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Justin Jones
In Cash & Working Capital, FX, Technology

Machine Learning Wizardry: Analytics-Based Cash-Type Forecasting

Data science “wizards” and clean, treasury-tagged cash transaction data are transforming cash forecasting at one corporate.

Transaction tagging, data science “wizards,” statistical models and machine learning (ML) are the current cornerstones of an ambitious, yearslong project by treasury at one NeuGroup member company to transform cash forecasting—which now includes grouping cash transactions by type. The FX leader and a member of his team shared details of the project, some of its successes and what they have learned along the way at a recent peer group meeting of NeuGroup for Foreign Exchange sponsored by Societe Generale.

  • The move to what the company calls analytics-based cash forecasting is aimed at overhauling the current, manual and resource-intensive process involving more than 150 global entities and forecasters contributing monthly currency cash forecasts used by treasury to produce rolling, 13-month cash flow forecasts for more than two dozen currencies.

Data science “wizards” and clean, treasury-tagged cash transaction data are transforming cash forecasting at one corporate.

Transaction tagging, data science “wizards,” statistical models and machine learning (ML) are the current cornerstones of an ambitious, yearslong project by treasury at one NeuGroup member company to transform cash forecasting—which now includes grouping cash transactions by type. The FX leader and a member of his team shared details of the project, some of its successes and what they have learned along the way at a recent peer group meeting of NeuGroup for Foreign Exchange sponsored by Societe Generale.

  • The move to what the company calls analytics-based cash forecasting is aimed at overhauling the current, manual and resource-intensive process involving more than 150 global entities and forecasters contributing monthly currency cash forecasts used by treasury to produce rolling, 13-month cash flow forecasts for more than two dozen currencies.
  • “These forecasts drive all our US dollar positioning, investments as well as our hedging,” the member said. “When they come in wrong, we’re educating people why it’s such a big deal: We run the risk of needing to change our hedges, offset trades, or miss hedging opportunities.”

Beginning of a journey. The project began with the risk management and cash teams working with a consultant to benchmark with other corporates, evaluate third-party solutions and do a feasibility study on model-driven forecasts. “Let’s not have those 150 forecasters do this each month if we can build a model to do it as well or better,” the member said, describing the goal.

  • That led to a proof of concept initiative using bank account balances, data scientists and ML models. But while initial results were promising, the team ultimately decided that account balance forecasting wasn’t sufficient and went back to the drawing board.
  • “When the account balance forecast wasn’t right, we had no way to answer the treasurer or other stakeholders as to why our 12-month cash forecast was off,” the member said. “We had no real insights.”

Clean data and tagging. To address that problem and identify why and where variances occur, a transition to so-called cash-type forecasting began: all cash transactions—inflows and outflows—would be grouped by type. At the highest level, the types are the corporate’s key drivers of cash flow actuals: payables, receivables, taxes and payroll. (By now, an internal analytics team had replaced the consulting firm and started readjusting the models.)

  • For the project to work, treasury needed to provide the analytics team with clean data and embarked on a massive, global tagging project involving all regional treasury centers. They had to tag all historic transactions and supply business logic for rules-based tagging for future transactions.
  • So far, more than five million transactions have been tagged with some 150 tags representing all transactions. Those 150 transaction types are filtered into about 70 mid-level cash types and about 40 high-level cash types.
  • This split into tiers will help treasury create different levels of forecasts and get more granular to explain variances beyond the main categories of inflows and outflows. Each currency is tagged and treasury can view data by currency alone, cash type by currency as well as by cash type and entity by currency.
  • The FX leader noted that the company had 98% visibility to its transactions by type within its FIS Trax system, giving it a significant leg up. “You have to be able to see that data to be able to tag it properly and know that you have that visibility to feel confident you’re capturing everything,” he said.

The wizards. Equally important to the treasury team’s efforts are those of the data scientists who are on the transformation team of the corporate’s global finance organization. The FX leader’s colleague calls them wizards. “They are a group of wizards who love statistics and are helping us along this journey,” she said. “They are the ones that are building our statistical models and machine learning forecasts. “

  • She explained that these data scientists have built a number of algorithmic models based on statistical time theories, machine learning, neural networks and regressions, among other tools.
  • The models are based on thousands of data points generating thousands of forecasts that are aggregated into one forecast. The models are constantly being refined based on feedback from the risk management team.
  • Treasury also provides the analytics team with information on cyclicality, M&A or anything else that could change the trajectory of the model. “It’s a constant feedback cycle,” the team member said. “The biggest thing we’ve learned with this project is not only does it take a lot of time, but it’s a constant innovation cycle.”
  • Forecasters access the model via an interactive user interface built with Power BI. The model can be refreshed in about 45 minutes.
  • The team is now working to embed internal forward-looking drivers including sales forecasts and business plan information as well as external inputs including economic indicators.

Success and the road ahead. The member’s presentation included accuracy and error data for three of the seven currencies the team has created currency models for thus far. The 12-month error metric ranged from 1% to 13% for the three currencies. The team is also tracking how often the model is meeting the corporate’s internal metric for accuracy. In each of these currencies, the member noted that the analytics-based cash forecast is more accurate than their legacy process.

