How to Modernize the Treasury Department

To add value and move beyond their focus on processing, treasury departments must win management buy-in, automate, and reach out to other functions.
David McCannMay 31, 2019

Treasury departments can provide advanced value to companies by aiding with planning and meeting goals for efficient operations, innovative credit and cash management, and other market opportunities.

Yet traditional treasury departments today are still focused on processing, with a majority of resources devoted to repetitive tasks and minimal time spent on strategic activities.

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In a poll of treasury professionals during a recent webinar co-hosted by Financial Executives International (FEI) and the Financial Executives Networking Group (FENG), nearly half (46%) of the respondents admitted to spending a majority of their resources on transactional or cash accounting/reconciliation activities.

“The issue for many companies is that they’re still trying to get the treasury team out from under the crushing volume of manual activities, which is sometimes a very difficult thing to do,” said Armando Gochuico, manager with EY’s Global Treasury Services, during the webinar.

To be sure, it’s not surprising that treasury departments are still focused on processing and repetitive tasks. Many of the treasury functions at smaller companies are born from accounting functions. For example, treasury staff often take on transactional record-keeping activity.

“It’s only as treasury departments grow that they take on more advanced activities,” stated Jeffery Krasner, vice president of product development at Matrix Applications, a provider of fixed income trading software.

According to Gochuico, how advanced a treasury department is depends on a few factors: the company’s needs, the department’s maturity, and the level of investment made in treasury. “Treasury can’t decide to be strategic on its own,” he said. “Management [must be] willing to provide the support and resources to help it get there.”

Sometimes, treasury gets siloed to the point that staffer hardly feel like they’re part of the company, suggested Caye Hursey, former treasurer at Advanced Micro Devices.

“What happens is, the CFO goes to accounting and asks questions, not realizing the contribution that treasury makes,” Hursey said. “Most people in other parts of the company don’t know what treasury does, besides collect money. Treasury needs to reach out throughout the organization and broaden its horizons.”

For FENG co-founder Bruce Lynn, who has 20 years of corporate and banking experience in all levels of treasury, evolving into the type of modern function that today’s business realities require is a considerable challenge.

“When we look at the modern treasury,” he said, “we move up from the basic functions of processing, primarily cash accounting to the middle tier—cash management, with a focus on investment, cash, and debt, to advanced goals and planning, including risk management. But it isn’t easy,” Lynn said.

A Modern Treasury Does More 

Today, an advanced treasury department should manage debt, cash, risk, and investment according to Lynn. “Policies should be highly visible with interactive communications, integrated functions and systems, and performance metrics to demonstrate value,” he said.

Relatively few departments have made that progression so far, perhaps because most companies lack “success metrics.” According to an April 2018 report from the Georgia Tech Financial Analysis Lab, only 25% of S&P 500 companies used cash flow metrics such as free cash flow.

The first step, according to Gochuico, is to automate manual processes. “You do that with technology support, so make sure you have the investment for that,” he says.

Also make sure to socialize the automation process, Gochuico advises: “It can be very unnerving to the treasury team when you are implementing robotic process automation or another new system. That requires managing morale so employees understand that you are repurposing their time so they can perform more high-end activities.”

Just getting a budget isn’t enough to automate a company’s many repetitive processes. “You need buy-in from others in the organization to [be] part of the process you want to build,” said Krasner.

To get to the advanced level treasury seeks, the function also likely will have to with the CFO and other department heads to develop some new processes and outsource some of the existing work, he added.

“It’s only when you start to add value to other parts of the company that they start to look at you as a partner,” Krasner said.

When he was employed at Merrill Lynch, treasury “worked directly with the tax department to create tax-advantaged entities that could generate tremendous savings for the firm. From then on, treasury was viewed as a valuable partner.”

How to Get Management Buy-In

Still, winning a sufficient budget is, of course, a key factor is treasury is to be a valuable business partner. Management must commit to invest the necessary financial resources for new systems and learning opportunities for treasury staff.

It’s therefore incumbent on treasury to prepare analyses that show the efficiencies and cost savings that could flow from modernizing the department, Hursey urged webinar attendees.

Unfortunately, even then management may not open the purse strings. Many companies, especially highly leveraged ones, are overly P&L-focused,” said Lynn.

Gochuico noted that the decision to modernize often follows some change or event, such as an acquisition or accelerated growth.

Here are discussion points treasury professionals can use to help show the department’s contributions to the company:

  • Contribution to EBITDA
  • Ability to affect operating cash flow
  • Impact on borrowing utilization
  • Reduced exposure to “rate risks” (e.g., currency, commodity, interest rate)
  • Ability to obtain sufficient third-party capital at the lowest after-tax cost

A modern treasury department, Lynn noted, can provide additional value by shifting its workload toward strategic analysis and decision-making and focusing on forecasting and centralizing funding.

At a company where treasury acts to reduce interest expense, lower risk, and improve cash flow management, there is less need to borrow, added Lynn.

And by employing more sophisticated banking services or restructuring existing bank networks, it’s possible to lower bank fees — an often overlooked benefit associated with a modern treasury.

How to Make the Change

One way to move from a traditional treasury to a modern one is with a “four flows” model, Lynn recommended.

“Become proactive by preventing rather than curing liquidity or risk issues,” he said. “Become a problem-solving resource for business units. Take economic ownership of the cash flow statement. Broaden interactions with other departments throughout the organization.”

These actions will enhance work, cash, accounting, and information “flows,” Lynn said.

He closed the webinar by recommending a 10-step approach to help treasury departments modernize. In order of increasing difficulty, the steps are:

  1. Rationalize the bank network
  2. Set target balances at banks
  3. Re-bid bank services to obtain market prices
  4. Work with other units to establish joint goals (e.g., working capital)
  5. Upgrade treasury technology
  6. Set up pooling or netting arrangement at international locations
  7. Create an in-house bank
  8. Obtain analytical tools to measure risk
  9. Imbed and reward liquidity and risk performance measures into corporate planning processes
  10. Work with business units as “internal consultants”

Brian Cove is managing director of technical activities for Financial Executives International.