In a variety of meaningful ways, such as understanding the all-important working capital management.
What should or can be treasury’s role in supporting the growth of the business? With tools such as receivables financing, supply chain financing and overall knowledge of working capital and risk management, treasury can bring much to the table.
Here is a sample of some of those talents gleaned from a recent NeuGroup Assistant Treasurers’ Group of Thirty (AT30) meeting:
- Working capital management tops the list. Who knows working capital better than treasury? The answer is likely no one, which is why much of the discussion focused on calculations for. Treasury is charged with optimizing the use of company funds and there is a perpetual need to explain concepts such weighted average cost of capital, or WACC, to capital consuming businesses. To complicate matters some companies use a single WACC calculation across the organization while others use multiple calculations for different applications. For example, a large pharmaceutical company has a single WACC but a medical devices manufacturer uses a WACC calculation for investment decisions, but uses another metric for financing decisions. A major medical insurance provider uses multiple cost-of-capital calculations for different purposes.
- Adding value here or there? There is often a debate about which organization structure is better for supporting offshore business units, a centralized treasury at HQ, or a regional treasury structure. The common reply is that it depends on the type of business. The AT from a large software company notes that they have eliminated the BU level finance director position in favor of a more regional finance role. A global equipment manufacturer has a long history of centralized treasury but has been working to push treasury activities out to regions. They are finding that it can be difficult to keep things consistent. A large global engineering and construction firm relies on country controllers and banks for supporting offshore treasury needs.When considering how best to move toward establishing regional treasury operations it may be prudent to start with more than one person.
The medical devices manufacturer tried dipping a toe in the water with a single individual working exclusively for treasury in a foreign office. The result was that the local influence eventually took more priority than treasury and the resource ended up working more for the local office than for treasury. Practitioners agree that it is dangerous to have a single treasury resource in a local office for that very reason. It is best to rely on general finance people until there is enough treasury activity to justify a small team to start.
- Reconciling supply chain finance value. Banks will tell you SCF programs are the greatest thing since sliced bread and indeed many companies report enormous benefits from their programs. Yet it consistently ranks very low, if not last, on treasuries’ list of how to add value. The explanation for this disconnect is that SCF programs are often led by the procurement group. Treasury just weighs in on bank selection.
Treasury is very capable of adding value to their businesses. But how they do that can take many paths. It can be done within the treasury comfort zone of extending their skills in areas such as risk management and working capital management. Or, it can be done by bringing innovative products and services to the table such as supply chain finance and corporate card programs. Or, it can take on the more challenging path of getting more deeply involved in the business operation in areas such as acquisition due diligence. How these approaches are executed seems to be evolving. The historical perspective is that treasury, and the company, has been best served through a centralized structure. Company expansions to more countries is proving that model to be limited and more treasuries are viewing regional offices with increasing favor.