Managing Modern World Treasury: How Should Treasury Measure Its Success

Bruce Lynn: [00:04]
Over the next 45 minutes or so, we’ll talk about Treasury. And really this whole presentation is Organized around one simple question, those Treasury measures. Now if you are in a corporation and you were asked that question, CFO, you’d probably get answers like market or earnings, market growth, or some sort of number that is really oriented. That’s not bad. I’m not saying throw that out. That’s a very one-dimensional view of a corporation’s performance. Hers is we’re all as people found out. Interest rates are rising. Supply chain issues are political situations. A lot of uncertainty. We’ll go through this in a minute. Tell you sort of what I think is happening. So it gets back to the idea of how do you measure. Yes. Earnings for Treasury earnings isn’t really going to help them. I would argue that earnings alone is not a corporation. I mean, for example, you can’t borrow from a bank, really care what the prices. prices is infinite as you can’t borrow anymore. So you have a problem. We’re going to talk a little bit here about today’s world and. Okay. About the only thing out on today’s world. Uncertainty is for certain. And so we’ll talk about today’s world. Also talk a little bit about today’s Treasury and where most Treasury departments are. Then we’ll move on to what I’ll call the perfect Treasury module and perfect of course, I’ll be older and then we’ll go from there into building a business case to go from what I call the traditional to the modern treasury. And along the way, we have to measure success. First question, really? And again, this is more of a show of hands. You have success measures. I have to reason. And if you don’t want to, but when I’ve done this in the past, the answer is, well, sort of. And we’ve got something if I talk to the CFO and and he says, if, you know, if you do this, I’ll get a bonus. That’s not exactly where I’m going with that. That’s not really a measure of success maybe for you personally. But what about your department? So let me just give you a little bit of view about the business of Treasury. Treasury is in the liquidity risk business. And so questions like how much liquidity is enough? How much much are the questions you have to answer? I have to have metrics, measure those factors. That’s not the same thing as earnings. But again, if you’re out of cash. Ere what your profits were last year. Can’t pay your bills. Can’t pay. And you know, the old saying is you can’t pay payroll with profits. Ash has to come from someplace. Really? Only have two choices. Bake it or buy it. Baking it, of course, is operating cash flow, selling something, or then pay for it. Ash comes in eventually. Why it’s important to collect your receivables. The cash comes in and that’s great. But what do you do between the time the cash goes out and the cash comes in, or you want to buy your competitor? Where’s that cash coming from? That’s probably more cash that’s coming in. So you have to buy it. You have to go into the capital markets or then subject to forces way beyond your control. Rates other. Early access enough capital. So give me an idea here about liquidity. This is the 439 companies, the S&P 500, about the banks. And it gives you an idea about some companies are better off than other companies. For example, you look at technology. Read. Bio is a total debt or term long term. And the other ones are, let’s say, the blue one, for example, cash and short term investment. If you have a lot of debt. Then you need to worry about how you’re going to pay that back. So have enough liquidity. Pay that back. You’re not paying it back at. However, I have to pay some of it back at some point in time. So take a look at this chart here. Green ones by the by our working capital. And the other one is another one is free cash flow and the technology boys are in pretty good shape. I mean, if they had to, they could pay off, you know, half their. Roughly half. They’re dead today, but it doesn’t all come to maturity as the one thing this chart does not show. But if you’re some of the other industries like energy. Industrial. I think you got more of a problem about your cash flow statement. What that means in earnings is not enough. Earnings is one dimension needs some other dimensions, like liquidity or like risk. Think of these balls have to have up in the air after all right. Now about what I can juggle. Oh. This is the question I have to ask yourself. Have enough liquidity in some industries. You don’t care. Apple has last i. $1 billion of fashion. I don’t think they need that to come out with iPhone 14. Oh, you probably have enough cash. I’m not too sure. Interest inflation, GDP growth is to give you a sort of a flavor going. This is from Reuters. And you can see up here in the top circle. Observe their idea. E Growth and inflation is circle in the middle. Or I guess. But you can see inflation is down sometime in 2023. Interest rates. Rates are going up. Which means that if you are heavily leveraged, uh, the cost or interest expense cost, you could double. And so whether you got fixed or variable voting rate yet, but if you have a lot of variable debt and you don’t do something to. Refinance that interest expense go up. You are marginally profitable now. It could kill you. So again, it depends on the industry, but it’s not both. Both not so great error rates going up. I think what industry you’re in your recipe. Unhappiness. And then you look at this chart here, courtesy of the Association for Financial Professionals. They did a survey. They talked about risk and got here. Over half the group surveyed. Does that be a