Integration between treasury and business

Column Laurens Tijdhof

Integration between treasury and business

Integration between treasury and the wider business is a prerequisite for an effective and efficient treasury organization. The remit of the treasury function has changed in recent years so that treasury is now expected to be a much more proactive advisor to the company.

Traditionally, the treasurer’s role was primarily based on ‘how to manage cash flows effectively’. Over the past decade, the treasurer’s function has grown to become more of a strategic partner for the business. Currently, treasury is considered the expert on 1) the quantification of financial risks and 2) the time value and accessibility of future cash flows. The specific knowledge around those two areas can and should be used in an integrated way for the business.

There are numerous examples of where this specific knowledge is required and how it adds value to the business process. One instance is the capital allocation process. Treasury has a leading role in advising the CFO on decisions around complex investments, taking into account country-specific risks, diversifying companies’ debt portfolio, project-specific WACC calculations, impediments from restrained cash, etc. Yet another, mostly still undiscovered, area where treasury can play a pivotal role for the business is on the commercial side. Market practice is to evaluate (forecasted) sales by taking into account financial risk factors. By measuring the Risk Adjusted Return On Sales (RAROS), the company can gain more insight into the true profitability of individual projects and business transactions.

“The remit of the treasury function has expanded.”

This more integrated approach offers an increasing scope for treasury (and other functions) in areas such as pension funds, working capital management, credit risk management, insurance and procurement. With regards to the latter, treasury is often asked to support procurement with regards to purchasing different commodities and energy and managing the related financial risks in the process. In the area of managing working capital, treasury is well positioned to take a leading role in working towards a more efficient use of cash within the supply chain. With financial supply chain management, the company is able to decrease working capital while also increasing supply chain resilience. This is vital for most corporates, since supply chain disruptions are costly.

Against the background of these developments and the increased focus on centralization and standardization, we see that, with treasury in the driving seat and in close cooperation with the AR and AP departments, companies are increasingly outsourcing their payments, and to some extent their collection processes, to a shared service centre (SSC). With the use of a payment and collection factory and concepts like Payment on Behalf of (PoBo) and Receivables on Behalf of (RoBo), corporates are able to increase efficiency, control and visibility significantly. In the light of increased demand for real-time visibility and accessibility of global cash positions, this is considered best market practice.

To conclude, due to the changing role of the treasurer, the remit of the treasury function has expanded. Treasurers can therefore take advantage of new opportunities and thereby add value across the business.