Today’s businesses are competing in hyper-disruptive and volatile markets. To maintain financial performance, health, and resiliency, they need to take a holistic approach to unleash the $1.4 trillion worth of liquidity trapped inside companies’ accounts and operations.
However, the concern of some CFOs for minimizing operational risk is creating a blind spot for optimizing liquidity.
Historically, CFOs have been held accountable for reducing risk and maintaining compliance — for overseeing FX-related currency losses, for example, and for being fined when they’ve been found to be out of compliance with regulatory requirements and statutory mandates.
These high-stakes fiduciary and corporate responsibilities are crucial to companies’ financial health. But companies may have unintentionally incentivized CFOs to limit the treasury function’s ability to play a more prominent and needed role in optimizing liquidity performance.
CFOs have aimed at preserving value in order to satisfy financial audits, regulatory requirements, and tax laws. This traditional approach is creating a blind spot, if you will, to a more strategic opportunity that will put CFOs and their companies in a better position to thrive.
In short, the risk-and-reward formula for a company’s financial health has changed. Economies of scale are global, and even regional economies have massively expanded. The ability to gain capital and increase free cash flow has never been more significant.
Redefining Treasury’s Role
CFOs and CEOs should fundamentally rethink the role of treasury. Rather than the function’s traditional role as custodian of cash activities with a point-in-time view of liquidity, it should be charged with a more strategic and expansive mandate to manage enterprise liquidity across the full liquidity lifecycle.
By taking this more holistic approach to liquidity and empowering treasury departments to be a strategic partner that helps fund growth objectives, CFOs have an opportunity to maximize existing talent while also meeting regulatory mandates.
There are many benefits to be gained from elevating treasury teams’ ability to leverage the vast amount of financial data at their disposal to inform strategic decision-making at the CFO and board level. This digital transformation helps treasurers manage the growing risk of payments fraud and adds visibility across cash reserves, which in turn improves companies’ ability to fund working capital programs.
That’s important, because the pressures on treasury are mounting. According to the 2019 PwC Global Treasury Benchmarking Survey, 64% of respondents noted they have an increased focus on working capital management.
Today’s treasurers increasingly are asked to do more than back office cash management. They are also charged with streamlining and managing financial risk management. In the same PwC survey, 73% of respondents said strategic thinking is a key attribute for treasurers.
Clearly, the role of the treasury function is evolving due to market pressures and volatility. However, many organizations have yet to make the strategic changes needed for treasury to enable measurable value creation.
The Chief Liquidity Officer
To acknowledge the treasurer’s evolving role, organizations should explore designating a chief liquidity officer. This position can be a single, authoritative point of accountability that oversees the lifecycle of liquidity and reports to the CFO. The CLO can develop a holistic strategy and be empowered to execute based on the company’s enterprise objectives.
Ideally, the CLO will have all the tools and resources necessary to steer cash management, including forecasting, payments, and working capital, and access to all of the levers that can affect it.
Beyond simple operational savings, the CLO can provide other benefits, including better return on investments, fewer missed earnings targets, and faster growth through the additional liquidity made available.
A highly performing liquidity management approach relies on harmonized, centralized, integrated, and automated process flows. We are finally in an era where digital tools are available to help support this.
And with the growth of robotic process automation, advanced analytics, and artificial intelligence, the CLO’s role will become even more important, allowing for integration with upstream and downstream systems to enable effective and timely decision-making.
Unifying Disjointed Initiatives
According to a recent IDC survey, only 1% of treasurers believe their companies are currently well equipped to benefit from better process centralization and autonomy. This is a bit troubling, as better process centralization and autonomy are table stakes for enabling treasury to play a more prominent, strategic role as an adviser to the CFO and a business partner to the organization.
A major factor in this underperformance is that most organizations have disjointed initiatives. At the tactical level, the overall goals and tools are fragmented across multiple departments, without an overarching liquidity performance strategy.
Leading organizations that employ an integrated liquidity strategy have embraced liquidity as an enterprise priority and have invested in organizational change, digital technology, and advanced analytical practices. Liquidity must take into account many internal and external factors, such as taxation, compliance, regulatory environments, economic outlook, and internal processes.
One of the challenges most companies face is that separate functions within the enterprise own different fragments of liquidity: Treasury owns cash and investments, procurement owns suppliers and spend, operations owns inventory. Hence, managing liquidity performance from the top level is paramount in order to truly optimize enterprise liquidity.
The good news is that improving liquidity performance is possible today. But it requires a shift in the way CFOs prioritize roles and functions in their organization.
Jean-Luc Robert is the CEO of Kyriba, a provider of cloud-based treasury and finance solutions.