  • “We’re seeing some nice pockets of opportunity,” the FX leader added. “It’s clearly better in some spaces for us to use this model-based forecast than our existing process.
  • “And it’s really a question of how long it will take us to get all of our currency forecasts built and ready for a transition from our legacy process to the new, machine learning model. We’re thrilled with where we’re seeing it go.”
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Justin Jones
In Compliance, Risk Management

Getting Ahead of the Curve: ERM’s Reputational Risk Rethink

The case for ERM practitioners to view reputational risk less as an impact of other risks and more as a risk itself.

The power of social media to damage corporate reputations in the blink of an eye is just one factor leading a growing number of enterprise risk managers to take a more proactive stance toward heading off reputational risks rather than reacting to them after the fact. This marks a shift in perspective by some ERM practitioners who have traditionally viewed reputational risk more as an impact of other threats instead of a bona fide risk itself.

  • That emerged as a key takeaway at a recent monthly session of NeuGroup for Enterprise Risk Management where several members shared how they collaborate across departments including communications in order to be prepared should their companies’ reputations come into question.

The case for ERM practitioners to view reputational risk less as an impact of other risks and more as a risk itself.

The power of social media to damage corporate reputations in the blink of an eye is just one factor leading a growing number of enterprise risk managers to take a more proactive stance toward heading off reputational risks rather than reacting to them after the fact. This marks a shift in perspective by some ERM practitioners who have traditionally viewed reputational risk more as an impact of other threats instead of a bona fide risk itself.

  • That emerged as a key takeaway at a recent monthly session of NeuGroup for Enterprise Risk Management where several members shared how they collaborate across departments including communications in order to be prepared should their companies’ reputations come into question.
  • One member at the forefront of this trend noted that “from a social media perspective, companies are being held to account for things that they say now. Activist investors and activist groups are more sophisticated at picking apart statements and promises and holding us to account.”
  • The climate of heightened scrutiny and instant critique underscores the relevance of the oft-repeated phrase quoted by one member at the session: “Reputation takes a lifetime to build and minute to destroy.”

From impact to risk. The traditional view of reputational risk framed it as a byproduct of other, operational risks such as human rights violations by vendors in the global supply chain (a major area of risk for multinationals with thousands of suppliers). John Sidwell, a member of the ERM group and co-author of “Enhanced Enterprise Risk Management,” explains: “Reputational risks historically relate to being associated in ERM as an impact of other risk topics and generally part of the assessment in rating the risk topics in the risk profile.”

  • The pivot to viewing reputational risks as “individual risk profile topics,” he says, also reflects the effects of geopolitical events, media reporting and new regulations governing public company disclosures related to cybersecurity and ESG. Those realities are prompting some senior executives to view reputational risk through a sharper financial lens.
  • “We were one of the two-thirds of organizations two years ago who viewed it as an impact call rather than a risk,” one member said. “Then we had an executive comms session where we had certain leaders in the organization who felt there was a direct carrying cost to capital and propensity to win business based on poor decision-making around ethics and compliance.
  • “So, it wasn’t just an impact, but a preceding risk. We changed tack and flipped to the other side of the fence, and we manage it as a risk in itself. It typically polls as a top-15 risk.”
  • That said, it’s important to set boundaries and not position ERM to track every reputational risk, such as customer complaints. “We set some limits around materiality,” the member said. “They are expressed as long-term revenue impact, free cash flow impact and share price impact.”

Ahead of the curve. The proactive perspective taken by members who are ahead of the curve requires tactics and cross-functional collaboration to prepare and plan. “Every company needs to have robust programs in place to proactively identify, treat and respond to reputational threats,” Mr. Sidwell observed. “These would be embedded in the company’s ERM program.”

  • He added, “This overall risk governance would include mitigation strategies including crisis management plans, communication protocols, and contingency measures, risk awareness of employees and their role in safeguarding the reputation of the organization.”
  • Of critical importance is aligning with the corporate communications team on reputational issues. Several members said they game out possible risks and have “drawer statements” ready should a negative story break.
  • “Our ERM team talks to our head of communications quarterly and then many times on an interim basis” one member said. “They have a playbook that they keep in close proximity that if something were to come up, then they have a plan as to how they are going to respond.”

Enlisting audit. Corporate risk managers must work in tandem not only with communications departments but also with internal auditors responsible for monitoring overall risk governance, according to Mr. Sidwell, who is chief audit executive at Infinera. “The internal audit function has the responsibility to ensure the company has effective risk management programs in place,” he said. “It can proactively help protect an organization’s reputation and build trust with stakeholders.”

  • He added, “To audit a company’s reputation protection effectiveness, auditors would really need to focus on those sources of events that could damage a company’s reputation and assess the robustness of the efforts in place to identify and manage reputational risks collectively as a singular program—not a fragmented approach or in a reactive manner.”
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Justin Jones
In Capital Markets, Risk Management

Corporates May Need to Add Sugar to Recipe for Bonds Funding M&A

Investors may demand better terms in special mandatory redemption clauses amid longer deal review times and rate cut risk.

