TREASURY AND  CASH MANAGEMENT ESSENTIALS

Business operations and stakeholder relations

Effective treasury requires a thorough understanding of the organization's business model and its industry. Developing strong relationships with internal and external stakeholders alike builds credibility and trust in treasury and financing operations.

Business operations

The level and nature of business risks and their impact on cash flows have a material impact on key treasury activities such as managing capital structure, funding and liquidity and financial risks. It is important that those responsible for treasury thoroughly understand the business model and the industry sector within which the organization operates, while supporting and enabling the organization’s business operations and strategy.

Management accountants responsible for treasury activities must stay close to operational management to ensure they understand their view and demonstrate that the interdependency of business strategy and financial strategy is acknowledged by both parties.

For example, whenever an organization issues a tender or price list with foreign currency content and/or with foreign currency costs in the supply chain, the treasurer should understand the risks involved. By working closely with the procurement function, the treasurer can facilitate the debate on whether to procure from one country over another. When a new project or investment is being considered, the treasurer can also give guidance on financing rates, discount rates, entity structuring, cash investment and repatriation, sources and structuring of finance and their impact on the company’s credit rating.

Equally, when the treasurer talks to lenders in the capital markets, understanding both their own sector and that of their lenders is crucial. They should know how each organization compares to its peers as well as to the wider market for risk and return. For example, organizations with high business risk are less likely to take significant financial risks. On the other hand, stable organizations with high-quality earnings may take more financial risks.

Stakeholder relations

Whether it has a dedicated treasury function or not, every business ‘does’ treasury – often without realizing it. Treasury interfaces with a range of business stakeholders, and it is vital that the management accounting, tax and treasury functions are all properly aligned and mutually supportive. Treasury is a specialist practice that focuses on the security of funding, the liquidity of the business and the yield from investments; as such, it is vital to effective and trustworthy management accounting. To do its job effectively, treasury (however it is structured) relies on building credibility and trust, both throughout the business and externally.

Figure 4: Treasury relationships

Treasury relationships

Management accountants responsible for treasury will have relationships at all levels in the business, from the CFO, Board members and (in larger or listed companies) Board Committees such as Audit and Risk Management, downwards through divisional management to the line staff running day-to-day operations and processes. Across other business functions, strong relationships are formed with tax, commercial, legal and other support functions as well as those running pension or employee-benefit schemes.

Externally, treasury professionals articulate the organization’s credit strength and its strategy and model for value creation. They also ensure that the business is at all times provided with the financial products and services it needs, from high-quality sources and at an appropriate post-tax cost.

Typical external relationships include not only lenders and potential lenders, but also publishers of credit ratings, external accounting, tax and other advisers, systems and information providers, insurers, employee-benefits providers, government agencies and auditors. Since the 2008 global financial crisis, regulation, market forces and technology have been among the factors which have driven fundamental and far-reaching changes in the provision of finance. For this reason, external relationships are every bit as important as internal ones.

Own credit risk

Presenting and explaining your own organization’s credit standing to external parties will influence their willingness to do business with you and the terms they will demand. This applies to your suppliers, your lenders and lessors alike. Even your clients and customers will want to assess the likelihood that you will still be in business to honor your commitments in the months and years ahead.

Larger organizations that issue publicly traded bonds may have a formal credit rating from international credit-rating agencies. Almost all organizations will find they have at some point been assessed by a credit-reference agency, an organization that performs a fairly mechanized analysis of publicly available information such as annual accounts, invoice-payment histories and court orders.

Credit analysis will start with an organization’s historical performance, supplemented with forecasts, projections and perhaps an audit of assets. Analysts typically consider the quality of an organization’s senior management, the credibility of their strategy and its financial flexibility when developing their forecasts.

The business plan and cash flow should be stress-tested in a variety of scenarios to demonstrate the business’s compliance with loan covenants, re-financing abilities and other limiting factors. Credit analysts focus on how the organization controls potential downside risks. They are less interested in outperformance on the upside, which is more the domain of equity analysts.

Getting ahead – The management accountant’s perspective

Managers need to understand how their organization appears to a lender, including not only their credit profile but also the economic business case where lending is part of a wider relationship. Management accountants should actively manage the credit standing of their organization and routinely report it in their management information. The initiatives, activities and processes that drive the organization’s credit standing should form the basis of the 'narrative' that explains how the credit standing is achieved and how the business plans to sustain or improve it. This narrative might include the ratings agencies involved, the relationship-management initiatives and processes that are in place with them and the factors that they assess.


Tool: Credit Agencies
TOOL
CREDIT AGENCIES
 

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