Silver Lining for Treasurers in the Dark Clouds of Recession ?

The credit crisis has created numerous cash and liquidity issues for treasurers. This article examines current treasury priorities and how these may change going forward.

These are tough times for treasurers. As the global economy continues to struggle through recession, treasury functions remain under significant pressure to maintain adequate liquidity and access to cash. This is no surprise.

But amid the stress, treasurers recognise that their role has new visibility, gives greater airtime with senior board members and offers new opportunities to work closely with the business. Lessons learned now and plans made for future action - both in terms of treasury’s role and the skills required to be successful within it - could uncover a silver lining on what has been a very dark economic storm cloud.

This spring, PricewaterhouseCoopers (PwC) spoke in depth to a number of treasurers from major FTSE 350 companies, asking their opinions about a range of issues. These findings were reinforced by insights gained through ongoing relationships with treasury professionals throughout the year. By sharing this knowledge, treasurers and their senior executive colleagues can see how their views align with or differ from others, how closely their current focus and future expectations match and what potential exists for developing their own treasury functions and the value they provide.

Key Current Treasury Priorities

There are no surprises in the key priorities that currently dominate every treasurer’s agenda. Access to cash and debt is a key concern, as is increased focus on working capital management. These are market-driven priorities, reflecting treasurers’ ultimate responsibility for maintaining liquidity.

When it comes to liquidity and cash, organisations are taking a relatively cautious approach. Efforts are being made to arrange financing well in advance of actual need, even though additional costs are incurred. The pricing and terms of funding are important but are secondary considerations when compared to access. Treasurers are also seeking insurance through increasing their funding options, including new banking relationships or bank lines. Counterparty and credit risks have been at the top of board agendas with many companies investing time to identify all direct and indirect exposures across the organisation.

The pressure created for treasury functions in addressing these issues is, as might be expected in a downturn, rarely alleviated by additional resourcing. Thus there is a tendency to maintain an intense focus on their own company’s current issues - a treasury tunnel vision - rather than looking outside to the problems and solutions in other organisations. Treasurers who might in better times interact with more peers to share insights and best practice now typically finds themselves further locked within their own corporate worlds. Although some would argue that this is not necessarily a bad thing.

So have there been any surprises from the changes to our economic climate or are treasurers simply witnessing the descent of the cyclical curve and tightening their purse-strings accordingly?

Unexpected Hot Issues

Extent of the fall

Though the credit crisis is now an accepted fact of life, many treasurers are surprised by the extent to which the market has fallen and by how dramatically and rapidly the position of banks has changed. The collapse of major financial institutions has also increased the sense of insecurity - even fear - as to what might happen next.

Relationship banking

Treasurers are also disappointed - even hurt - by the apparent evolution of relationship banking. Cash and funding are key treasury priorities, but the banks are appearing less helpful - taking more time to make decisions, applying increased scrutiny, putting additional pressure on margins and attempting to accelerate re-pricing. Some treasurers feel they are being bullied, others ignored.

Treasury functions are surprised by how slow and difficult even routine actions have become. Given the banks’ capital constraints, funding decisions are being made in the cold hard light of return on investment - relationship managers within the banks are having to risk their own reputations by backing clients, and are therefore demanding more reassurance and negotiating tougher terms.

Credit nationalism

There is also some suspicion of an emerging ‘credit nationalism’, with some treasurers believing banks are more likely to support businesses in their own territories. Such suspicions reinforce the sense of a reduction in the support being offered by the banking sector to its corporate clients

Tougher banking attitudes and responses - real or perceived - have caught treasury functions off guard after years of relatively easy fundraising. The necessity of change to banking relationships built during those high liquidity days has revealed that some were less robust than was thought. This is leaving some treasurers feeling less empowered to influence their situation.

But the news is not all bad. Treasurers who have put significant effort into their banking relationships, to win support based on a real understanding of corporate strength, business strategy and future opportunity, are now reaping the benefits. Positive stories do exist, where treasurers are achieving high success rates in their funding negotiations, despite the economic downturn.

Future Focus

Looking to the future, treasurers are focusing on getting closer to the business and acting as part of a team. They are starting to engage with procurement and M&A teams, acting as advisers to better prepare the business to meet its strategy in the new economic climate. For example, in terms of foreign exchange, they are looking to take advantage of the current volatility in exchange rates and the weakness of sterling. Some are considering changing the reporting currency, others are re-assessing their hedging strategies and the related interdependencies with other variables, such as liquidity and counterparty risks.

A prime concern is to achieve a degree of certainty, even if that means taking a route that doesn’t deliver optimum profitability. Treasury functions will be seeking a balance in their hedging activity - aiming to achieve reasonable certainty without ending up with excessive cover.

Achieving greater certainty will involve working more closely with the business. Treasurers need a strong understanding of the cash and foreign exchange flows taking place. Strengthening links with the business can support more accurate forecasting and reduce the risk of unanticipated exposures. If the sales team negotiates with an overseas client, or arranges a deal in a foreign currency, treasury needs to know.