Treasury teams structuring bond deals to fund M&A transactions who want to lock in rates before an acquisition closes may need to sweeten the terms of a clause in bond offerings called a special mandatory redemption. The key reason: increased risks for investors stemming from longer regulatory reviews of mergers and the possibility that deals fall apart.

  • SMRs typically require an issuer to repurchase the bonds at a premium—typically 101% of par—if the deal is not completed within a specified period, traditionally one year.
  • SMRs help corporates entice investors who are exposed to interest rate risk if the deal falls through. The clauses also give companies increased financing flexibility.

Investors may demand better terms in special mandatory redemption clauses amid longer deal review times and rate cut risk.

Treasury teams structuring bond deals to fund M&A transactions who want to lock in rates before an acquisition closes may need to sweeten the terms of a clause in bond offerings called a special mandatory redemption. The key reason: increased risks for investors stemming from longer regulatory reviews of mergers and the possibility that deals fall apart.

  • SMRs typically require an issuer to repurchase the bonds at a premium—typically 101% of par—if the deal is not completed within a specified period, traditionally one year.
  • SMRs help corporates entice investors who are exposed to interest rate risk if the deal falls through. The clauses also give companies increased financing flexibility.

Regulators and rates. More scrutiny of M&A deals and longer periods to review them by US regulators, as well as a possible recession and the specter of falling interest rates, may drive more investors to push for changes in SMR terms in the months ahead, according to NeuGroup members and bankers who work with issuers.

  • At a session of NeuGroup for Capital Markets sponsored by Deutsche Bank, Ryan Montgomery, a managing director in liability management at the bank, spoke about the shifting state of M&A financing and what steps corporates should be prepared to take to draw in investors if market and economic conditions shift.
  • “Investor willingness can change,” Mr. Montgomery said. “If you’re contemplating M&A and you might not be funding it until sometime in 2024, you have to be prepared that the environment might not be as easy to obtain these types of provisions. So the question is, how can companies adapt to continue to get the flexibility they need?”

Higher premiums. In addition to M&A deals taking longer to complete under the Biden administration, SMRs are coming into focus now because of the possible effects of falling interest rates that would likely come with a recession. In that scenario, investors holding SMR bonds issued when rates were still high will likely see them trade at a premium as rates fall and bond prices rise. No problem there.

  • But if the acquisition is delayed by regulators past the SMR date (triggering the SMR clause), investors would lose their mark-to-market gains and receive only the 1% premium for a bond trading above that in the secondary market. And they would be reinvesting at lower rates.
  • To ensure the bonds remain attractive to investors, some corporates are considering raising the premium paid if the SMR clause is triggered. One member in another session has weighed raising the premium two or three points above par. However, he expressed concern this would signal a heightened risk of the deal not closing.

The synthetic route. Another way to improve SMR terms for investors is pricing bonds at a discount to par, which one member called raising the premium synthetically.

  • One complication with the synthetic approach is that by pricing the bonds at a discount, the corporate receives less cash from the bond issuance, potentially creating the need to raise the size of the deal.
  • “As the discount gets larger, it could start to add up. For example, an average of five points on a $10 billion deal would be another $500 million of funding,” Mr. Montgomery said.

Step right up? In response to longer regulatory reviews of deals, some corporates, including one NeuGroup member, have extended the terms of an SMR clause to 16-24 months to give themselves more negotiating time and maneuverability. But this creates more time when market conditions could move against investors who buy the bonds.

  • If investors begin to push back on these longer time horizons for a standard 101% redemption, Mr. Montgomery suggested issuers “consider including SMR pricing that steps up to something like 102% after 12 months and maybe more after 18 or 24 months.”

Investor activism. This year, The Canadian Bond Investors Association and The Credit Roundtable have advocated for changes in SMR provisions. Their proposals include requiring that at least two-thirds of bondholders support changes to SMR terms—including the time-period in which the deal must be completed.

  • Perhaps the most significant proposal is setting the redemption price at the greater of a) a price based on a predetermined percentage of the original offer spread and b) a pre-set percentage of par, such as 101%. That change would expose the corporate to interest rate risk.
  • Mr. Montgomery does not expect issuers to be willing to bear this risk. “The whole reason SMRs exist is that issuers want to get large-scale financing done and be able to lock in interest rates,” he said.
  • “If the acquisition goes away, they are willing to pay the extra point for insurance. If corporates had to bear the full exposure to interest rate moves in the event of a busted deal, they would probably simply not do the M&A financing ahead of closing.”

Prepare for a bear. A deeper than expected recession could send corporate bond spreads wider as investors demand more yield in response to weaker earnings and lower cash flows. That would also likely prompt investors to demand changes in SMR terms. “Investors aren’t yet pulling out of fixed income markets, but a bearish credit market could come, and investors could collectively push back enough to get a big change,” Mr. Montgomery said.

