The article by Brian Birkenhead in last month’s edition of Financial Director encouraged management to consider hiring in a specialist team to manage the company’s treasury. A parallel was drawn between outsourcing pension fund management and payroll and extending the idea to outsourcing treasury department operations. Birkenhead was correct to remind readers that treasury management is an area that requires care and expertise. But even more, it requires a clear understanding of what the company is intending to achieve through its treasury department and how its activities will be monitored and controlled. This applies whether or not a treasury is outsourced. A treasury department is concerned with managing the financial risks of a business. The treasurer’s job is to understand the nature of these risks and the way they interact. His recommended action to manage them, within board-approved policy guidelines, will be critical in achieving the added value that can be won from a treasurer’s department as much as from any other business operation. The difficulty with outsourcing this activity is that the bought-in specialist needs to be constantly aware of the changing circumstances of the company and its financial environment. Risks can and do change quickly, and management response needs to be coordinated in a way that is rapid and develops confidence in the solutions proposed. Although not impossible to do with an outside advisor, it is much simpler if a suitably qualified treasurer is employed to carry out this task. Of course, there are certain areas within treasury management that can benefit from specialist input. In his article, Birkenhead mentions the investment of surplus cash, and today many treasurers are using specialist investment companies to add additional value at an acceptable level of risk, through active cash management strategies. These necessarily require a definition of the liquidity constraints on the fund manager to ensure the investment can be realised as required, and these liquidity parameters will interact with the company’s own cash-flow volatility and the availability of any standby funding lines. It is still the treasurer’s job to balance the cost of additional standby funding with the benefits that can be obtained from long-term cash investment. Specialist input in the quantification of foreign exchange hedging can also be valuable where sophisticated hedging strategies, which require an analysis of the correlation between the movements expected in various currencies, are used. Basket hedges can be effective, and cost less, than a multiplicity of hedges that exactly match the underlying exposures but are inefficient in terms of dealing costs. But who is to determine when an unacceptable foreign exchange risk exists? Decisions on how and when to hedge balance sheet and profit generation exposures are quite different from those required on hedging transactional exposures associated with, say, the foreign exchange expected from a future export. To achieve the best results, hedging policies need to be developed at a senior level in the company and must then be incorporated within a marketing strategy. This cannot easily be done by a remote, specialist team whose focus on a company is intermittent and whose views are necessarily expressed in terms of the likely market movements of currencies, rather than on the competitive dynamics of the company’s exports. And there is still a much more fundamental reason why a company should consider carefully before outsourcing all of its treasury operations. A well managed and focused treasury department led by a strong treasury team will add value in the management of its company’s financial risk. It will also act as a fertile ground for training general management in those risks. Many companies, such as British Petroleum, have found substantial benefit from encouraging their high-flying managers to spend a period of time in treasury, in order for them to gain an insight into the dynamics of the way a company is funded and manages financial risk. Even in a small company, where the financial controller often has responsibility for treasury matters, those involved in resolving treasury problems gain greater confidence in handling the more difficult areas of financial management, which can be built on by studying directly for the professional treasury qualifications awarded by the Association of Corporate Treasurers. A good treasurer is a natural successor to a group’s finance director because of the substantial skills he or she will build up in the management of financial exposures. The classic route to the finance director’s job, through the financial controller position, may not serve business so well in the 21st century, in a world that has to grapple with increasing global financial integration and volatility. David Creed is director general of the Association of Corporate Treasurers.
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