At many organizations, the treasury department traditionally has operated behind the scenes. As long as no significant problems arose -- say, a bank relationship went sour -- management often didn't see a need to pay much attention to it. "It's typically been a back-office, transactional function. No one looked at it as a strategic gold mine," says Lalig J. Musserian, director of research and sales operations with Aberdeen Group in Boston.
That's changing. "This function is at a crossroads," Musserian observes. Senior executives now recognize that by streamlining processes and introducing appropriate technology in the treasury department they can cut expenses and increase profits. Equally important, most management teams are making a concerted effort to ensure that their treasury function complies with Sarbanes-Oxley and other government regulations.
Many treasurers are searching for tools and tactics they can use to shorten transaction-processing time, better manage financial information and improve the accuracy of their cash forecasting capabilities. While these objectives have been part of the treasury landscape for the past five to 10 years, the pressure to achieve them has recently increased, says Bent Benjaminsen, senior vice president of business development with technology provider SunGard AvantGard in Calabasas, Calif.
That view finds strong support in the results of an online survey of finance and management professionals at 167 companies conducted by Aberdeen Group and Business Finance, and sponsored by SunGard AvantGard. The survey was conducted in February and March of this year.
The survey demographics break down as follows: 68 percent of respondents were from North America and 19 percent from Europe. Respondents were fairly evenly split between those with revenue of more than $1 billion, at 36 percent; businesses with revenue of $50 million to $1 billion, at 35 percent; and those with revenues of less than $50 million, at 29 percent. Twenty-eight percent of survey participants were from the services and high-tech sectors, 27 percent were from manufacturing, and 12 percent from retail and wholesale.
Focus on Treasury Sharpens
More than four in five survey respondents, 81 percent, indicated that executives within their company plan to increase their focus on treasury and cash management over the upcoming 12 to 18 months. The top reason for this is the pressure to reduce costs, which was cited by 60 percent of respondents. Fifty-three percent of participants listed internal control and compliance requirements as a motivator to zero in on treasury. And the push to increase profit margins was mentioned by 39 percent of respondents. (See figure 1 below.)
Many companies already have taken steps to improve their treasury and cash management operations. Frederick A. Schacknies has seen this within his own firm. Schacknies is director of the in-house bank and treasury director with Lucent Technologies, a systems, services and software designer in Murray Hill, N.J. "Over the last five to six years, we've been actively involved in re-engineering core treasury processes," he says. "Our main objectives were driving efficiency (financial and process) and, in addition, gaining control and visibility.
"A compounded financial solution comes when you break down silos and look at functions holistically," Schacknies says. To achieve these goals, Lucent implemented a treasury solution from London-based strategic software provider Trema. Schacknies and his team integrated seemingly disparate areas of treasury, such as the management of foreign exchange exposures, cash reconciliation and accounting. By implementing the Trema system, Schacknies also gained the ability to run several comprehensive reports from within the software, such as a statement showing fx exposure along with forecasted cash flows and current cash balances.
In addition, the treasury department itself underwent some reorganization. For example, functions such as fx trading and investment, which had been handled regionally, now are managed centrally. Management also wanted to reduce the use of external services and increase the amount of cash that was pooled and actively invested. Previously, Lucent outsourced several treasury services, such as intercompany payment netting and accounting for intercompany loans. The organization has been able to discontinue the use of these services and save those costs.
The Goal Is Control
Survey findings point out a clear need for greater control over the treasury function at most companies. For instance, fully two-thirds of survey participants reported that their treasury staff lacks complete control over all their organization's bank accounts. Even many companies that are not public, and therefore not required to comply with Sarbanes-Oxley, are trying to establish the control environment outlined within the legislation. "Cash is the lifeblood of companies; it's what companies live on, so it's critical to have control," says David Lifschitz, vice president of finance and CFO with Gehr Enterprises in Los Angeles. Gehr has operations in manufacturing, wholesale and distribution.
Despite the criticisms some observers have heaped on Sarbanes-Oxley -- for example, that complying with its many provisions is inordinately expensive and time-consuming -- the law brought to the forefront the need for unambiguous control over corporate funds. "Cash is relatively easy to steal if there's poor internal control. It takes just one loophole or collusion between a couple of people," Lifschitz says. "Good internal controls are also good business."