  • “We think issuers should prepare for this possibility so that if markets turn for the worse, they are ready with SMR terms that respond to investor concerns in a way that balances issuer and investor interests.
  • “While changes may not be necessary in a strong market environment, we don’t want to see issuers caught flat-footed if the market for jumbo M&A offerings becomes more challenging from when they announce their M&A deal until they launch the financing.”
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Justin Jones
In Crypto, Technology

Corporates’ Tentative Steps Into the NFT Universe

Over half of NeuGroup members that have implemented NFTs manage some portion of the project in-house.

Corporate uses of nonfungible tokens (NFTs) have had a roller-coaster journey over the last two years, with a boom of adoptions in 2021 that plateaued rapidly. But the tokens are far from dead—nearly a third of respondents to NeuGroup’s newest survey, Digital Assets: Current and Future Use Cases, said they’ve already issued NFTs.

  • NFTs are unique digital assets similar to cryptocurrencies that can be bought and sold, built on a digital ledger known as a blockchain. But these tokens do not store any value, instead serving as a proof of ownership of digital or physical items.

Over half of NeuGroup members that have implemented NFTs manage some portion of the project in-house.

Corporate uses of nonfungible tokens (NFTs) have had a roller-coaster journey over the last two years, with a boom of adoptions in 2021 that plateaued rapidly. But the tokens are far from dead—nearly a third of respondents to NeuGroup’s newest survey, Digital Assets: Current and Future Use Cases, said they’ve already issued NFTs.

  • NFTs are unique digital assets similar to cryptocurrencies that can be bought and sold, built on a digital ledger known as a blockchain. But these tokens do not store any value, instead serving as a proof of ownership of digital or physical items.
  • Largely, NFT implementation has been limited to digital images or videos: for example, a collectible based on a recognizable representation of a company’s brand. More innovative NFT uses include tying the token to a proof of membership, tying it to a physical good as an authenticated receipt, and creating digital media that can be used in a video game or the metaverse.

NFT implementation. In the last two years, as markets and technologies for the tokens have matured, the number of options that corporates have to issue, or “mint” NFTs, has grown significantly.

  • When NFTs were first popularized, a number of NeuGroup members didn’t trust the technology enough to mint them directly or to accept the cryptocurrencies required to sell them, instead hiring third parties that assumed all responsibilities, but for a high fee.
  • Now, multiple members have begun minting NFTs on the Ethereum blockchain directly. Of those who are active in the NFT space, only 40% outsource their entire project to a third party (see below).

Understanding the options. When outsourcing, members pay a percentage of NFT sales or royalty payments to the third party, or they completely relinquish ownership and the sales process. The cost to outsource may be worth it if a company does a one-time mint; but for repeated mints, the costs can add up.

Building up. One member, who previously employed an advertising agency to accept cryptocurrency made from NFTs on her company’s behalf, has now set up a digital wallet through Coinbase that accepts ether directly, and converts to USD daily.

  • The drawbacks to building a project internally, even partially, are the required expertise and operational know-how, which are expensive to develop or acquire. Even companies that choose to go the in-house route often rely on outside experts to outline their strategy and operational requirements.
  • For some companies, another option to ramp up expertise is acquiring an NFT provider to expand product offerings and accelerate return on investment—a strategy one member has already implemented successfully.

NFT holdouts. Respondents who have so far shied away from the NFT universe listed several reasons; chief among them is the absence of relevant use cases. Other hurdles include the complexity of the required technology infrastructure, an immature marketplace, complex legal, tax and accounting issues as well as a lack of senior management backing.

  • “There may be a use case for an NFT to be a store of membership to something that can be redeemed, but building that would be hard,” one member said. “You’d need the technology to support, track and monitor the NFTs, and users that will know what to do with it when they get it. There’s a bunch of barriers.”
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Justin Jones
In Insurance, Risk Management, Talking Shop

Talking Shop: Charging Stores for Workers’ Comp Insurance Claims

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Context: Members of NeuGroup for Retail Treasury represent a variety of businesses that operate thousands of stores, restaurants and other retail outlets where the safety of customers and workers is a preeminent priority. But accidents inevitably occur. So it’s essential that companies managing the risk of people being injured at their facilities have workers’ compensation (WC) and general liability (GL) insurance coverage.

  • To incentivize managers to prioritize reducing accidents and the associated insurance costs, many retail member companies issue what members have dubbed “chargebacks” to store locations that file WC or GL claims. These charges hit the store’s P&L and may impact manager incentive pay. Companies can also award credits to locations for positive post-accident actions or superior safety records.
  • One member told NeuGroup Insights that he believes corporates are “borrowing” the term chargeback from banks and finance companies because “it works in much the same way.” He offers two alternatives: “Instead of chargeback, you could say ‘cross-charge’ (more of an internal construct, which is what this is) or simply, ‘charge.’”

Member questions: “A few months ago, all risk management functions, including insurance, enterprise risk management, and crisis management moved from legal to treasury. As part of this process, we have been reviewing and updating safety documentation with the goal to reduce claims that ultimately impact the bottom line.

