Golden Treasury

Finance directors urgently need to understand the value that treasury department adds to the organisation, ascertaining whether it is consuming resources or creating value for the business.

The treasury department, as part of the wider finance function, has to balance conflicting issues. It must show value, undertake and manage its activities efficiently and provide a proper control environment (see Figure 1).

It is essential that the added value provided by treasurers is visible, measurable and effectively communicated to internal and external stakeholders.

With the introduction of the Sarbanes-Oxley Act and international financial reporting standards, finance directors have considered controls and compliance to be a key focus of the treasury department. While this continues to be a key responsibility, given the complexity of IAS39 and the transactions executed by treasury, the challenge now is to develop and embed sustainable processes to meet these demands as efficiently as possible.

COMMUNICATING VALUE

The standardisation and automation of some of the treasury's traditional transactional activities has enabled leading treasuries to focus on adding value to the wider business. At the same time, treasury departments can deliver more by widening the scope of their activities, maximising the efficient use of technology and creating a performance management system. In doing this, they need to ensure that they are communicating their value effectively to the finance director and the wider business.

The PricewaterhouseCoopers European Treasury Survey 2006 – Measuring Value from Treasury found a significant divergence in what was seen as important in adding value (see Figure 2). For instance, treasurers view bank relationship management as the most important value-added activity they can offer, while acknowledging that shareholders are more likely to consider treasury risk management as most important.

This suggests a communication gap between treasurers and shareholders, as well as a potentially different focus. Treasurers therefore need to explain their role and activities better.

RAISED PROFILE

The introduction of international accounting standards has raised the treasurers' profile within the wider organisation and they are now in a position to build on this increased profile.

One area where they can do this is in performance measurement and management. This has created controversy because most treasuries do not operate as profit centres. Putting in place satisfactory performance measures has been difficult, with many of the measures seen as subjective, especially in risk management. Treasury departments are not profit centres or banks, so finding an appropriate measure is not easy. But there is scope for using numeric and risk-weighted measures.

The best treasurers are quantifying activities that add value or have an associated return. One risk management challenge for treasurers is to translate the company's written treasury policy into numerical measures against which the effectiveness of the department's performance can be measured.

For example, if the treasury guidelines state that the aim of foreign exchange risk management is to reduce volatility in earnings, this should be quantified by analysing the level of exposure to different currencies, the market volatility in that currency over a period of time and how effectively the company's hedging has reduced that volatility. Such a benchmarking exercise could lead to the redefinition of treasury policies.

Benchmarks can also help a corporate re-examine and refocus on the major risk areas for treasurers, which can materially alter the overall risk picture. In this way, measuring treasury performance may encourage a more integrated and holistic approach to treasury management.

Efficient technology is vital. Finance directors need access to up-to- date information without having to ask the treasury department to do some fast number crunching. Technology should enable and facilitate a real-time information stream. The most efficient approach to transaction processing is through centralising and standardising execution using straight-through processing (STP) and outsourcing where that makes sense.

MEETING STANDARDS

Treasury departments have seen a significant increase in the requirements of their control environment. These requirements are usually met with Excel spreadsheets to create the appropriate models. Now treasury departments are facing the challenge of reviewing the control environment. PricewaterhouseCoopers' experience indicates that they are moving to tailored, fit-for-purpose technology solutions, which represent a more efficient method of embedding and performing the same operations.

There has been a lot of activity in large European corporates to create payment factories and shared service centres (SSCs). Some of these technology-based solutions are demonstrating real returns, such as significantly reduced bank charges. This means treasurers are spending less time on transaction work and processing. As the SSCs and payment factories are automated, they should also benefit from more accurate, real-time information streams.

Finally, treasury departments should ensure that a focused reporting framework is integrated with existing reporting structures to avoid extra paperwork.

Removing some of the more mundane transaction work, coupled with advances in STP, is a great opportunity for treasuries to add value.

THE WIDER PICTURE

PricewaterhouseCoopers' research clearly indicates that leading treasurers are broadening their horizons and becoming involved in an increasing number of activities, including management of working capital and pensions and commodity risk.

The tasks coming onto the treasurers' agenda represent the wider risks and underlying sources of finance within the business that treasurers have long managed effectively in their most centralised form. Finance directors now appreciate that treasurers have extensive experience of managing these issues, particularly within a framework of risk and return, and that their skills can be put to use in the wider business.

Treasurers need to demonstrate that they add value and can offer more to the wider business. For example, if their cash management skills add value, they should be engaging with the rest of the company on financial supply chain and working capital issues. The treasury department should bring efficiency and focus to these additional responsibilities.

If the treasury takes over responsibility for managing certain aspects of the accounts payable process on behalf of subsidiaries – via a payment factory, for example – it should develop an agreed standard that can be measured automatically and fed back to the subsidiaries to show the effectiveness of the services provided.

There is no doubt that one of the main challenges for treasury departments, in conjunction with finance directors, is focusing on performance measurement. The leading treasurers are working on quantifying the activities that add value, or have an associated, measurable return.

They realise that the challenge is not only to provide added value, but also to demonstrate conclusively that they are doing so by effective communication. If treasurers can do this, they will be well placed to provide even greater support to their finance directors at a time when the role of the treasurer is continuing to evolve.