Treasury Management Best Practices

While the role of corporate treasury management has always played a critical role in the financial viability of corporations, its importance appears to have grown in recent years. Treasury departments that collaborate with other business areas as strategic business partners require more sophisticated tools and technology.

Simply put, treasury management encompasses the financial planning and cash management functions for firms, and also the banking relationships that support those functions. The responsibility for these financial processes also extends to the management of the financial risks a company is exposed to, from counterparty risk to market risk.

Listed below are a few corporate treasury management best practices for assembling and managing a skilled, capable team:

Get FTP Right

Developing a balance sheet can be arduous, especially if there is a high turnover of items and/or weak IT treasury management systems. However, by getting it right, new business activities using the balance sheet can become value-added by ensuring that the mindset of fully-loaded margins prevails within business units.

For this reason, using a floating interest rate benchmark (like the ones LIBOR used to use) for the whole company is the best method of pricing FTP. This diminishes arbitrage opportunities, eliminates interest rate curve risk, and makes the ALM team’s monitoring process much easier.

It is also worth mentioning that FTP shouldn’t be considered a risk factor. By scoring counterparties for risk and charging appropriately on top of FTP, credit/deal teams should be able to price deals on a case-by-case basis. It demonstrates further the agnostic nature of treasury staff towards the business: the team is an enabler, not an arbitrator.

Structure and Compensation

A company must locate its treasurer in the right place at the top of the organization. Effective teams comprise:

• Impartial: Not associated with or biased towards a particular commercial area
• Empowered: Not just in terms of human and capital resources, but also in terms of flexibility to move about.
• Incentivized: Without being a profit centre, team members must have measurable targets.

Agency Costs of Incentives

Treasury departments interact externally, and they are responsible for projecting corporate image and confidence. Thus, compensating and incentivizing the right way is also crucial from a performance perspective. It stems both from how a team is created and from where they sit in the office.

Unlike a profit center, the team does not receive any profits from the central company entity, which means there may be perverse incentives. For instance, taking a risky policy of raising cash over the long-term then lending it out over the short-term is not a commercially sound practice outside of severe market stress.

Although, if the treasury is not incentivized to take this option, it is safe and they will be paid regardless. A similar issue is that P&L is just swallowed up by the company, with performance not tied to it. This can lead to best execution policies being overridden.

Providing treasury staff with suitable and compelling incentives reduces agency costs. A variable compensation scheme that is based on the work performed by the team is an interesting way to measure holistic team performance.

Communicate Effectively

Listening to the markets and dealing with the balance sheet, the treasury management function is an important information source for the company. Specifically, macroeconomic events should be handled as risks, or as opportunities. Instead of forwarding information along, actionable insights should be packaged: “How does this affect our business?”

A business’ cash position is an important end-of-day report, but reporting of it should not be limited to this. In presenting to the executive committee, reports should be concise and not just be a collection of mundane information.

When reporting data, highlight key metrics showing:

• Liquidity Horizon: Under what conditions would you still survive if liabilities ceased accruing.
• FTP Cost
• Weighted Average Yield: Return on assets under your control
• Value at Risk (VAR): Assets and derivative positions

With an objective traffic light system, you can emphasize urgency and give relativity to your actions. The data should be accompanied by qualitative commentary to explain qualitatively why an aspect has changed.

Invest Time in Research

As buy-side institutions, treasury departments need market makers to supply them with financial products ranging from vanilla deposits to esoteric derivatives. As a result, a dealer usually sticks to a handful of providers, either because they aren’t proactive enough or they want to give their clients some entertainment.

They should also have direct access to the market as a footnote to the above. Passing the parcel through other teams within the same company breeds inefficiency because it amounts to P&L passing the parcel.

Building an ERP and Taking the Time to Do It Right

Corporate treasurers cannot assemble a balance sheet and communicate their liquidity positions and risk exposures without effective software. You will be overwhelmed wanting to reconcile positions if you do not know where the money moves by the second. Having fewer systems is better for ensuring seamless workflow crossover, as the treasuries need systems that can cater to a wide range of functionality.

To Conclude

Operating a high-performing treasury function is challenging, and more as modern-day financial risks and demands accelerate. Nonetheless, these best practices provide the foundation to pave the way for efficient corporate treasury management.