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Context: Members of NeuGroup for Retail Treasury represent a variety of businesses that operate thousands of stores, restaurants and other retail outlets where the safety of customers and workers is a preeminent priority. But accidents inevitably occur. So it’s essential that companies managing the risk of people being injured at their facilities have workers’ compensation (WC) and general liability (GL) insurance coverage.

  • To incentivize managers to prioritize reducing accidents and the associated insurance costs, many retail member companies issue what members have dubbed “chargebacks” to store locations that file WC or GL claims. These charges hit the store’s P&L and may impact manager incentive pay. Companies can also award credits to locations for positive post-accident actions or superior safety records.
  • One member told NeuGroup Insights that he believes corporates are “borrowing” the term chargeback from banks and finance companies because “it works in much the same way.” He offers two alternatives: “Instead of chargeback, you could say ‘cross-charge’ (more of an internal construct, which is what this is) or simply, ‘charge.’”

Member questions: “A few months ago, all risk management functions, including insurance, enterprise risk management, and crisis management moved from legal to treasury. As part of this process, we have been reviewing and updating safety documentation with the goal to reduce claims that ultimately impact the bottom line.

  • “Do you issue chargebacks to locations for filed claims? If so, is it a flat rate or variable rate depending on some criteria (medical-only vs. lost time, repeat offender, etc.)? Do you issue a chargeback for general liability incidents?
  • “In which department does your operational safety function reside?”

Peer answer 1: “We have a carrot and stick approach: We use a variable schedule of chargebacks and credits to penalize failures and reward good actions. The chargebacks are internal only and are zeroed out for external reporting, but they will impact the location’s P&L and therefore the manager’s bonus.

  • “For example, a $5,000 charge to the P&L for a WC claim that results in lost time. Conversely, a $750 credit if the incident is reported the same day and/or a credit of $3,000 if the impacted employee returns to work within seven days. There are also longer-term incentives to encourage the desired behavior/focus (e.g., a $1,700 credit if the location has no injuries during the year).
  • “We use chargebacks similarly for workers’ comp and general liability claims. The issues are the same (ensure appropriate safety procedures are followed in an effort to minimize accidents), the difference is simply who was injured (an employee or a non-employee).
  • “This practice is also consistent with the general accounting concept of matching. While it might not be realistic or productive for a location’s P&L to bear the entire cost of a claim, it is only fair that some portion of the financial consequence resides on the P&L responsible.

“Our safety strategy and program design reside with the corporate risk management team, reporting into treasury. Safety program execution resides in the individual brands, led by ops and asset protection/loss prevention.”

Peer answer 2: “We issue chargebacks for WC and GL at a flat fee based on the type of claim (minor or major). We take the total estimate for the year, and charge all locations about half the fee, and use the chargebacks to cover the rest. We usually ‘overcharge’ them in total, which enables us to give back a bonus to safest locations at the end of the year.

  • “Safety is with asset protection (in ops).”
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Justin Jones
In Capital Allocation, Cash & Working Capital

Marriage or Dating: Dividends vs. Buybacks for Capital Return

What companies facing pressure from investors to return capital need to consider as they mature and growth slows.

The decision to start paying a dividend to return capital to shareholders is one that growing companies don’t take lightly—and for good reason: the consequences of later lowering or eliminating the quarterly payouts is an undeniably bearish signal in the eyes of most investors. That fact informed discussions about dividends and share repurchases among members of NeuGroup for Large-Cap Assistant Treasurers at their first-half peer group meeting, and in a monthly virtual session.

  • One member referenced the nature of romantic relationships to capture the difference between repurchases and dividends: “You date share repurchases, and you marry dividends.”

What companies facing pressure from investors to return capital need to consider as they mature and growth slows.

The decision to start paying a dividend to return capital to shareholders is one that growing companies don’t take lightly—and for good reason: the consequences of later lowering or eliminating the quarterly payouts is an undeniably bearish signal in the eyes of most investors. That fact informed discussions about dividends and share repurchases among members of NeuGroup for Large-Cap Assistant Treasurers at their first-half peer group meeting, and in a monthly virtual session.

  • One member referenced the nature of romantic relationships to capture the difference between repurchases and dividends: “You date share repurchases, and you marry dividends.”

Capital return considerations. The first question is always whether a company has reached a point in its growth where it should consider returning capital; the second question is picking the form of that return. Balancing financial flexibility and capital allocation is the ultimate consideration as corporates mature, say bankers who work with them.

  • Dividends, perceived to be in perpetuity, offer investors a certain payout now. One concern, though, is how they may affect stock valuation. A share repurchase program, meanwhile, tends to solve two issues: it offsets dilution from stock-based compensation and reduces the number of shares outstanding.
  • Most companies that pay a dividend do it in conjunction with a share buyback program; and while dividend yield is an important target, capital allocation metrics are expressed in reference to free cash flow.
  • Bankers tell NeuGroup Insights that whether to institute a dividend is also resurfacing as a major boardroom conversation topic for more mature companies whose top line growth is decelerating.

