Bringing Experience to the Fore

The E&C’s fall meeting focused primarily on crisis management and cash with an international flavor, as members discussed business continuity, global cash pooling, cash forecasting and challenges with currency-controlled countries. 

Members of The NeuGroup’s group for treasurers of large engineering and construction companies met in late September 2014 and showed how their years of experience has helped them deal with a host of challenges. These include issues surrounding cash efficiency, business continuity, and dealing with export credit agencies, banks and other partners. Further highlights from the meeting included:

1) Crisis management. How does treasury maintain business continuity in the event of an unforeseen interruption in operations? From anthrax in the mailroom to hackers accessing systems, member considered various scenarios and how to best prepare for a disruption to their treasury.

2) Investment regulatory briefing. As new Fed regulations have squeezed out MMFs as a viable alternative for corporate investments, members in this session focused on where treasurers can get the best returns for cash now and moving forward. One takeaway: in the near future, banks will differentiate the value of the liquidity corporates give them as they adhere to new ratio requirements, so beware of excessive “operating” cash balances.

3) Cash forecasting and working capital metrics. This member-led session zeroed in on how the cash forecasting and tracking process can be improved and which approaches and measurements work best. Members zeroed in on the idea that “creating a culture of cash” internally and holding entities responsible are the keys to improving the process.

4) International treasury review. Looking at cash from both a centralized global management and a currency-controlled country perspective, this two-part session was jointly led by BNP Paribas and experienced members who shared their knowledge and processes for handling foreign-currency cash balances.

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Managing Treasury Through a Crisis

One member led the discussion on crisis planning in the event of a disaster involving sudden inaccessibility of the main office site, systems or treasury personnel. How does treasury maintain business continuity in the event of an unforeseen interruption in operations?.

KEY TAKEAWAYS

1) Take a rational approach in preparing to deal with a crisis. Members got a good overview of how a crisis situation could happen quickly and unexpectedly. From crises from within to company-wide system failure, members were given various scenarios and asked to consider what they have in their back-up plan for dealing with each situation. The discussion included which tools to employ given the severity of the situation and the security required to transact treasury business. The session leader suggested that emphasized that although “there are a lot of high-cost solutions” the key os to first seek “easy and rational approaches to crisis planning.” Members offered some of their current approaches/ideas:

Personal computers (PC) and other data access back-ups. One member keeps two dedicated PCs offsite that are kept updated. Another suggestion was to have a policy requiring treasury people to take their PCs and bank tokens home daily.

Frequent drills. One member has created a system that gets tested every six months. The solution includes texts and emails to employees.

Spread the skillset. Another suggestion was from a member who has some people in larger legal entities that do their own cash management and could make emergency payments in a pinch.

2) Members’ to-do lists lengthen as additional steps to ensure operational continuity are noted. Despite most members having some degree of back-up plan or resources in place, the scenarios presented challenged them to take a closer look and rethink where gaps may exist. Some of the low-hanging fruit that can be tackled relatively quickly include:

• Ensure offsite access to updated employee and bank contact information, laptops and/or security devices.
• Update all bank authorizations ensuring alternate funds-transfer methods, such as telephonic initiation, are ready to go.
• Select a secondary site reachable by most treasury staff for initially meeting and/or continuing to operate if your office location is suddenly inaccessible.
• Clearly communicate with staff what to do in a crisis – BNP Paribas offered that they have emergency instructions on the back of employees’ identification cards.
• Question to ask IT—how many people can access network from home on the VPN? You may need to increase access to accommodate more users.

3) Sharing the responsibility lessens the load. When it comes to treasury operations, the responsibility for crisis planning is often jointly owned with the information services (IT) department. Members shared how they approached business continuity, highlighting how partnering internally, as well as externally by employing outside resources, can get you to a better place in ensuring you continue to operate.

