Rethinking Treasury: The road ahead Global report summary

These are interesting times for CFOs and their counterparts in treasury, as the world looks to a post-pandemic future while still dealing with its impact. How are CFOs and treasurers working together to set the stage for growth amid ongoing uncertainty?

CFOs and treasurers agree the role of treasury is shifting, accelerated in part by the challenges posed by COVID-19 as well as the ongoing evolution of their relationship. How are both parties balancing the need for more rigorous risk management with their company’s long-term strategic aspirations?

The pandemic and its sweeping impact on economic activity, combined with unprecedented monetary intervention, have made macro and market risks incredibly difficult to gauge. The need for clear lines of communication and coordination between CFOs and the treasury function has therefore never been more critical to secure both the financial health and growth of the business.

The unique pressures of the pandemic are being felt across financial functions. CFOs have been forced to revise financing, investment and capital allocation strategies accordingly. In its supporting role to the CFO, having navigated one of the most challenging business environments in recent memory, the treasurer is stepping up and assuming more strategic responsibilities.

The view from the CFO

Since we last surveyed CFOs in 2018, there have been large gains in their confidence in the strategic skill levels of the treasury function. Nearly two-thirds (64%) of CFOs in Europe and 58% of those in larger firms (with revenues above $5bn) say they have total confidence in their treasurers in this regard, a positive step towards a joint vision shared by the two roles.

This is also important given that, the dual impact of the pandemic and protectionism are currently the largest macro concerns for CFOs globally, both of which will require strategic planning and coordination.

Without a doubt, the past 18 months have made their presence felt. Most CFOs agree that the role of the treasury has changed dramatically during the pandemic, with 73% from smaller organisations (those with revenues between $1-5bn) and 90% from larger firms agreeing on this point.

Digitisation is another area where treasuries can level up their support to the business. Digitally-led functions benefit from improved insights which can strengthen risk management capabilities. Real-time data fed through dashboards in areas such as FX forecasting can also greatly improve visibility, ensuring the C-suite is at all times aware of the organisation's liquidity position.

These benefits are especially valuable in large organisations, which may be geographically diverse and have multiple subsidiaries using a network of banking systems and accounts. This explains why 60% of CFOs of larger organisations say their treasury is responsible for digitisation projects on financial data and processes, compared with just 38% in smaller organisations. This also reflects the larger budgets and resources often available to treasuries in these larger organisations.

More than half (54%) of CFOs in large organisations say their treasury plays a key role in strategic decisions, falling to 28% for smaller firms. EMEA is out in front here once again with 64% reporting this critical role in the broader decision-making processes of the business. In the Americas, this sits at 50%, but just 14% in Asia.

The same is also true for treasuries providing strategic resources across business units, with functions in larger organisations (64%) and those in EMEA (70%) leading the charge in this respect. This indicates far better integration and trust across the business in these instances, with the treasury being relied upon for its unique financial and risk management insights and expertise in optimising operations and achieving the overall corporate strategy.

The challenges posed by, among other things, COVID-19, protectionist sentiment and ongoing trade disputes, means that “traditional” treasury tasks are once again the priority, from liquidity to supply chains – though new challenges are waiting on the horizon.

In a COVID-19 world, nothing is guaranteed. The unpredictability of the economic environment means that traditional treasury activities have come back into focus for CFOs, and that cash is once again king. As many as 82% say that keeping sufficient cash buffers has become a more important treasury duty in the past three years, with 84% saying the same for optimising working capital.

The priorities of CEOs in the current environment have also shifted. According to CFOs in our survey, more CEOs ask questions relating to cash flow and liquidity or hedging strategies now than they did three years ago. This shift away from more strategic topics such as financing and M&A speaks to the pressures the pandemic has put companies under.

For many CFOs, their attention has turned to supply chain-related risks: commodity prices (37%) and supply chain risks (30%) are cited as the top risks (among many) occupying the largest proportion of their attention.

A return to the traditional

Supply chains have been massively disrupted by pandemic restrictions and forecasting complications, the ongoing global semiconductor shortage caused by a stronger bounce-back in demand not met by supply-side investments being a case in point.

Without the requisite materials and components, companies relying on them are unable to sell and distribute their products at their targeted volumes and delivery schedules. This reduces revenues while raising costs to secure scarce materials, resulting in worsening cash flows, squeezed margins and the weakening of a company's financial position.

Supply chain and commodity prices are likely to be risk priorities for CFOs based on whether or not they believe their organisation is able to cope with them.