Investors clamoring. Interestingly, idle on-balance sheet cash, even in the current interest rate environment, can draw the attention of activist investors looking for enhanced returns and operational efficiency. One member at the H1 meeting mentioned that his company had a large amount of cash on its balance sheet and is predictably hearing from shareholders about issuing a dividend.

  • “It’s a conversation we’re having with our board. Investors are saying, ‘if you start paying a dividend, this will open the company up to a whole new group of investors—income investors.’” He asked whether peers had initiated a dividend.
  • Among the dividend lessons learned by one member whose company pays one: Once you start, “there is an expectation to increase the dividend, and the debate is around the pace of that.” Dividend yield relative to the peer group becomes an important performance benchmark, potentially resulting in pressure to increase the payout.
  • Another member is in a similar situation: “The noise from our investors is getting louder. Are we at that point in our company where we should start paying dividends?” He added that the decision isn’t simple given that cash is getting tighter, and the macro horizon looks tough. Flexibility in uncertain times is important. How do you manage EPS growth going into an earnings recession?

Not so special? The member discussing the issue with the board asked about options, including a special dividend, a non-recurring distribution of company assets, usually in the form of cash. They’re often tied to a specific liquidity event like an asset sale.

  • One member whose previous employer had taken that route said he was not in favor of the move. “We issued a special dividend, then we saw a decrease in the stock price by exactly the same amount,” he said.
  • And while uncommon, special dividends are on the rise this year, noted NeuGroup senior director Scott Flieger. “It is rare to see investment-grade companies issue them unless it is tied to the sale of an asset,” he said.
  • “During the late 1980s, due to the LBO era, they were used as an anti-takeover strategy,” he added. “In the last 15 years or so, they have been used by private equity firms to pay themselves; so they effectively get back the equity, typically in the range of 30% to 35%, that they put up to take a company private, essentially reducing their downside risk.”

Divorcing (or diminishing) a dividend. In the monthly session on dividends and share repurchases—where the marriage vs dating comparison was made—one member quipped, “We just divorced our dividend.” Actually, they clarified, the company hadn’t eliminated the dividend but had reduced it substantially.

  • “We had this really big dividend,” they explained. “There was this feeling that we were an aristocrat. But is that really the priority of our business? For the health of the business and to create long-term shareholder value, we needed to lower the dividend. We were leasing away our future.”
  • While the decision was difficult, the company’s decision-makers concluded it made sense. “It was the right thing to do,” the member said. The stock is trading lower than before the reduction, “but not any worse than expected.”

Share repurchase complexities. The member who asked peers about initiating a dividend said his company had a history of buying back shares. “There is a lot of equity-based compensation,” he said. “We’re fortunate that our share price has gone up a lot. But at what point are you just buying your shares to pay your employees?”

  • When the topic of doing more share repurchases instead of initiating a dividend came up, one member said, “I ran a pretty aggressive share repurchase program at a previous company. It was a systematic program that kind of worked like a dividend.”
  • Another member with a similar story said repurchase programs can be difficult to walk away from as well. “For us we also do a lot of share-based compensation, so there’s an expectation that we’ll at least buy back our dilution. When compensation is share-based, buybacks can be a bit of a drug.”
  • He went on to say that when the repurchase discussion arises it seems that “the answer is never fewer buybacks. I’ll tell you that.”

Final word. The overwhelming market perspective, bankers say, is that as long as companies continue to deliver growth, capital allocation policy is secondary. However, as businesses mature and growth tapers, investors’ focus shifts to operational efficiency, free cash flow generation and capital allocation. More mature corporates find themselves under pressure to improve shareholder returns and to conform to the capital allocation policy in their peer group.

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Justin Jones
In FX, Technology, The NeuGroup Insights Interview

One Man’s Goal: Leveling the Playing Field for FX Trades

Just Technologies CEO Anders Bakke wants to give corporates pricing data that lets them negotiate better with banks.

In the newest episode of NeuGroup’s Strategic Finance Lab podcast, NeuGroup founder and CEO Joseph Neu talks with a man on a mission to bring more pricing transparency to corporate treasury teams that trade in the foreign exchange market. His name is Anders Nikolai Bakke, a serial entrepreneur who is the CEO and founder of Just Technologies, or Just for short. The fintech company started in Oslo, Norway in 2017, serves businesses in Europe and is now expanding into North America.

  • As you’ll hear in the podcast, available on Apple and Spotify, Just offers corporate treasurers a data-driven trade cost analysis (TCA) solution with the goal of giving them more negotiating power with the banks that charge fees and earn profit margins from FX trades that global businesses use to translate revenues from one currency to another, as well as to hedge FX exposures.

Just Technologies CEO Anders Bakke wants to give corporates pricing data that lets them negotiate better with banks.