Systems and processes

Weak systems and processes in such areas will now be exposed and could generate significant loss in value to organisations. In a stable market, the foreign exchange risks created by isolated acts may be low. In a volatile environment they can become significant. Treasurers may want to seek reassurance that their systems and processes are up to the challenge.

Working capital

Working capital is also demanding attention. Treasury may not necessarily have responsibility for its management, but be acting as an adviser to a separate, specialist working capital team.

The increasing need for treasury to work closely with other functions and business teams is also creating opportunity. Contact on specific issues opens up channels of communication. Treasurers can capitalise on this by helping the business understand the benefits to be had from close cooperation with the treasury team. Even when the credit crunch and recessionary pressures subside, creating strong links now could enable treasurers to sustain greater integration with the business: if conversations become the norm now, why not in future?

Banking relationships

As well as keeping close to the business, treasurers appreciate the need to strengthen their banking relationships. This is of paramount importance. Treasury functions are becoming even more proactive - initiating contact and meetings, planning how to ‘sell’ the opportunity that the business can offer the bank. There is also a growing understanding of the need to build a relationship with the right person - someone who knows how to ‘deliver’ the bank - someone inside the bank with the power, commitment and willingness to put their own neck on the line.

Despite these being difficult times for treasurers, most are coping well with the pressure. Past experience of recession is a help, as is a strong sense of being part of a team, working alongside the CFO and other board members to meet the challenges caused by the financial crisis. Although some may be feeling the weight of their responsibility for funding adequacy, they also appreciate that many other companies - and treasurers - are in the same situation. Greater communication among treasurers is thus seen as a potentially helpful way of alleviating stress.

A silver lining?

Many treasurers find encouragement in the upsides associated with the increased importance of cash management and treasury’s role - particularly increased visibility and greater contact with the board.

Where in the past treasurers might have attended board meetings just once a year, now their input may be required once a quarter. Even if treasury roles haven’t changed significantly, the attention paid to them has. The greater contact with board members is calling on the high-level skills that treasurers possess - the ability to communicate potentially complex funding and liquidity issues in high level, business and strategic terms.

Another positive repercussion of the credit crunch is that treasury functions are being encouraged to work more closely with the business. As already noted, this opens up new opportunities for managing cash and working capital more successfully, as well as enriching the treasury role. It highlights the importance of ‘sales’ skills in the treasury function. Buying services is one thing; explaining how treasury can help a business perform better is another.

Treasurers are also finding intellectual stimulation in responding to the difficult market, while for some there is also satisfaction in seeing positive results from past ‘conservative’ policies. They are also aware of the need to think ahead, linking strategic business decisions to liquidity and working capital needs.

Stimulation and job satisfaction aside, sustained pressure for a long period of time is a potential problem. Systems, processes and people have been tested - many to the limit. The stress can feel unrelenting. Maintaining high performance for the unspecified future could be a tough challenge.

Poised for Future Challenges

In general, treasurers feel themselves well placed to cope with the challenges of the next few years. This is partly due to having a strong understanding of the business. By staying close to the business, as well as the markets, they believe they can stay on top of issues as they emerge.

The importance of developing close links with the business was also highlighted in PwC’s April 2008 report, Treasurer’s Agenda. This questioned whether treasurers were embracing their new-found attention and using it to expand their influence outside the traditional treasury domain. It suggested that those who did not could be missing a vital opportunity to expand their reach and improve their lines of communication with the board. Our recent conversations indicate that this opportunity remains and that leading treasurers are increasingly aware of the need to take it.

Effective Communication

Most also emphasise the importance of effective communication in enabling the treasury function to maximise its impact. This communication is both internal - with managers elsewhere in the business and top level board members - and external, with banks, investors and other stakeholders. The communication skills required are multifaceted. Treasury specialists need to be able to explain treasury concepts to the layman, translating potentially complex issues into plain business English. They also need to be able to ‘sell’ themselves to others - winning the support of fellow executives as well as banks and other funders through the persuasiveness of their case.

Repeatedly, treasurers state that communication is the most important part of the job, taking primary place - ahead of technical knowledge - for making an effective contribution to the business. Technical expertise may reside in the team or can be brought in from outside - from auditors in terms of accounting, from banks in terms of financial modelling, from consultants in terms of systems and processes.

This doesn’t mean that internal resources do not require further investment. Treasurers highlight the importance of training for their teams - particularly in so-called ‘softer’ areas of leadership, communication and rapport building. High performers who can demonstrate ability in these skills will mark themselves out as the leading treasurers of the future.

Article by Yann Umbricht is the partner leading the PricewaterhouseCoopers Treasury Group in the UK. He has extensive experience of working with clients in defining corporate treasury risk objectives, formulating policies, optimising organisational structure, implementing control procedures and improving efficiency of treasury operations. He is also engaged in providing financial audits of treasury functions and controls. Umbricht is also a former practising treasurer of a £1.5bn corporate recovery fund. He is a French qualified accountant and a council member of the Association of Corporate Treasurers (ACT) as well as serving on its technical committee.