- Increased volatility in financial markets means a well-functioning treasury is vital to business operations.
- Your treasury team should be translating market forecasts into tangible impacts, helping you craft financial risk management strategies that matter.
- There are plenty of steps you can take to improve your treasury function and unlock their potential.
Results from PwC’s recent pulse survey in the US show that 65 percent of CFOs are adjusting their financial forecasts and budgets in response to the current volatility in financial markets. We’re seeing the same activity in Australia. As CFOs respond to this market volatility – a result of factors including increased tariffs, interest rate uncertainty, geopolitical tension and the move to renewable energy sources – the capability and performance of their company’s treasury function is crucial to the stability of finance operations. In such a volatile environment, how can CFOs ensure their treasury is equipped to provide them with the insights and analytics they need to make strategic decisions and enable company growth?
To begin, it’s important to be aware that certain types of companies are especially vulnerable to market volatility. These include companies:
- That buy and sell goods and/or services overseas (due to foreign currency fluctuations),
- That have large amounts of bank debt and/or capital markets debt (due to uncertainty around interest rates, liquidity, funding),
- Whose input costs, such as copper, oil, gas, electricity, wheat, sugar and beef are a large part of the company’s cost base (due to their manufacturing processes),
- That produce goods (i.e wheat, sugar, beef) as part of a supply chain are also particularly vulnerable.
Now considering these types of companies, are you as a CFO getting the timely and comprehensive insights you need to optimise your business? And if not, what action can you take to get more out of your treasury?
What should you expect from a treasury function?
A treasury function needs to be strategic and forward-looking; able to take information from financial markets about current events and interpret their potential impact on the company. In particular, CFOs should expect their treasury team to provide guidance in these five areas:
If your treasury isn’t able to deliver on one or more of these areas, it could be due to staff or resource shortages, such as a lack of data or tools. Or perhaps your company’s current policy and governance structure doesn’t allow you to capitalise on market opportunities in a timely manner. Finding longer term solutions to these problems takes planning and organisation. In the meantime, here are some quick fixes CFOs can implement to help ensure their treasury function is providing the strategic advice they need to navigate the current market volatility.
Actions CFOs can take to improve their treasury function
A treasury function needs to be strategic and forward-looking; able to take information from financial markets about current events and interpret their potential impact on the company. In particular, CFOs should expect their treasury team to provide guidance in these four areas:
Systems/Technology
- If you have a treasury system, ensure that dynamic, dependable, and data-led reporting capabilities are available. If it isn’t, there are some quick fixes (such as enhancing data granularity and capture, or configuring additional capacity) to enhance the analytics from Treasury and enable more informed strategic decisions. Forward leaning Treasury functions are increasingly adopting correlation, scenario and sensitivity analysis to assess potential financial risk impacts to the business.
- Ask where your TMS provider is on its journey to adopt generative AI in relation to reporting and analytics. Depending on how advanced they are, assess how these tools can be effectively adopted to generate the information your organisation requires. Factors to consider include: access to relevant data, especially if it’s not currently stored in the TMS; the ability of the team to train the AI to produce the required reports; and the safeguards that must be put in place to ensure the information is accurate.
- Engage your banks to understand the solutions they have built in relation to cash visibility and forecasting, trade finance, transaction portals and connectivity (e.g. use of banks APIs). Many banks offer analytical services using bank data (at an additional charge), which can reduce the work required by treasury teams and supplement the liquidity reporting provided. Make it a key requirement of your transaction banking refresh.
Governance and process
- Weigh up whether your treasury policy and related hedge strategy are dynamic enough to address the changing financial market conditions (i.e. can hedging levels can be easily increased or decreased, and/or new hedge product types such as options be utilised?). Does your current governance structure support quick execution of hedges and the right type of product, when required?
- Assess whether you have adequate bank credit lines with a reasonable number of counterparties and established processes so new derivative types can be transacted seamlessly, if required. For example, if you decide to hedge a commodity risk and have never done so before, which of your banks do you go to, and have you got the ISDAs and related documentation in place to support the execution of a commodity linked derivative?
People
- Reduce the time your people spend on BAU tasks by automating routine activities wherever possible. To do so, take advantage of system functionality and other tools, and leverage services offered by your banks. For example:
- Cash management – the process to collect and manage cash balances can be automated through the various services provided by the bank such as automated cash sweeps, or cash pooling and the use of APIs to provide bank connectivity to your TMS. Trade finance – managing a huge quantity of bank guarantees and letters of credit can be made easier through the use of bank portals and/or specialist software, which can be integrated into a TMS, making it easier to understand your working capital position.
- Foreign Exchange portals – banks through their banking portals provide direct access to their FX hedging desks (i.e. allow you to see pricing and execute FX hedges online including placing standing orders) and provide the necessary functionality to embed delegations of authority approval and streamline settlements.
- Upskill team members to improve their use of TMS/BI tools. Many vendors offer custom training services.
CFOs should expect their treasury team to harness market predictions about world events and translate them into the possible impact on their company and its ambitions. Indeed, treasury teams are generally very keen to do more business partnering within the company and provide input into strategic decisions at all levels. However, most treasury teams face obstacles in doing so, either due to resourcing constraints and/or a lack of investment in technology and process automation, which limits the time they can spend providing market driven insights. lack of investment in technology and process automation, which limits the time they can spend providing market driven insights.
Getting more from your treasury requires an investment in both time and money, but the results can be extremely beneficial for your company. With market volatility showing no signs of abating, CFOs would do well to consider how they can support their treasury function to become a better business partner and provide more strategic advice.
Contacts
Contributors
Robert Kable, Senior Manager, PwC Australia