In the newest episode of NeuGroup’s Strategic Finance Lab podcast, NeuGroup founder and CEO Joseph Neu talks with a man on a mission to bring more pricing transparency to corporate treasury teams that trade in the foreign exchange market. His name is Anders Nicolai Bakke, a serial entrepreneur who is the CEO and founder of Just Technologies, or Just for short. The fintech company started in Oslo, Norway in 2017, serves businesses in Europe and is now expanding into North America.

  • As you’ll hear in the podcast, available on Apple and Spotify, Just offers corporate treasurers a data-driven trade cost analysis (TCA) solution with the goal of giving them more negotiating power with the banks that charge fees and earn profit margins from FX trades that global businesses use to translate revenues from one currency to another, as well as to hedge FX exposures.
  • Mr. Bakke says banks have access to far more market knowledge and data than many customers—a disparity that for many large but especially medium-sized companies leads to what he describes as price discrimination. Of course, that conclusion is not how many bankers view what is a multi-layered and complex subject, a point Joseph raises and explores with Anders.

Anders Bakke
CEO, Just Technologies

In addition to TCA, you’ll hear another acronym in the podcast: MTF. It stands for multilateral trading facility, a European term for a trading system for transactions between multiple parties. In this context, it includes multi-dealer FX platforms like FX All, 360T and Bloomberg’s FX Go.

  • One thing you won’t hear but might enjoy knowing is that for three years, Anders played professional bandy, a Nordic sport that’s a cross between ice hockey, field hockey and soccer. Some say bandy is the world’s fastest team sport. So maybe it’s no surprise that Anders is committed to creating what he thinks is a more fair and level FX playing field between corporates and banks.
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Justin Jones
In Cash & Working Capital, Investment Management

Collaboration with Treasury as Key to Improving Working Capital

Breaking down silos between treasury, AP and procurement to optimize invoice processing and strategic liquidity management.

With interest rates likely to remain higher for longer, opportunistic treasury teams want to invest excess cash where it can earn attractive yields. One obstacle standing in the way at some companies stems from differing priorities between accounts payable (AP), which often aims to pay invoices as soon as possible, and treasury, which has a more strategic view of liquidity.

  • At a recent session of NeuGroup for Payments Strategy sponsored by Citi, treasury team members shared how they are thinking more strategically about the procure-to-pay (P2P) cycle by collaborating with AP and procurement, which negotiates payment terms.

Breaking down silos between treasury, AP and procurement to optimize invoice processing and strategic liquidity management.

With interest rates likely to remain higher for longer, opportunistic treasury teams want to invest excess cash where it can earn attractive yields. One obstacle standing in the way at some companies stems from differing priorities between accounts payable (AP), which often aims to pay invoices as soon as possible, and treasury, which has a more strategic view of liquidity.

  • At a recent session of NeuGroup for Payments Strategy sponsored by Citi, treasury team members shared how they are thinking more strategically about the procure-to-pay (P2P) cycle by collaborating with AP and procurement, which negotiates payment terms.
  • The session included discussion of tools offered by Coupa, a business spend management platform whose offerings include a TMS and a solution called Coupa Pay that fosters open lines of communication between the three pillars of the P2P process.
  • Coupa vice president Tamir Shafer discussed the added importance in times of economic uncertainty of invoice processing that balances a company’s liquidity situation, plus the yield or discounts that can be generated based on the method of payment, as well as the timing of that payment. “The higher that interest rates are, the more important a program that takes all these pieces into account becomes as more potential yield is in play,” Mr. Shafer said.

Efficiency vs. strategy. In the session, one member said her company used to pay its invoices within about a week of receiving them, regardless of the payment terms. But interest rate hikes have put a premium on cash, forcing her to rethink strategy and make changes. “I said, ‘Let’s get working capital [operating] as organically as we can,’ so we created a playbook,” she said.

  • Under treasury’s guidance, the procurement team reached out to suppliers and renegotiated payment terms that are now followed. “We started negotiations at 120 days, then landed at 90. You’d be surprised how many companies are okay with 90-day payment terms,” she said. There’s also an option now to pay early at a discount—if the price is right.
  • Another member is attempting a similar rethink of how payments are processed, but is encountering difficulties due to AP’s different priorities. “Our AP team wants to be very efficient, so as soon as an invoice comes in, they process,” he said. “And that’s the exact opposite of what treasury wants to do: hold funds until the agreed time and put the cash to work.”
  • “If treasury is short cash, and AP is paying on day 12, instead of day 30 for example, then the process is broken, especially if treasury needs to go borrow money at a rate higher than what cash sitting in a bank account is earning,” Mr. Shafer said. “We have a vision of treasury and AP working together to make smarter decisions to ultimately improve working capital.”

A portal to collaboration. The problem, Mr. Shafer said, is that AP often isn’t aware of the lost opportunity to invest short-term cash when paying even a few days or weeks early. “That decision can only be made with treasury input,” he said. “If AP can help treasury make smarter decisions, that ultimately improves working capital.”