Treasurers are taking the call to focus on cash flows. Just over half (53%) of treasurers say cash flow forecasting and monitoring is one of the most important aspects of their job, followed by FX risk management (52%) and liquidity management (50%). On the other hand, commodity risk management is seen as one of the three most important tasks by only 5% – possibly because most treasurers are not fully responsible for those aspects, with procurement and other departments being frequently involved in the process.

What's more, the former are also the most time-consuming aspects of the treasury’s work: 55% of treasurers overall say FX risk management takes up most of their time, followed by liquidity management (51%) and cash flow forecasting and monitoring (51%). More than half (59%) of treasurers in EMEA say liquidity management is one of the main things taking up most of their time, versus just 38% in the Americas and 46% of those in Asia.

What works well

While treasuries have baseline strengths in capital management, financing and hedging, all functions are not created equal. Where some excel, others may struggle to keep up. There’s been some improvement overall since 2018, when CFOs were asked which areas of their treasury function were “best in class” – specifically in working capital utilisation (67%, up 18 percentage points globally since 2018), group financing (41%, up 20 percentage points) and interest rate risk management (34%, up nine percentage points). CFOs in general also describe their treasuries as best in class in cash flow forecasting and monitoring (74%) and liquidity management (58%).

This correlates with one of the most trying periods treasurers have experienced, as lockdowns in Q2 of 2020 raised serious solvency concerns for countless businesses. Treasurers were put to the ultimate test as far as liquidity management and cash flow forecasting are concerned, and while some will have come up short, most excelled under this pressure.

Future risks

CFOs are looking to the treasurer to execute strategic plans and address macro threats, and most have faith in their treasury's ability to navigate these choppy waters. This will become an increasingly important value-add, given the many pressures being faced by businesses.

The two main macro concerns – each picked by 39% of CFOs globally – are the rise of protectionism globally as well as a prolonged economic downturn from the pandemic. While a relatively equal percentage of CFOs cite the pandemic as a concern across regions and company sizes, CFOs in EMEA and in larger institutions are more frequently concerned about protectionism (57% and 45% respectively).

Nonetheless, in larger organisations, 58% of CFOs are completely confident that their treasury function has the required skills to play a highly strategic role in their business, the same percentage as in 2018. For smaller firms, there has been some improvement in the past three years. In 2018, only 28% expressed this level of confidence and this has since climbed to 36%.

Automation and digitisation are increasingly integrated into corporates’ financial processes, but what does this mean for their long-term strategic goals?

To contribute to the CFO’s strategic vision, treasurers will increasingly need to harness digital tools. Once embedded, these can expedite traditional manual processes and analyses, and offer better visibility and control over a company’s finances.

In doing so, time-poor treasury functions can realise efficiencies, focus on emerging financial risks and contribute more to business strategy, raising their game across the board.

Digitisation and day-to-day finance decisions

More than half (53%) of CFOs overall expect digitisation to give their business model a “large boost” in the next three to five years, while just 1% expect it to produce a negative impact. Meanwhile, 81% of CFOs view digitisation of treasury processes to have already increased in importance in the past three years.

Automation allows for certain business responsibilities to be outsourced which, if executed well, can reduce costs, improve efficiency and free up time for the in-house treasury to perform more value-add duties.

In larger organisations, 44% of CFOs say they have outsourced some of their day-to-day treasury functions as a result of increased process automation or digitisation, while a further 29% are at least thinking about outsourcing some responsibilities. Smaller businesses are further behind in their journey but are no less aspirational. Only 17% of CFOs in these firms say digitisation has resulted in treasury outsourcing, but as much as 43% are weighing up taking this approach.

Regionally, EMEA companies have been most active in outsourcing, aligning with the broader picture arising from the survey of an advanced stage of the journey in this region. For companies in Asia, this has just happened for 10% of respondents compared with 51% in EMEA.

For many, the strategic benefits of outsourcing are already being realised, positive proof that this approach can yield observable results. Almost two-thirds of all CFOs say the shift to outsourcing has raised treasury’s strategic role and improved process efficiency, and these improvements are being felt in organisations of all sizes.

Resource allocation differs around the world

Choosing in which form to invest in treasury improvements and enhance its strategic prowess will largely depend on the company in question, the function's current capabilities and its long-term objectives. Location also has an influence on how that investment is likely to be delivered in the next three years.

CFOs overall are agreeing to allocate more resources to the treasury function and these will be split between people and technology.

In EMEA, resource investment is expected to lean more heavily towards technology, while in the Americas and Asia it is likely to be more balanced between technology and people. Specifically, 74% of CFOs in EMEA say they expect at least three-quarters of new resources to be directed towards technology rather than employees in the next three years, compared with 32% and 28% of CFOs in the Americas and Asia, respectively, who are more likely to emphasise investment in employees.

