PUTTING THE ‘STRATEGIC’ IN STRATEGIC TREASURY

Why should Treasurers and treasuries care about being strategic?

In a previous paper Normal, New Normal and Next Normal – A Corporate Treasury Perspective, I concluded that key responsibilities of Treasurers and treasuries are to build corporate resilience to adverse economic conditions and business cycle downturns; and to influence corporate strategic direction.  This is because in the absence of resilience corporations are vulnerable to foreseen and especially unforeseen events; and, in the absence of strategic influence, Treasurers and treasuries passively react rather than proactively lead, hoping that others position the company firstly for survival, and secondly for success.  Hope is not a strategy or a plan.

In addition to the real economic benefits of building resilience and influencing direction, being strategic opens the door for a mutually productive relationship with the Executive and the Board.  It is because Executive and Board focus is strategic, that being strategically influential gives the best opportunity to secure a seat at the decision-making table.  Demonstrating to the Executive and Board how you can help them to deliver on one of their key responsibilities, including designing scenario analyses; integrating strategy with business plans and budgets; and sourcing, structuring and allocating capital to fund implementation; raises the profile of the Treasurer and the treasury both internally and externally to the corporation.

Unfortunately, being strategic means different things to different people.  For me, being strategic is about elevation and extension – elevating focus from your own patch to enterprise-wide; and extending the time horizon to at least ten years in the future.  Think of it as a photographer panning out from a close-up to a panoramic bird’s eye view, in both spatial and temporal dimensions.

Elevating focus and extending the time horizon is challenging.  Data for the distant future can be difficult to obtain.  Once obtained, those estimates are more uncertain than estimates for the near future.  Extra care also must be taken with model assumptions, as the sensitivity of model outputs to model assumptions is likely to increase.  However, overcoming the challenges means that you will gain unique insights into the financial drivers of the corporation and the sensitivity of the drivers to variables and possible future states.  As a result, you will become invaluable to the corporation.

Most Treasurers and treasuries have much more modest ambitions, considering themselves to be cost centres focused on reducing financial risk and reducing their own functional cost base through operational efficiencies.  While these foci are worthy and should continue, the scale of strategic value-add potential is substantial and typically substantially more than operational efficiencies.

Notwithstanding the size of the prize, not everyone is convinced.  I worked for a CFO who said it is not worth looking beyond one year because there is too much uncertainty.  The opposite is true:  it is precisely because the future is uncertain that we must attempt to model it, and the more uncertainty the greater the need.  Modelling is not about precision, it is about reducing real world complexity to something more manageable, consumable, and comprehensible for decision makers.  Scenario and sensitivity analyses are key elements of the Treasurer’s tool kit not only for handling uncertainty, but also for communicating to decision makers that because of the extent of ‘art’ in the ‘science’ of financial economic modelling, we do not rely excessively on model outputs, we instead focus on gaining useful analytical insights.  That is, modelling is performed to support thought, not to be a substitute for it.  Failing to model because of uncertainty guarantees that you will never be prepared for it.

By elevating focus and extending the time horizon, we presented the CFO with submissions identifying corporate financial reforms worth over $750M; and regulatory reforms worth over $1,000M.  Keeping leverage constant, these reforms collectively increased capital funding capacity by over $2,500M, financing necessary infrastructure investment while also building resilience to adverse economic conditions and business cycle downturns.  Value of this magnitude is extremely difficult to create through non-strategic means.

If we accept that being strategic has utility for corporations, Treasurers and treasuries, what steps are necessary to transform an operational treasury into a strategic treasury?

Fortunately, the necessary transformation is evolutionary not revolutionary.  It requires a change in mindset and a change in skillset, but these changes can occur incrementally over time.  This is because strategic treasury is still part of, just further along, the same professional continuum as operational treasury.  In fact, strategic treasuries must build on a strong operational treasury foundation.  Dropping the ball operationally – breaching limits, compliance errors, etc. – will undermine the confidence of the Executive and the Board in treasury and the strategic value in your message either will not be heard or will not be heeded.

A simple example of evolutionary transformation is in the management of cash flows.  Forecasting cash flow is a key pillar of operational treasury, investing or funding cash excesses or shortfalls to meet short-term operational needs.  On the other hand, increasing cash flow is a key pillar of strategic treasury, creating enterprise value to increase capital funding capacity for long-term strategic and operational needs, including growth ambitions sourced organically and/or through M&A.

Another example of evolutionary change is in engagement.  The Treasurer and the treasury must be integrated with, and deeply embedded in, the value chain of the corporation.  Treasurers and treasuries need to be involved early to influence decision-making, as opposed to just funding decisions already made.  Treasurers and treasuries can become indispensable to both Strategy and Risk teams, because of their unique understanding of financial drivers and financial risks, which are usually among the most important criteria for evaluating strategic alternatives and ensuring alignment of risk profiles to the corporate risk appetite.  What has worked very well for me in the past, has been to exploit:

• the responsibility for managing cash flows to follow the arterial flow of cash throughout the company to understand how cash is generated and who consumes it, developing relationships as you go and communicating the importance of increasing cash flow throughout the business
• ownership of the corporate financial model to work closely with Strategy, Risk, Executive and Board to influence corporate direction.

A subsequent paper in this series will explore how Treasurers and treasuries can create and manage for enterprise value, and how increasing enterprise value can be the guiding principle which financial professionals in general, and treasury professionals in particular, rally behind as key contributors to the corporation, as opposed to being small cogs in a large wheel.