Twenty-one percent of survey respondents listed international risk as a driver behind the increased focus on treasury, and twenty-six percent of companies with revenues exceeding $1 billion identified better managing foreign exchange risk as a top goal. The increasing globalization of the business world is prompting greater attention to treasury at Indianapolis-based Norwood Promotional Products Inc., says Beth Williams, vice president of finance. "The whole payment stream with foreign businesses can be overwhelming," she says. The company purchases about 80 percent of its products from Asian suppliers.
To gain better insight into the company's upcoming cash flows, Williams and her team have been working more closely with their colleagues in manufacturing. For instance, Williams is proactively obtaining information from sales and collections on a monthly, weekly or even daily basis. "It's [about] getting us information to better manage and plan for our cash needs," she says.
Revisiting Metrics
Even as treasury operations have grown inc-reasingly complex, many companies have continued to use relatively unsophisticated measures to gauge operations. For instance, 58 percent of companies look at total annual banking fees, 55 percent track the average collection period for accounts receivable, and 40 percent watch the average payment period for accounts payable.
These measures provide an indication of the effectiveness of specific areas of treasury and cash management. However, as the business environment and the treasury function become more complex, the need for more sophisticated treasury performance metrics increases.
For example, a growing number of companies transact business around the world and have to consider currency risks. Lucent's treasury function measures the risk of the company's foreign exchange portfolio using statistical tools to assess the likely worst-case loss. "We look at the volatility and correlation of our currencies," Schacknies says. Lucent also tracks the volume of transactions processed through its in-house bank. In fact, the company estimates that it was able to add $5 million to the bottom line in 2005, the first full year the bank was in operation. The boost was a result of reduced foreign exchange transactions, better pooling and investing of cash, and the elimination of some transaction fees.
The Shift toCentralized Organizations
Centralization is often a step toward creating an in-house bank, and the report reveals that many treasury operations are moving to centralized organizational structures. Thirty-three percent of respondents list this as one of their top three goals. Forty percent of respondents indicated that their company currently operates under an enterprisewide centralized structure, while 27 percent combine centralized and decentralized structures. (See figure 2.)
In 2004, Norwood Promotional Products moved from a decentralized treasury structure to a shared-services environment in which different treasury functions, such as accounts payable and receivable, are handled by a single department. The goals of this transition were to boost efficiency and control. Those are the same reasons that Williams is working to reduce the number of Norwood's bank accounts from about 27 to 11; fewer accounts will be easier to administer.
Lagging Investments In Technology
One key survey finding is the gap between treasurers' desire for automation and the actual state of many treasury operations. Currently, half the treasury processes at most companies are manual or completed using spreadsheets. For example, 48 percent of respondents manually process accounts payable; 45 percent manually process accounts receivable. (See figure 3.)
Perhaps this isn't surprising, given that 50 percent of respondents had implemented no new technology in treasury and cash management over the past 12 to 18 months. (See figure 4.) That number rises to 63 percent for companies with revenues below $50 million. Cost is one reason for the lack of investment. "It is hard to make a financial case for automation, since implementing solutions doesn't give a fast return," says Viktoriya Sadlovska, a research analyst with Aberdeen Group. Sadlov-ska also contributed to the survey analysis and report.
In addition, many smaller companies simply don't have the need for expensive technology implementations. "As far as investing in technology, we're planning on that, but down the road as we gain size," says Efstratios Psarianos, president and lead consultant with SPP Consultants, a Montreal-based organization focused on process optimization and control engineering.
Plus, many treasurers have been burned by past technology implementations that failed to live up to their hype, Benjaminsen notes. "Treasurers have been bombarded with promises that technology would solve everything," he says. "Now they're asking, 'what did we get out of it?' " Too many have found that the benefits didn't justify the costs.
As a result, treasurers today are considering only investments in which they'll earn a return quickly, Benjaminsen notes. "They want to see returns within months."
Many companies have installed relatively inexpensive scanners to make electronic images of checks; the images, rather than the actual paper checks, can be electronically transmitted to the bank. DSU Peterbilt & GMC Inc., a Portland, Ore.-based truck dealer, now scans the 300-some checks it receives at its office each day as payment for trucks, parts and services. "It's been real key for us," says Patrick Howard, controller. "If someone buys a truck at 5 p.m., we can scan the check right then."