risk? Oh. How much up? Those in the future. But they expect more volatility. So I think that as I look into 2020. Really. I think the watchwords for Treasury well as a company is, quite frankly, ability. Alien, Billy, ever. I’d like to point out at the. Lookouts on the Titanic did see the iceberg. It’s money out of the way, not agile. So can’t understand exactly what’s going on. I have to do that quickly. However. I think. Watchful waiting, I guess, is other. Yeah. There’s a lot of risks to talk about and possibly talk about them in 5 minutes, X couple of days. So I’m going to focus on financial. These are volatility associated with changes in. Ranges, commodity prices changes or exchange rates which as you see in the in the scheme of things and again. Look at the bottom half from the bottom up and what to worry about. These are some risks. Worry about in surveys. Financial risks are too right up there. One of the important. No liquidity in risk. That’s what we’re trying to talk about. Now the CFO obviously is concerned about certain things. And if the Treasury aren’t, they would. But some of the same things. And in fact. Look at. Lineup UFO things important as we went there in not too bad of a. Up to one, two or to one. That’s good. Okay. So we really have to look at oh, but you look at cash and liquidity and funding and capital structure. The CFO, when you think about that, has to look at the capital markets. By definition, no company. Capital markets. Oh, there’s one right there. All prices and to some extent have some control have zero control over. Broken. Are highly leveraged or you. Countries. The chances of that affecting your earnings are large. Strengthens, Euro, weakens. All those large profits coming in. HERBERT Now worth less. Best. You about that? Well, there are things you can do, but any. So you have to align these things and quite frankly, makes it easier if you have a structure or competition. Infrastructure within your company makes it simple. I have an industrial bearing and. A mantra here is fewer moving parts. Or parts you have to worry about. The more things fail. If you have fewer bank accounts and simplified bank structure, you can move your money around much and add more complicated structure. I had a client that had. Bank accounts in 50 banks around the world. They think they had money, but they couldn’t move it from one pocket of their pants to the other. You know, they were always borrowing. Now my argument here is Treasury. Really focused on asset. Too much processing? I don’t know. The words air resources treasury by the. All companies under about 500 million sales. Have a true. Oh. To them, cashmere. Really more about magic. About reconciling. That’s nice, but. Of 10 million banked, all reconciles. And talk about what it ends on. So a lot of companies with or without Treasury Department focused on the bottom there. A. Transactional approach. I’m suggesting it on a moving order and Treasury want to go up that Feingold are talking about on balance. Enlist. That. And. Top pinnacle. Worrying about what if? But what if this happened? It happened again. Yeah. I’d have to react. So you want to go from processing to planning on to move official treasury project? Asset. I had another client. On. Posing. Herbert. Oh. Know what happened 28 days ago. Thank. I don’t happen yesterday. So the idea that wasn’t. Actions, not the credit. That’s a problem. I just have to look at it. That’s not enough. That’s the beginning of. You want to start moving up and. Giving away. Otter, in fact, again, based on some surveys happening at. Each approach that if a wants or one almost basic. About funding more about interacting markets. However, a lot of the resources are on the processing. So there’s an. One of the reasons. Make a way out of grunt work. So you can focus on the work, which is, quite frankly, biting. Oh. And it’s something that episode. Teams. Want to get into. Don’t you make? So in our. Issues focused on, again, on the fact that everybody wants to be Egypt but not their. That’s boring. Too many spreadsheet. So you need to consider that. It just really to change your focus. So here is here’s this chart again. The AP did this. They asked people, okay, are you a strategic treasury? Have you moved away from the traditional side? And I think the good news here is that there are more strategic treasuries today than they used to be. Captured. However, the bad news is in among in this survey, only 22% of the Treasury Department said their strategic. And that’s after three years. If he does just about every. No, no. This is a little out of date. I think they did this on a pre pre-pandemic. He. But the trends have been not so good. So we’re talking about this and why aren’t people moving toward ESRI? And I would argue that, quite frankly, a lack of metrics allow you to know whether you add. So if you don’t know whether you’re any better and we just sort of do what we do and hopefully, you know, it works out, that’s not really a good approach if you. So again, the question is, well, what’s spending things? What’s preventing Treasury? I mean, strategic. Is it Baff levels, banking, network, technology, IPS? So these are the kinds of questions that you should be asking. And then as you’re doing that, you then have to come up with, okay, we throw everything out. What is the perfect? Where should we be going? And I know what you know, I devil. I know I do that. Swift 15 step process, but I know 15 steps. If I throw them out, whatever, what do I replace it with? Well, here’s a here’s a model. And again, a 50,000 foot model. But Treasury is really from an outside in an inside approach to outside approaches the financial markets