The Resilient

CFO’s at the end of this long COVID crisis have a major objective: to make finance and treasury more resilient. To this end, they must, in consultation with their treasurer, work on several levels: further automate overly manual processes and banish XL as much as possible, consider new technologies and data mining, reduce working capital requirements, optimize the capital structure, reduce the financial supply chain, review the management of excess cash, rethink treasury recruitment to adapt skills to new needs, involve treasury more in M&A operations, scan new regulations, a wave of which is coming our way, strengthen internal controls and mitigate financial risks, and improve cash flow forecasts. The pandemic has highlighted the need for accuracy and speed. With these few fundamentals, treasury will become more resilient than ever.

The CFO questioning

With so many unexpected challenges from every direction, all CFO’s must ask themselves if they are in the best position to steer the company through the next critical situation. The businesses and operations will look to finance to support innovation, to facilitate internal and external value creation, and to lead workplace “co-creation” efforts. Organizations should ask themselves if they are doing the right things, not just doing the things right. The most resilient posture for the business and the CFO/Treasurer in the face of dynamic and uncertain change is to retain control at the center but ensure flexibility at the edge. The CFO should give the tempo and the “la” for the changes and the revamping of the whole finance function. He/she must be the conductor of this profound transformation. If the CFO does not initiate this change, then it seems difficult for the treasurer alone to achieve a radical change in the organization. If I were a financial analyst or a rating agency, I would check the changes made by the CFO’s. A company whose CFO does not initiate any changes should be penalized by the markets and rating agencies, as it should be. Otherwise, some people will never change the financial environment, believing that they will escape any future crisis if they have survived this one and others before. This is again the simplest attitude to avoid at all costs. The mindset is also crucial: the CFO must be willing to question himself and to consider what can be done better or more efficiently. This is often a problem, as CFOs sometimes believe that everything is under control and works well. Accepting that your organization can be improved requires a minimum of honesty, humility, and sincerity. This is the most important starting point without which we will never achieve our goals.

Rethinking Treasury

Treasurers are the stewards of the information that CEO’s need to make key business and finance decisions. Treasurer’s role is no longer about just cash positioning, and this shed a light on how inaccurate and inefficient existing processes were sometimes. Treasurers have difficulties to change historic systems and processes. The pandemic has forced a change away from dated processes a lot of people were too comfortable with. Rethinking cash flow is crucial, because it is the cornerstone of finance, the focal point, the lever to be activated in priority. To be more resilient and resistant to any crisis, any unusual and contrary element, any extreme market volatility, or any strict regulation, it is necessary to be meticulously organized. This requires automation, a review of basic concepts and better recruitment. The first step is to accept the idea that we can do better and that we must improve the existing organization. This is an essential starting point, without which you cannot move forward. Being able to reinvent yourself, accepting that you could do better and wanting to guard against it is commendable but often difficult to admit. It is easier to be complacent about what you have always done and pretend that it is the best you can do. It is an outdated, arrogant attitude that even the best CFO and treasurer would never have. I admire treasurers who want to change things and accept the idea that better (still) is possible in terms of organizing the function. It seems to me too easy to pretend that you do not have the budget, or the time, or that everything is already optimal. Humility is the most important quality of the modern treasurer. It is not permanent dissatisfaction, but a desire to strengthen his/her organization increasingly to make it more durable and solid. This is audacity and modernity required.

Action plan

We are going to propose few main lines of action for the CFO (with the support of the treasurer). The first axis is the automation of processes such as FX, payments, trade finance operations, or accounting reconciliations. If there was an objective, it would be to banish XL from treasury management or make it minimal and secondary. The second axis is (information) technology, which allows automation of course, but also to manage more dynamically, more efficiently, and to integrate via API’s the systems between them, by optimizing the information accessible on the banking side. It also starts to allow data mining and the use of existing data, but often untapped and unused until now. With this data, it will be possible to produce more relevant, condensed, immediate and relevant reports. The next axis is the optimization of the working capital need, often under-exploited and not maximized. Reducing the working capital requirement is one of the cheapest ways to finance oneself and/or to make beneficial use of one’s excess liquidity, penalized by the still negative interest rates. At the same time, optimizing the capital structure is an important axis. However, the search for WACC should not be maximal, but on the contrary “optimal” (which implies that one does not look for the theoretical optimal level at all costs, but for a practicable and attainable level).

As already mentioned, reducing the supply chain finance (SCF) has become a major objective for manufacturing companies, because here again the factor is a cost element that can be maximized by reducing it and increasing the “cash conversion” factor (or CCC). It has become essential for cash rich companies to limit the cost of negative or low interest rates. This implies reviewing strategies and splitting up the layers of cash according to their use, to allocate them to other, more profitable assets and to seek to generate or extract yield. The treasurer also needs to be more involved in M&A transactions, to help protect investments, reduce their costs, protect new risks, and integrate them into centralized treasury management and group financial reporting. Forecasting of future cash flows was again an issue during COVID. The reliability and relevance of the figures, the ability to crunch and analyze them, by hypothesis, allow the CFO to make faster and better decisions. Production time and the irrelevance of forecasts are his two worst enemies.

Risk management is becoming more complex due to increased market volatility, fraud, and cyber-risk. This requires strengthening internal controls and (back to the first axis) automating processes to mitigate operational risks. What is manually produced is at risk and delivering reports is far less useful than interpreting them. It is impossible not to scan the new financial regulations that are starting to come in. This also requires a more legal perspective. Another critical area is recruitment to adapt skills to new needs. We need to rethink the type of profile we are looking for and avoid hiring only typical treasurers. Soft skills must also be revisited to surround the team with different cultures, new horizons and complementary and more IT skills.

In short, we need to improve on digital literacy and digital skills. Those without access or digital skills would be left behind. In couple of countries, in Europe and beyond, have tried to adapt the education systems to the world of today and of the future, but it is not going fast enough. We must make more efforts to accelerate the digital literacy, especially with young people, to successfully implement this required digital shift.

More resilient than ever

The goal would be to make the entire finance department more resilient and robust. CFO’s have already started down the path to digitalization, with varying degrees of progress and success. Progress is very often slow and gradual, although COVID has clearly slowed it down. Many financial executives, including treasurers, think that having a TMS in place and a “payment factory” is the Holy Grail and that they are therefore completely digitalized. Often, due to a lack of knowledge of what could be done, they stop in the middle of the digitization process. This is obviously a mistake. It is simplistic and reductive. Digitization is the ultimate in automation and the surest security and protection against adversity and financial crises. We can never be automated enough. It is therefore useful and recommended to question oneself. Why not simply perform a treasury diagnosis to see where you left off and what else could be done. At little or no cost, the CFO can get an idea of the productivity gains to be sought. We must also recommend that he never forget the qualitative aspect, the risk aspect to be mitigated and the internal controls, the best possible protection against fraud. Daring to question oneself can only generate value for the whole company and consecrate the strategic role of the treasury. In conclusion, I would say: “Embrace emerging technologies or be left behind”. You should not be afraid because even the highest mountains have a path that leads to their summit, never forget it.

François Masquelier, CEO of Simply Treasury – Luxembourg 2022

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).