Strategic Treasury

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Supporting a New Decade of Treasury While liquidity and financial risk functions remain at the core of treasury activities, the effects of the financial crisis mean treasurers must conduct a broader spectrum of activities within an enterprise-wide framework.

Supporting a New Decade of Treasury

by Michael Spiegel, Head of Trade Finance and Cash Management Corporates, Global Transaction Banking, Deutsche Bank

When many treasury departments were first established, often in the 1970s and 1980s, they were typically tasked to manage the liquidity requirements and financial risk of the business, particularly as companies expanded their geographic footprint. Twenty or thirty years later, while liquidity and risk remain the lynchpin of the treasury department’s activities, the effects of the 2008 financial crisis mean that treasurers must now conduct a broader spectrum of activities. Treasury management has evolved as a result of certain drivers, facilitators and consequences of treasurers’ expanded role, and how banks are positioned to support them.

An expanded view of liquidity and risk

Since the liquidity crisis – and indeed, this is the best description for the global financial crisis as many companies found their access to liquidity severely constrained – treasurers have had increasingly to concentrate on liquidity beyond cash management. In particular they rapidly saw the need to maximise access to liquidity, and to understand and influence the inflows and outflows of funds in order to reduce working capital requirements. Furthermore, with access to bank credit lines often constrained and with capital markets contracting, treasurers started to look at alternative sources of financing, especially with regard to trade and structured finance.

Treasurers have also expanded their horizons from a risk management perspective. While they traditionally focused on interest rate, currency, counterparty and, in some cases, commodity risk, this has now expanded to an enterprise-wide risk framework, including credit, insurance, concentration and liquidity risks as part of treasurers’ overall objective to enhance financial stability and sustainability.

A sustainable supply chain

The emphasis on sustainability is crucial. Treasurers recognise that squeezing suppliers, for example, is an unsustainable way of enhancing liquidity. Instead, there is a greater emphasis on partnerships and ensuring the integrity and stability of the financial supply chain, from clients through to suppliers. While this is an issue that has been discussed for some time, we are now seeing concepts being translated into action, with proactive initiatives to work more closely and effectively with supply chain players. Strengthening the financial supply chain is critical both to creating an efficient working capital cycle, and also to leverage financial assets as collateral for alternative forms of financing.

For example, supply chain financing was one of the very first products offered by Deutsche Bank in the 1870s, with an emphasis on promoting and supporting international business. Today, supply chain finance is an integral part of our offering, but a wider range of companies, including large multinationals are going ’back to basics’ to consider the benefits of traditional forms of financing using financial assets as collateral, albeit in a more sophisticated way than in the past. Not only is supply chain financing now highly flexible and specific to each company’s needs, but it is facilitated by innovative technology and enriched by information that can be integrated with other processes and systems.

Innovation as treasury fundamental

Without leveraging innovative technology and integrating processes and systems in an automated and seamless way, it is almost inconceivable that treasurers could have taken on such a range of new responsibilities, particularly as treasury departments themselves have rarely expanded and often shrunk. We recognise the significant role that banks such as Deutsche Bank have to play in delivering the right communication channels, standardised formats and versatile integration capabilities in order to facilitate automated processes such as reconciliation and account posting and indeed, we have invested substantially in these areas. Furthermore, just as treasurers have extended their remit into liquidity optimisation, so too must their banks respond by delivering wider liquidity management and optimisation solutions rather than simply focus on banking products and services.

Treasurers can now leverage both cash and trade instruments through a single supply chain portal.

There are a variety of ways in which progressive banks are enabling this transformation. Firstly, combining cash management and trade finance into a single business function was an important step, facilitating more integrated, client-centric solutions that span clients’ liquidity and risk management requirements. With both open account transactions and the use of trade instruments continuing to increase, treasurers can now leverage both cash and trade instruments through a single supply chain portal, maximising flexibility and transparency in financial management.

Channels as enablers

In addition to the provision of an information-rich, secure proprietary communication portal, large multinational companies that frequently work with multiple banking partners often seek to access services through a bank-neutral portal such as SWIFTNet. We are also seeing mid-cap companies accessing their banks via SWIFT in order to increase their flexibility in their choice of banking partners. This is a positive development that allows banks to differentiate themselves not simply on channel technology, although this will remain important to a wide range of organisations. Banks will meet and exceed their clients’ expectations based on the quality, timeliness and format of information they provide, the range of services available through the channel, and the ease with which data can be integrated with other processes and systems.

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