Treasury as a strategic business partner

Treasury as a strategic business partner

“I've heard a lot about making sure treasury is a strategic partner to the business. Can you clarify what steps treasurers can take to achieve this and what are the benefits?”

Question answered in treasurytoday (June 2014) by Sander van Tol

Integration between treasury and the business is a prerequisite for an effective and efficient treasury organization. The remit of the treasury function has changed over the last few years, and treasury is now expected to be much more of pro-active advisor to the company.

Traditionally, the added-value of the treasurer was primarily based around how to manage cash flows effectively. This rather operational role of the treasury function has gradually evolved over the last decade towards treasury becoming more a strategic partner to the business.

Currently, treasury is seen as the expert in the quantification of financial risks and the time value and accessibility of future cash flows. The specific knowledge around those two areas, quantification of financial risks and time value of money, can and should be used in an integrated way towards the business. There are numerous examples of where this specific knowledge is required and can add value to business processes, for instance in the capital allocation process. Treasury plays a leading role in advising the CFO on decisions around complex investments, taking into account country specific risks, diversifying companies’ debt portfolio, project-specific WACC calculations and impediments from restrained cash.

Yet another, mostly still undiscovered, area where treasury can play a pivotal role for the business is on the commercial side. Best market practice is to evaluate (forecasted) sales by taking into account financial risk factors. By measuring the risk adjusted return on sales (RAROS) the company can gain greater insight into the true profitability of individual projects and business transactions.

Furthermore, with treasury’s integration with the business, we are seeing the scope of the treasury function increase, to include areas such as pension funds, working capital management, credit risk management, insurance and procurement. With regard to the latter, treasury is often asked to support procurement around purchasing commodities and energy, as well as managing the related financial risks from this process.

Elsewhere, in the area of managing working capital, treasury is well positioned to take a leading role to work towards a more efficient use of cash within the supply chain. With financial supply chain management, the company is able to decrease working capital while at the same time increasing supply chain resilience. This is vital for most corporates, since supply chain disruptions are proven to be costly.

Against this backdrop and with the increased focus on centralisation and standardisation that we are seeing with treasury working in close co-operation with AR and AP departments, companies are increasingly outsourcing their payments, and to some extent their collections process, to a shared service centre (SSC). With the use of a payments and collections factory and concepts like payment on behalf of (PoBo) and receivables on behalf of (RoBo), corporates are able to significantly increase efficiency, control and visibility. In the light of increased demand for real-time visibility and accessibility of global cash positions this is considered best market practice.

In short, due to the increasing ‘added-value’ brought by the treasurer to business processes, the remit of the treasury function has actually grown. Treasurers should grasp the opportunities that this change brings, thereby adding even greater company value.