CFOs are on top of the blockchain agenda

Cryptocurrency is one of the hottest topics in the retail investment world but the distributed ledger technology – better known as blockchains – on which these assets sit is less well understood. While still in their infancy, smart contracts are expected to find increasing real-world applications. These are essentially transaction protocols that automatically execute or document events and actions determined by the terms of the contract or agreement.

Blockchain technology is currently unfamiliar territory for most and not popularly adopted in the day-to-day activities of corporate treasuries, but that could soon change. Certainly, CFOs see this being the case, while treasurers are less confident. Nearly all (97%) CFOs see at least one future use case for blockchain technology, with most (54%) considering the ability to create easier and leaner trade documentation as one of two main use cases. A further 51% and 44%, respectively, see FX exposure management and payment security as among the main use cases – which differs from the treasury perspective, where FX exposure management is less emphasised.

As a whole, treasurers have not yet bought into the promise of the blockchain story or been involved in related projects to the same extent as their CFOs. More than half (54%) overall say that they have not yet identified any specific use case for blockchain technology in their company – with this being an area of technology that Asia-based treasurers are more frequently expecting to adopt.

ESG principles are growing in importance for CFOs across the company’s financial value chain – but treasury is not fully on board yet.

Companies can no longer ignore ESG. Institutional investors' and regulators' increasing demands for transparency combined with consumers gravitating towards businesses with strong sustainably and social responsibility credentials make this an existential risk and a fundamental commercial opportunity. Corporates that are resistant to this change over the longer term will find poorer access to financing and may struggle to retain customers.

In the main, corporates in Asia have not embedded these criteria in their activities to the same extent as their counterparts in EMEA or the Americas, instead being in the consideration stage on the impact of ESG across various areas. And, once again, there is a gap between the priorisation of CFOs and their treasurers on this topic.

ESG is on top of the C-suite agenda

ESG principles touch corporates widely, from borrowing to capital investments and supply chains, as CFOs have recognised the importance of sustainability in all their activities. For example, between 74% and 90% of CFOs acknowledge that ESG criteria are important across a broad spectrum of operations including sales and logistics, supply chains and financial market activities. Companies are also thinking carefully about how to grow their operations in a more environmentally responsible manner; 87% of all organisations see ESG as important to the allocation of their capex budget.

Meanwhile, ESG as it relates to the supply chain is considered “very important” for two-thirds of CFOs in EMEA, the top regional score across business areas and commensurate with proactive policymaking in the region. Earlier this year, the EU Parliament voted in support of a new directive on corporate due diligence and corporate accountability that would require companies to identify, address and remedy the ESG risks in their supply chains. This suggests that CFOs are widely aware that their organisation cannot outsource ESG risks to partners in their chains as a shortcut to becoming more sustainable.

Impact of other megatrends

The role of the CFO has evolved as well, taking on more of a strategic partnership with the CEO in terms of process changes and business planning. After all, any changes to the operations and strategy of a company depend on first-class financial management and capital allocation.

This means that CFOs must understand how their company plans to capitalise on any fundamental shifts in the macro business environment. In general, CFOs in our survey appear to be optimistic about their companies' ability to capitalise on big global trends, at least to some degree.

Opportunities in emerging markets

Concerns over the pandemic will likely persist for some time, but CFOs remain optimistic about the future growth of their companies. Following the worst global recession on record, economies are recovering robustly, providing a strong tailwind. CFOs most commonly point to a strong global economic rebound as a potential driving factor that could grow earnings in the next three years. This was cited by 60%, followed by over 52% who see stronger growth in emerging markets as supporting future earnings.

In fact, the growth of emerging markets themselves is expected to have a significant impact – 63% of CFOs believe the development of emerging market economies will provide a “large boost” to their business models, topping the list of trends that CFOs expect to significantly benefit their business model.

Regionally, CFOs in Asia – many of them headquartered in an emerging market economy themselves – back this view the most. In a related question, 72% of CFOs in the region see a strong growth in emerging markets as one of two most important growth factors for their company’s earnings whereas this is just picked by 30% of CFOs in EMEA.

Conclusion

As was the case back in our original report in 2018, the question uppermost on the minds of many CFOs and treasurers is: How can we best navigate uncertainty? Progress has been made in the past three years, despite the extraordinary developments of the past 18 months. Companies across the board have been tested by these circumstances and, for many, their success has been down to swift decisions on the part of the company’s finance function.

CFOs and the treasury need to take the lessons they have learned from this experience and determine the best way to apply it to their growth strategies.