Future Technology Investments
Treasurers remain cautious, but they are also starting to recognize that some investments are needed in order to automate processes and increase efficiency. Going forward, it appears that investments in treasury technology will pick up. Nearly half (49 percent) of respondents stated that automating financial transactions was one of their top three goals.
Treasurers in the survey identified several areas in which they planned to invest within the next 18 months. For instance, while only 19 percent of respondents currently have integrated rules-based alerts into their treasury workflow so that they are notified electronically when a transaction falls outside established parameters, 46 percent plan to implement this technology. (See figure 5 below.) "That's probably the biggest thing people are looking at, so that they know where to focus," says Benjaminsen. Forty-one percent of those surveyed are aiming to adopt financial analytics tools and 35 percent want to utilize e-signature or other encryption technology.
Less popular solutions include third-party payroll disbursement, which only 14 percent of respondents plan to implement. Accounts receivable conversion through a lockbox is on deck for 16 percent of surveyed companies.
Investment in big-ticket technology can pay off. According to Aberdeen Group's analysis of the survey data, 50 percent of companies with revenues of $1 billion or more that had implemented integrated treasury and cash management solutions had both knowledge of and control over their bank accounts. In contrast, zero percent of companies this size with bank-hosted solutions reported having full control over their bank accounts.
Norwood Promotional Products is moving to a PeopleSoft platform to replace the half-dozen legacy financial systems (mostly acquired when the company bought other firms) that it's currently using. "It will get us away from spreadsheet analysis," says Williams, and thereby save staff time and labor.
The findings shift a bit for companies with revenues of less than $1 billion. Here, bank-hosted solutions provide greater control and knowledge of bank accounts than do vendor solutions. In fact, 56 percent of treasurers using bank-hosted solutions indicated that they had both knowledge of and control over their accounts; that compares with 40 percent of companies using vendor solutions.
Midsize companies are the largest users of bank-hosted technology; 12 percent of firms with revenues of between $50 million and $1 billion take advantage of this resource. That compares with 7 percent of companies with top lines under $50 million and 4 percent of $1 billion-plus firms.
DSU Peterbilt & GMC has effectively deployed bank-hosted technology. For the past three years, the company has been able to check its consolidated bank account balances online each morning. "We pretty much have full knowledge of our bank account balances now," says Howard.
Enhancing Cash-Flow Forecasting
As Howard's comment indicates, treasurers do more than process transactions and maneuver cash. "Treasury people are looked at as money managers, but we spend as much time managing information," Schacknies notes.
However, that often becomes a challenging task. Twenty-eight percent of survey participants have found it difficult to access financial information within their firms, and twenty-six percent struggle with redundant data. Perhaps not surprisingly then, the inability to accurately predict available funds emerged as the top internal hindrance to optimizing treasury and cash-flow forecasting, reported by two-thirds of survey respondents. This is crucial, of course, because it can undermine treasurers' efforts to produce reliable budgets, effectively allocate funds and manage working capital.
Enhancing cash flow forecasting is an ongoing effort at SPP Consultants, says Psarianos. "We're project-oriented," he notes; to get a handle on the company's overall cash inflows and outflows, the project managers get together weekly. Psarianos can see what stage each project is at and determine when project income and outlays -- such as expenses for the specialized consultants that the firm uses for its engagements -- will likely hit the books.
Clearly, obtaining a forecast of capital that's as accurate as possible is key. However, Schacknies believes that treasurers, particularly at very large companies, will never obtain a perfect view of the future volatility and uncertainty of their organizations' operations.
Instead, he says, they need to focus on adapting to the inherent ups and downs of business. They can do this by building into their processes the tools needed to cope with uncertainty. For example, Schacknies says, they can learn how to appropriately use options such as hedging tools, and they can introduce statistical and probability models into functions like cash operations.
"I'm not trying to undermine the value of trying to get an [accurate] forecast. You should always try to do that," Schacknies says. "But it's a bit of a Holy Grail. You're always looking for it and you're never going to find it."