OUTLOOK

It was clear that despite some crisis planning, most treasurers need to rethink and possibly retool so that they are prepared for the unexpected. As one member put it – “We’re really good at getting out of the ditch. We are not good at staying on the road.” Engaging internal and external partners can shift some of the burden, add control and solidify back-up capability. Because treasury is generally responsible either in whole or in part for business continuity, it is prudent to expect some interruption in the unforeseeable future and prepare now so that you don’t get caught short tomorrow.

The Way of the Dodo: Viable Investment Options

BNP Paribas’s Asset Management group provided a thorough update on the impact of pending regulations on MMFs and other investment vehicles and the implications for corporate treasury as we move closer to effective change dates. One clear message was that when it comes to investing excess corporate cash, viable short-term options for treasurers are certainly decreasing..

KEY TAKEAWAYS

1) Looking at the 3 Rs of money markets: rates, reduced supply and regulation. The Fed’s goals are to shrink prime MMFS specifically and money markets generally. As explained by Rena Walsh, changes in regulation will lead to a decrease in MMFs, as floating Net Asset Value (NAV) goes into effect in October 2016 putting principal at risk. Some MMFs like institutional governments, with new requirements that they have 100 percent government-backed investments in the fund, will stay valued at $1. However, earning only zero to 1 percent they are not attractive investments. Another goal mentioned was on the funding side; the Fed is heavily incenting banks to stay out of the short-term market, wanting corporates to fund longer in line with the effect of the new regulations.

2) The Fed and its methods are changing. Since the financial crisis, the Fed has taken on a more global focus, and engages more with other central bankers as they attempt to rein in the system effects from key players in the markets. As quantitative easing (QE) comes to a close, expect to see the Fed using different tools to tighten money supply this time around, given the changed financial environment and the large size of the balance sheet that it will need to unwind; Fed assets grew from less than $1T pre-crisis to more than $4T today.

3) Banks will differentiate the value of the liquidity corporates give them. Generally, under the new rules, corporates are considered a better risk class than financial firms. For instance, corporates = 40 percent deposit runoff (when put in a stress environment) compared to financial firms = 100 percent deposit runoff.

OUTLOOK

“We are changing as the world changes,” as one summed it up when it comes to the flexibility that corporate treasury will need to maintain as the investment arena they manage within continues to evolve amid financial regulatory change. Keeping abreast of regulatory implications via your investment partners will be important. Also, be aggressive in negotiating better rates for those funds in your liquidity pool that are becoming more and more valuable to your bank as the new rules go into effect. BNP Paribas for their part will continue to manage onshore and offshore investment funds and buy readily recognizable names.

Cash Forecasting and Working Capital Metrics

Members explored how companies are approaching cash forecasting and tracking, and engaging business units in the process. Despite the tools and methods incorporated, it was clear that creating a culture of cash internally is key to improving the process.

KEY TAKEAWAY

1) Educating the businesses is a top priority for improving the cash forecast process. Members agreed that educating business units takes time and repetition. One member emphasized that there is a need “to train BUs that cash is a corporate asset.” Another member noted that her project managers don’t understand the value of cash while still another said she reminds businesses that “you can’t make payroll with accruals.”

2) Hold businesses accountable for their cash. At one member company, this includes a cash memo which highlights the top five best and worst performers of the period. Also, the BUs are told how much cash they should collect in the quarter, and during internal operations calls “the CEO is not afraid to call people out.” One member noted that his company publishes quarterly the best and worst forecasts. This treasury also tracks actual cash balances against the forecast, looking at trends to see who improves and who gets worse.

OUTLOOK

Treasurers should remain diligent about highlighting those businesses that have significant variances from the cash forecast. As one member pointed out, “BUs say they want to control their own destiny but they need to understand that managing your cash helps you do that.” Members will continue to have to drive home to the businesses that “cash is queen” and track trends in performance. Instilling a culture of cash and otherwise raising awareness is important regardless of which approach to cash forecasting you take.