to name a few, support growth of mid-market companies.
Last but not least, e-commerce plays a vital role in the current society. The pandemic forces mid-market companies to look for alternatives to meet their clients’ demand. Companies shift to online channels which results in EUR 3.72 trillion global retail e-commerce sales in 2020, an increase of 25% compared to 2019, according to latest estimates4. This increase implies more ‘borderless’ cash flow streams in a wide variety of currencies.
Impact on the finance function
Due to the factors mentioned above, the mid-market is experiencing an accelerated development of scale, revenue and technology opportunities. Despite this growth momentum, your organization may not always have the specialized treasury resources, which can put pressure on your finance department. We often see a finance department that does much more than the finance administration, which at a certain moment becomes too much. Suddenly, there are too many currencies to handle and too many activities to cover with numerous banks, such as KYC procedures and bank account openings. In addition, visibility of liquidity is only possible via numerous banking systems, which makes it difficult to reconcile. Furthermore, we often see that the controller is responsible for FX trading, hedge accounting and cash flow forecasting. This could result in the finance department to reach its maximum bandwidth. Therefore, in situations like these it is important to understand your company’s treasury maturity and reconsider its treasury’s position and role within the organization.
Zanders Treasury Risk Maturity Model
To identify where a company is in their treasury maturity we have created the Zanders Treasury Risk Maturity Model (ZTRMM) as an effective tool. It can also be used to identify financial and operational risks and give recommendations on how to mitigate these. Recommendations are prioritized based on risk, impact, and effort/cost in a roadmap. The ZTRMM offers tailored advice on how to enhance the Treasury of your company. The model is structured around five maturity phases, being ‘Foundation’, ‘Developing’, ‘Established’, ‘Enhancing’, ‘Optimized’. To identify the level of maturity, four core treasury enablers (Strategy & Organization, Processes & Systems, Governance & Control, Treasury Sustainability) and three core treasury activities (Treasury Operations, Financial Risk Management, Corporate Finance) are assessed. An example of the scope of the ZTRMM is shown in Figure 1. Each ‘Enabler’ and ‘Activity’ consists of detailed sub-topics to achieve an appropriate level of insight into the treasury maturity of the company. Eventually, the assessment results in an overall treasury maturity, a classification to indicate the level of treasury impact on the overall organization, ranging from a ‘transactional treasury’ via ‘efficiency & cost focused treasury’ to a ‘value added & strategic treasury’.
Figure 1: Zanders Treasury and Risk Maturity Model Scope
The ZTRMM starts with the ‘Foundation & Developing’ phase, which is reflected in Figure 2. A treasury department is slowly starting to get shape and consists of employees that are specialized in certain treasury activities such as corporate finance, incorporate stand-alone electronic banking systems, develop ad-hoc reporting and short-term improvement plans. In addition, operational processes are primarily manual and carried out with excel-based treasury tools.
More mature treasury functions are labelled as ‘Established’ and are characterized as ‘efficient & cost focused’ treasury departments. Established treasury departments have built a more centralized corporate treasury structure. Furthermore, they automate and integrate operational processes, and build standard and regular reports.
Treasury departments are most mature when they have ‘Enhancing and Optimized’ treasury functions. These departments are a strategic, pro-active business partner and advisor to the CFO and the business, handle central payment platforms with standardized workflows and bank-agnostic connectivity (e.g., SWIFT, EBICS).
Determining your position on the maturity curve is essential in drafting a successful and well-founded forward growth strategy. Without the creation of a solid treasury function and system landscape it will be challenging for mid-market companies to benefit from international expansion, open banking, fintech solutions and e-commerce.
Figure 2: Zanders Treasury and Risk Maturity Model
Conclusion: create a future-proof treasury
In today’s rapidly developing and fast-growing mid-market segment, companies should take advantage of the accelerated developments within the treasury environment. External advice may be required to move to the next maturity phase in treasury, because the know-how and expertise is not always available within your company. As independent advisor, Zanders can support you to assess and improve your treasury function. Being a trusted advisor to many mid-market companies, we understand and recognize the requirements needed to grow to the next treasury maturity level and as such create a future-proof treasury.