which. Controllable from a corporate perspective. Then you have all the users inside the company. That’s the box on the right hand side. And Treasury really has four different functions as to. Link one to another. Again, this is where technology. Really. Baber today the technology in use. It’s a very nice 1980s technology, but we’re a little bit long in the tooth when it comes to that. Although everybody likes spreadsheets and like paper, I don’t think it’s going away any time soon. And not that spreadsheets are bad, but they’re not enough. It’s just like using, you know, it’s just like we want to build a pyramid and do it with shovels. But, you know, earth moving equipment is so much more you know, you have to get better tool. Anyway. You see the relationships here. You’ve got cash management, risk management, asset management and investment management. Right. Assets. Liabilities. Cash flow. Risk is one of those things about, well, it all goes wrong. How do I know that? That’s the analytical side. And again, you want to have some policies in place. We want to have, you know, integrated. You want to have standards to communicate one to another. So you want to add value and be honest, processing a transaction at a higher. No, I don’t think that’s where you want to spend a lot of your time. So you want to move away from the traditional side into the more modern, what I call planning side. And I’m suggesting you use what I will call a four flows model. Sort of a shorthand or. Workflows. Cash flows. Accounting flows. Patient. And these things have to flow. My air is your AP. It flows from one to another for inputs, processing and outputs. And my outputs are usually somebody else’s inputs. So they have to link together sort of where these little arrows are. These are the flows as things work together. Start with information, let’s say, from your bank or outside of the corporate envelope. And information comes in, you put it together. And you could be organized this way or that way. You’ll have to sum this stuff together. You then bring in the internal information or cash. We’re doing a short term forecast. You probably want information from R or your AP. Who am I paying tomorrow? What money is coming in that I build 28 days ago? Whatever. And while that together you worry about the currencies. Heroes. What’s coming in tomorrow? Oh, do I want to buy currencies? Sell currencies? I put this into my cash position in functional currencies. By organizational structures, you have to slice and dice it. What makes sense for your company’s performance, which again is why technologies so much more efficient than trying to do this by hand. Once you know that you invest or do I borrow? 9:00 in the morning. Where in the world is my cash? 11:00 in the morning. Do I invest or do I borrow? And then after you figure that out, maybe in the afternoon you issue instructions to your bank. You have as if you’re doing this by hand or whatever. If you have an automated system system, then create the accounting entries and system. Your system, treasury management system flows to the ERP system so you have information flows, accounting flows, workflows. All these flows have to be audited. If you look at this from Earth, from these kinds of flows, I think it’s a little simpler trying to figure out which spreadsheet going to which email address. Not really, but looking. And again, let me just go back here again. You’ve got the relationships between the various functions or companies are organized in certain ways. You’ve got the business units, you’ve got Treasury, you’ve got FPGA, you’ve got the back office. And again, all of these people and organizations have to know what’s going on. Having a workflow and having a chart. It’s a good thing. One of the things I do when I try to consult with companies. Okay. Can you sketch me out how all of your flows run from one bank account to another or one other do? Surprisingly, those charts don’t exist. Someone’s head someplace. Well, you know what? On at 11:00, you know, Susie sends me an email and no one knows. I mean, even the account numbers are used incorrectly, and a lot of companies stop bleeding. Rose at leading. So no one really knows where some of this stuff is. Let’s just talk about systems for a minute. I mean, systems to me are sort of the glue that holds whether, again, you can do all this stuff by hand. Well-meaning people. What I like to call the conspiracy of the competent overcomes a lot of failure. But if you have a nice system and again you have information flows moving from, let’s say, your banks, treasury management system, your forecast systems and things flow projections about two oceans to your various reports of investor management reports, whatever a lot simpler if you have, you know, where all these flows come from. And quite frankly, the fewer spreadsheet used, the better off you are. I always like to joke that if you know how many spreadsheet takes to run your company probably should be embarrassed. You don’t know how many spreadsheet it takes to run. I believe should be embarrassed. No. It’s not a good situation when you have. So the issue now becomes one of how do I go from, you know, sort of from less than perfect to perfect? I need to know whether I’m getting any better or not. And now we’re getting into the idea of. So how do you build a business case for making change? And quite frankly, you can’t do this. On duct tape and a can opener you need to make an investment in. Oh. Systems. Also, you need to coordinate with the other people that are in other organizations as you try to do this on itself. It would fail. As I output as somebody else. Now, again, we’re talking about