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What Keeps the Corporate Treasurer Up at Night?

What can be done to lessen the stress on treasurers so that counting cash during the day doesn’t lead to counting sheep at night?

Bob Stark
Bob Stark
If you look down the annual lists of the most stressful jobs, the corporate treasurer never appears in the top ten. While treasurers certainly don’t face anywhere near the level of acute stress as military and law enforcement do, it’s certainly true the role comes with a certain amount of pressure. Aside from being responsible for managing potentially billions of dollars of corporate cash, treasurers also have to ensure that their organizations generate the highest risk-free returns, all while ensuring adequate liquidity, minimal idle cash, and keeping compliant with myriad internal and external regulations.

With this in mind, what are the key issues that keep the treasurer up at night? More importantly, what can be done to lessen the stress that they cause so that counting cash during the day doesn’t lead to counting sheep at night?

Internal Compliance

While compliance will always be a critical element of the treasurer’s role, it’s less about the prospect of needing to comply with regulations that causes concern, but more about the sinking feeling of“uh oh, our compliance wasn’t good enough,” and the company remains exposed on both an internal and external level.

Internal compliance primarily focuses around the audit and control processes established by the finance department, and the need to ensure that they are both strong and transparent enough to be effective. If the treasurer implements insufficient controls, the potential for either inadvertent or malicious errors increases. Examples include the transmitting of incorrect payments or making the wrong trade (perhaps with an extra ‘0’). While such mistakes are reversible, there are financial costs and the magnitude of those costs depends on just how quickly the errors were found.

A more sinister impact of not having the right controls and checks in place could also be the potential for fraudulent activity to occur, since you don’t have the right procedures to control payments or bank accounts being opened or emptied without your knowledge. While the possibility of a fraudulent event may seem low, it takes only one instance to create a series of sleepless nights.

In addition to error-based and fraud-based compliance issues, treasurers also need to ensure that they comply with internal treasury policies, such as investment counterparty limits or hedging program limits. Even in the event of financial loss, if the treasurer followed policy; at least that may be an acceptable explanation to the CFO and potentially the board. However, if they didn’t follow policy, the oversight could be career limiting.

Regulatory Compliance

External compliance is generally regulatory in nature and therefore the risk of non-compliance is not just financial, but also legal. In the wake of scandals such as Enron, Tyco and AIG a slew of corporate financial regulations have evolved, and the penalties for non-compliance can be significant for both organizations and individuals. While an internal audit identifying financial irregularities or lack of disclosures is certainly embarrassing, should these issues require a restatement of earnings, the potential financial and reputational risk could be enormous.

Treasurers whose organizations have international operations obviously have significantly more regulatory concerns. In addition to the specific regulations for each country where the company has a presence, any organization with a European entity will soon need to comply with SEPA (Single European Payment Area) regulations for credit transfers and direct debits as of February 2014. Additionally, there are still U.S. regulations that need to be complied with. In particular, FBAR requires annual disclosure of all foreign bank accounts. Should a foreign subsidiary set up a local account that the treasurer isn’t aware of and doesn’t disclose, the IRS will levy a stiff penalty – and as anyone who has been audited by the IRS can confirm, ignorance is no defense in the eyes of the law.

Incorrect Decision-making

A key stressor is the fear of making poor decisions and, even more critical, dealing with the fallout of making the wrong decision on a vital issue. Two of the commonest scenarios within treasury leading to gray hairs and sleepless nights, are liquidity challenges and inadequate risk management.

For liquidity, the biggest concern is always the potential or realization of “I don’t have enough cash to meet obligations!” While short-term cash can usually be raised to cover these shortfalls, it is both a stressful and expensive undertaking, and the consequences can be difficult to explain to management, to your bank, to your suppliers – or all of the above. It goes without saying that should a short term cash crunch lead to a long term liquidity crisis, the level of stress engendered within treasury increases exponentially.

For a treasurer and CFO, there is no more stressful event than having to explain why the risk management program was ineffective in protecting against financial loss. For treasurers, significant loss is usually related to counterparty risk or financial risk (i.e., changes in FX, interest, or commodity rates). While it isn’t expected that a U.S. financial institution would fail and not get bailed out, the $250,000 protection provided by the FDIC doesn’t offer much protection should such a scenario occur. More likely, such a failure would temporarily affect liquidity, pointing back to the expensive solutions to raise cash quickly.

Internationally this is a different story for countries that represent sovereign risk. It isn’t too farfetched to imagine one or more southern European countries abandoning the euro, affecting the value of and access to the assets in those locations.

Financial risk due to insufficient or ineffective hedging also has the potential to lead to a significant case of insomnia for the treasurer. Even for a medium-sized treasury with minor FX exposures, not properly protecting the balance sheet or future cash flows against changes in currency rates can easily lead to an erosion of company value. All it takes is a three percent swing in FX rates over a single week to wipe out millions of dollars or more of assets. Failure to protect the business value from changes in market rates makes this an uncomfortable conversation with senior management and investors.

Sleeping Pills for the Treasurer

So, while there are many potential sources of insomnia for treasurer, what can be done to alleviate these concerns and soothe them back to sleep? The two most important elements to consider are effective visibility and accurate forecasting. It can’t be stated enough that for treasurers to minimize concerns and risks relating to compliance, exposures and poor decision-making, they have to first have full visibility of the entire treasury operation.

In practical terms, this means putting tools and processes in place to minimize the likelihood of incorrect data being entered, as well as unauthorized activities taking place from fraudulent payments to bank accounts being opened and accessed. Much of this can also be eased by automating manual processes, such as bank connectivity or signatory management.

Once the treasurer is confident that these tools, processes and controls are in place, and they have full visibility of all their financial positions and exposures – they are enabled to focus on better decision-making. The most important tool that a treasurer has to make effective financial decisions is accurate cash forecast. Without confidence in cash and liquidity projections, no treasury decision can be made. Borrowing, investing, hedging, early payments to suppliers – none of these decisions can be optimized.

With accurate cash forecast, the treasurer is enabled to make good choices that don’t underutilize or over commit financial resources. They know that financial flows are predictable and unexpected events are protected against so that no matter the market condition, the company’s financial assets are safe and generating value. The treasurer is working their capital, so to speak, by leveraging all the tools at their disposal. More importantly, knowing that there won’t be unwelcome surprises will have a dramatic impact on the treasurer’s ability to sleep soundly.

Bob Stark is vice president, strategy, with Kyriba.

Bob has more than 15 years’ experience in the treasury management technology field, working for many of the best known technology providers in the industry. Bob has provided treasury management strategy to some of the world’s largest companies, and is a frequent speaker and author on treasury and cloud computing trends. Therefore, if it’s worth knowing about in the industry, you can assume he knows it. Unsurprisingly with this background, Bob has an answer for everything. Sometimes it’s the right one.

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Mercredi 17 Juillet 2013

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