Snorre Tysland and Michael Gehlen (Barclays): Transforming Treasury Management for the Future
Yann Guyomar and Louis Rousseau, Forvis Mazars – Debt & Treasury Advisory, In an unprecedented economic and geopolitical context, finance departments need to remain agile to optimize their financial performance and net debt landing at the end of the financial year. What levers are available to help them do this? What processes and tools can they implement to activate these levers effectively?
How are Treasurers Navigating the Real-Time Revolution?
The move towards real time, whereby data is accessible immediately and transactions can be performed instantly is one of the most transformative shifts in the financial industry seen in decades.
It allows for Treasurers to create a completely integrated ecosystem with their various partners, allowing for immediate information exchange and decision making. Moving away from file based processing and batch based processing, real time transactional processing allows for immediate settlement and ultimately more efficient use of liquidity for working capital improvements. Weathering the storm of geopolitical events, globalization and technology, requires robust and proactive treasury management. The more global the organization, the more the need to run operations in real-time. Global market and macro volatility makes it a necessity for organizations to understand the full picture of their cash flow in a real-time environment. Which includes the organization’s exposure to inflation and higher interest rates globally that will support protecting revenues. And allow for the immediate movement of surplus cash which is critical to financial success. Real time data will also support better risk management, by allowing for immediate visibility, forecasting and identifying possible risks proactively can safeguard the organization from costly investments. Additionally technology advancement allows for greater efficiencies and better deployment of human resources, ultimately supporting the further growth of the organization. Treasurers often underestimate the benefits of real-time payment schemes and how this will drive cost efficiencies, enhance working capital optimization, allow for reduced lending and speedy deposit placements. The investment and time need to implement a real time ecosystem is not to be underestimated, projects can take several months if not years. However the long term benefits are not to be underestimated and further technology advancement, in the particular AI will further improve efficiencies. The journey has only just begun!
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Louis Rousseau, Debt & Treasury Advisory
Financial management: What levers are available?
In practice, there are two main types of levers that can be used to optimize WCR:
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Structural levers: They aim at optimizing WCR by improving processes and organization. These may involve improving cash culture, optimizing stocks, O2C or P2P. These levers take longer to put in place, but they enable in-depth work to be done to control the impact of WCR over the long term, and so strengthen the resilience of the organization.
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Cyclical levers: They enable to react quickly to one-off variations in WCR. They consist of targeted, one-off actions, such as the sale of receivables with off-balance sheet treatment, cash marathons, negotiation of advance payments, participation in reverse factoring programs offered by certain customers, etc. While the use of short-term levers can be effective in the short term, they can also prove addictive.
Companies therefore need to strike a balance between these two types of levers and anticipate their implementation. It is advisable to favor structural levers, which are more virtuous in the long term for the organization, and to reserve the use of cyclical levers for adjustments during periods of turbulence affecting liquidity, particularly at accounting closing date. The finance department shall also be able to manage both FCF and the resulting net debt. This requires a medium to long-term view of the cash flow forecast obtained through an accounting approach EBITDA to Cash. It shall also work in parallel with the short-term vision, using so-called direct forecasts based on an analysis of cash receipts and disbursements over a short timeframe, generally monthly. Finally, it is worth remembering that the best forecast is one that is regularly confronted with actual realization. Regular reconciliation of forecasts and actuals helps to instill a learning mechanism throughout the organization, and so establishes reflexes over time.
AI and financial management tools are becoming essential
Finally, in the current context, management tools play a crucial role in supporting finance departments, both in terms of day-to-day cash management and short-term cash management. The pace at which treasurers must analyze and make decisions has increased considerably. They must therefore be able to rely on tools and data that enable them to assess the company's situation in real time, so that they can take corrective actions in a timely manner. Financial management tools can help the treasurer to project the company's liquidity position over the medium to long term and take any corrective actions required. Artificial intelligence (AI), in the case of cash management forecasting, can be a real support. Using Big Data and qualified forecast gaps, it enables the treasurer to model and anticipate the company's behavior and can also help to identify suspicious payments and prevent fraud. Managing liquidity is therefore a complex issue that requires a collaborative approach, covering transactional, organizational, accounting and financial communication aspects. When structuring a working capital financing solution, it is crucial to involve the auditors as early as possible, as well as the rating agencies, if applicable, so that any adjustments to their analysis can be discussed constructively with them and communicated to lenders and investors.
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