accounting. Talking about financial planning. Are you different areas? The business units. I mean, business units. Treasury has very little control over sales. It has some control, perhaps on the frequency of which the company gets paid and maybe even in the currency in which you get paid. But cost of goods sold. Not really. So, again, Treasury can act as a as a consultant, help around the edges. But do credit sales, debit air as we do there, represent a different currency? Treasury should know about that. Because if you when the time you get that collected in that 30 days, if the rate changes in that euro receivable, you’re going to get less euros or but you’re going to get less euros in 30 days. Nobody should know about that. So that is gain and loss. And we’re on the piano in a much. So let’s talk about how you can move to a modern treasury. And again, you’d have to do this in an integrated fashion. So here is sort of a basic chart. And again, this is binary, obviously. But you look at what is important to Treasury on the left hand side and across the top, the flows I was talking about and how these integrate one to another. And each cell needs to be worked on and agreed to by the people involved. And again, we’re talking here legal entities, for example. I’ve worked for companies which have 800 different entities. Every legal entity had a bank account. So it is a real mish mash. And what happens there is sometimes when a legal entity will not have enough cash, it will borrow from another legal. Okay, that’s good. But now you have interest expense or you should have interest expense or interest income. So if I am the cash agent or the company, I am basically funding all the other or the losers the company. Do I get for that? No, that kind of. Policy encourages good performance because the person who has the cash is lending it to the person who doesn’t have the cash. And again, on a large scale that would banks do don’t have the cash. I’ll be glad to lend it to you if you pay me. So why not have that same. Rewards. But again, you have to integrate all this. And this is this is a start. Now you want to build a business case for change. Well, how do we do that? That’s nice to have an integration chart. But why? Why should I do that? What’s in it for me? And I think that’s important. So who benefit? Interesting enough, Treasury is not the only area that will benefit. Age. And so this has to be explained to the other areas so that they work with you, not just say, oh, you’re from Treasury away. My my job is sales. That’s all I’m interested in. Yeah, but why are you selling a tie? Baht. It’s not worth anything. Oh, it’s a sale. It’s not worth anything to the company. Currency ones. So you have to be able to ordinate all of these things on the left. And there are benefits here. Interest income staff, staff timing in which which who benefits from? What is difficult to say right here. And so you can see from some of the. Here you go. The things in green, I think, are easier to measure. The things in orange are harder. Some things are really, really difficult to measure. Rollerball compliance, ample operating risks. It’s tough to stand here today and say, well, this is a tricky. I have some metrics here in a moment which are what I call a starter set, but depending on your business, they may be useful. But the important part here is that and build a business. And other people outside of your unit will benefit if you work together. Everybody gets more. So we’re still at the question about how do you measure success? And here is my starter kit. You know, again, you have to start someplace, so take the, um. Eight or ten. And some of them are pretty simple. One of my favorites. I mean, if I had to bet my salary on one metric that if I would understand it would be cash flow. And there are many companies, public companies mostly, that do promise to the street as part of their presentation order. Their free cash flow numbers. And free cash flow is operating cash flow. Minus CapEx and and minus dividends sometime. That’s sometimes they don’t. Which means that if I can’t generate enough cash a. Or my cap ex. Why would someone else outside of my company. I need a new plan. I’m not generating enough money to buy or build that new plan. I’m not really generating enough cash. I’m going to go out of business because annually I’ll be producing the buggy whips and nobody wants. Because I didn’t reinvest in my business. So free cash flow is one of the great numbers that I would I would argue, should be measured on on a business. But there’s others, for example, I mean, simple cash on hand. You have $10 million. Is that good or bad? Well, I thought I’d have 20. Well, that’s not so good, though. Something as simple as having a cash flow cash balance target is. One of my other favorites is what I call Day’s Cash on Hand. A sales outstanding is cash on hand, which means I have $10 million of cash in the bank. I have $10 million with liabilities. Current liabilities. I got about eight cash on hand. Well, that could be good. It could be bad. And again, so that’s just a start. But if I have $10 million of cash on hand and I’ve got $50 million in current liabilities, I got a problem. Unless you go into some of these other metrics like cash conversion cycle. My cash conversion cycle is three days. I know I will have more cash in three days. So again, you have to look at all of these metrics and look at them and balancing. This is, to me, the more exciting part than, say, credit or debit. What’s the general ledger number again? So here is a starter set. The most difficult one is at the bottom. Ray Rock. I don’t know if you’ve heard of Ray Kroc. Risk Adjusted