Is it Time for ‘Proceasury’?
by Seamus Desouza, Executive Director and Senior Product Manager for Foreign Exchange, J.P. Morgan Treasury Services, EMEA
The effectiveness of corporate treasury can be greatly influenced by tactical procurement decisions. It is not uncommon that the treasurer is late in finding a new cash-flow commitment. Such unplanned obligations can reduce working capital efficiency and create an unnecessary risk of currency exposure, potentially impacting supplier relations and profit margins. This article looks at how the treasury and procurement functions can collaborate to meet and potentially exceed each of their respective objectives.
The core purpose of treasury is to manage cash flow while minimising exposure to currency and liquidity risk. Many treasuries have a mandate from the board, in the form of a Treasury Policy, to put more emphasis on maximising opportunities, while mitigating risk, where possible. A good example of this is the use of FX options to minimise currency losses but benefit from favourable currency movements. For many procurement functions the primary objective is to drive lower costs through vendor management and various sourcing techniques. It is occasionally possible that procurement will have set the conditions for currency conversion within the supplier contract to achieve the same safeguard. Improperly executed, this can create an accounting issue by inadvertently entering into derivatives that are embedded in the contract.
The key contribution that treasury can provide to procurement is the freedom to contract in any currency and with a vendor in any location.
Inadequate co-ordination between treasury and procurement could prompt vendors to add a premium to their price or to quote in a non-functional currency, both having negative impacts on the business. Closer co-ordination between the two functions could enable treasury to manage that risk more effectively through a number of techniques. Increase the scenario over a global organisation with multiple diverse businesses and it becomes a clearer concern as to why the treasurer is left out of the buying decisions, as the timing of cash availability is not immediately seen as contributing to the cost-save or vendor management objectives.
A great many corporate treasury functions centralise currency risk at the parent entity so that the subsidiaries can focus on managing the business; i.e., customers and vendors. The effectiveness of banking arrangements, of cash flow information management, and of access to cash is paramount in releasing a subsidiary to focus on the business.
While it is generally easier to centralise a dematerialised function, like treasury, this can be more challenging when the procurement function has to deal with receipts of materials. The evolution of the Manufacturing Resource Planning (MRP) systems into the Enterprise Resource Planning (ERP) applications of today have created significant opportunity for a multinational corporation to leverage the investment and create an information bridge between centralised and decentralised functions.