Return on capital. Banks live and die by this. Most corporations, most non-financial are. And the idea is that sure, I return a certain amount to my capital, actually. The question now is on a risk adjusted basis. Enough. Because if I take a lot of risks, well, generate a lot of return. But when it goes bad. And I’m in trouble. So I have to know whether I really return the money. I got that right now. And a lot of money on Twitter. Maybe make money, maybe won’t. He doesn’t care. I don’t know. He’s got it. He’s got a lot of money, but most people would care. So the idea of having a metric kit or a starter kit for Treasury, I think it’s important and it’s important because now, you know, whether it makes sense to him or you. Or I think you should be in today’s. Now. How do you do that? Again, this is where we. This is some ideas to get started, and it’s nice to know that maybe you’re in the wrong place. Maybe. RG Actress How do we make it happen? And let’s start, you know, sort of simple, which is take a look at your banking network. How many banks? How many bank accounts? It’s just very hard. Back to many things. So try to simplify that. Then take a look at I some simple target balances. How much money do you wish to leave? Again, it forces you to talk about cash forecasting. You don’t want to leave. Too little bang. A little cash. Pay your bills. Well, how much have in terms of bills? I mean, the next week, next month, next year. So I want to keep X amount, but something as simple as a target balance number is better than what I reconcile. Thank you. I had a I did that. I figured out that it was really too much money in the bank was not invested properly. In other words, I was underinvested or I. Overborrowed. Therefore, that cash was properly in cash. What should you do with it as a higher value? Take a look at your. Thanks Services. And I don’t know if you realize this, but banks charge money. They are not a nonprofit organization. Well, how much money are they charging you? I had one client that was spending 350,000 a month. On their bank’s service fee. A B to C. I have a business. They had 7 million companies, 7 million consumers. So one of the things that they were doing was they were using too much paper and not enough plastic. And banks will certainly process your paper payments, but they will charge you more. And if I tronic electrons are cheaper than paper. So take a look at that. And maybe what you can do there is that in that chunk of money, you can actually use that to reinvest in a new treasury system. Look, if I collect so much cash and that cash is worth X and that enough of money to buy me it was system. But again, you have to you know, it has to be planned here. But we’re going from easy to hard and working with other units because all the benefits aren’t going to be, you know, you. They should help you. Same thing about upgrading your Treasury technology. Want to make sure that you have some ideas in place where you go out. If I say, excuse me, I’d like to spend $100,000 on a system. What do I get for 100,000? Well, by looking at the first four things, I would. You can figure that out. Again, this is getting harder and harder. No, a pooling and netting. I don’t know if people are arranging or familiar with pooling and netting, but. All the cash balances have and then you at various transactions. So if you have money all over the world, you want let’s say you have money in France and you have money. Might expect to cost more to borrow ever batsman. Oh. Why would you want? Borrowings of excess money grants by pooling those balances is by pooling those balances, eliminate some of the intercompany or bad company borrowings. Again, reduce your expenses and then house bank. Same thing. Want to have Treasury act? Especially if you’re netting transactions. I.O.U. You owe them. They owe, though. I mean, you can have multilateral flows all over the place. Every complex our Treasury acts as the bank, everybody owes Treasury as it pays out. Or in excess money comes the Treasury and Treasury gives you. Earnings as you gave them more cash by having an in-house bank eliminate operational flows. Property expenses. Make more money on your money. But it’s not easy. Don’t do that. Or analytical tools to analyze risk. Again, this is getting more and more complex. But are we talking? And again, this gets a complex software. By now you’re modeling your cash flow modeling companies, and in your organism, actually, it’ll be a lot of inputs and components. Ripple through effect. This is to me, these are the last two. I think this number nine actually important. Think about this. When you people get their bonuses, what do they get? Bonuses? The bonuses for sales. It bonuses, but the bonuses for cash flow. Maybe not. And quite frankly, being a little cynical, if you don’t pay somebody to do something, they won’t. So if you have cash flow is important. But it is important. Risk is important. You have to add that into the bonus. That is. Political punches. So that’s why it is really, really difficult. And that comes to the last part here. Really. You need to work with your. COLLINS Because they’re not going to do it on their own. They need some help. Treasury is by having the right people. I have certain. Not in the. Oh. You want to work with. Buys them uncertainty. It just might not be you. Again. So a lot of the other things I just mentioned could happen. So if you try to do some of these, all of these, take them again, slow one at a time. I mean, the integration plans, if you talk to, I think that you’ll be able to come up with a way. Really optimizing some of the uncertainty. But I happen. That. Done. And it’s now time for lunch.