  • Coupa Pay works by consolidating all three pillars of the P2P process into a single online portal. Procurement can use the portal to interact with and purchase goods and services from suppliers, similar to using an e-commerce platform like Amazon; then AP can verify and approve the invoice. All payments are reconciled with bank statements automatically, so treasury immediately can see payments made. The portal also reflects any early payment discounts negotiated by procurement.
  • Coupa’s TMS includes a treasury cash management worksheet that gives AP more visibility into the company’s liquidity picture. By consolidating all payment information in a single place, Mr. Shafer said treasury can help AP make smarter decisions on when—and when not—to hold on to cash.
  • “Is AP looking at payment terms, where they are either paying in the early payment window, or are they holding the invoice until it’s due? That decision can only be made effectively if treasury is advising AP of where they are from a liquidity perspective,” Mr. Shafer said.
  • One member said Coupa Pay could fit well into her treasury team’s toolbox, aiding the company’s ability to be agile and adapt to market conditions. “The key is having different levers you can pull,” she said.

To review, here’s an overview of how Coupa says users of its products can improve working capital management:

  1. “As AP related invoices are approved for payment, treasury sees those as a liquidity reduction, based on payment date, before the payments are actually made. This minimizes the need for treasury to manually input AP related payments in the treasury cash management worksheet (which otherwise could lead to manual input errors).
  2. “If the sum of payment amounts are material, treasury could push back on AP and ask, ‘What’s going on here? We don’t have liquidity, so could we delay these payments?’ Or conversely, ‘Hey AP, did you know we have a lot of liquidity? Tell me about these invoices you just approved; were there early pay discount options, and if there were, why didn’t we leverage it here?’
  3. “AP has visibility into the treasury cash management worksheet and forecast, and makes decisions about when to pay invoices given their access to the information, provided they worked with treasury to understand how to read the treasury cash management worksheet.”
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Justin Jones
In Crypto, Technology

Crypto Leads the Way in Corporates’ Blockchain Use Cases

A NeuGroup survey reveals trends among corporates embracing blockchain tech—and reasons others are holding back.

Members of NeuGroup for Digital Assets are among the groundbreakers for corporate use of digital currencies, blazing trails at companies including mega-cap corporates, by developing use cases for enterprise-wide projects involving a blockchain.

  • NeuGroup’s newest survey, Digital Assets: Current and Future Use Cases, clearly shows rising interest in this area—as well as a growing urgency among treasuries to learn more. The survey revealed that nearly half of respondents have already executed a blockchain project. A quarter of those who are not yet in the crypto market have plans to do so in the next 12-18 months, indicating broader adoption over the coming year.

A NeuGroup survey reveals trends among corporates embracing blockchain tech—and reasons others are holding back.

Members of NeuGroup for Digital Assets are among the groundbreakers for corporate use of digital currencies, blazing trails at companies including mega-cap corporates, by developing use cases for enterprise-wide projects involving a blockchain.

  • NeuGroup’s newest survey, Digital Assets: Current and Future Use Cases, clearly shows rising interest in this area—as well as a growing urgency among treasuries to learn more. The survey revealed that nearly half of respondents have already executed a blockchain project. A quarter of those who are not yet in the crypto market have plans to do so in the next 12-18 months, indicating broader adoption over the coming year.
  • “The best approach to coming up the learning curve is to find out how early adopters are deploying technology and using digital currencies to realize their objectives,” said NeuGroup’s Matt Thomas, who leads the group. “It ranges from supporting the business in expanding the customer base, to reducing friction in—and increasing the speed of—global liquidity management.”

Taking the first steps. Among respondents that have launched a blockchain project, almost two thirds (63%) are accepting, paying or holding digital currencies.

  • The survey shows that 37% of early adopters are holding cryptocurrencies such as ether, bitcoin and polygon for daily operational needs, with about half of those also taking direct balance sheet exposure.
  • Other digital currencies in use include central banks’ digital currencies, also known as CBDCs, and fiat-based stablecoins, which can support liquidity management through cross-border payments.

Self-custody. The next most common use case, at 25%, is direct custody of digital assets, primarily because members are concerned about the steady deterioration in the creditworthiness of current counterparties. Because regulatory oversight of this new asset class is in the early stages of development, third parties have often been the providers of custodial depository accounts.

  • One member at a so-called “crypto-native” company with a business model based exclusively on use of blockchain technologies said his company mostly uses self-custody, not external custodians. “Self-custody makes it a lot easier to do payments to vendors, and even invest to diversify our portfolio,” he said.

Smarter contracts. The third most common blockchain application among members is using distributed ledger technology to program an automated agreement called a smart contract. These are typically coded into the blockchain, requiring a decent amount of technological proficiency, and can be used to track NFTs or even physical goods.

  • The member at the crypto-native company said he is exploring smart contracts that automatically convert a certain amount of the company’s profits to the USD-backed stablecoin USDC. Then, once a month, treasury could convert to dollars to save as cash reserves.
  • One member said more established corporates may find smart contracts are nice to have, but aren’t quite ready for widespread adoption. “This is going to take a long time for old companies to embrace,” he said. “Until someone has a solution to make creating smart contracts easier, it won’t happen quickly, since you have to create your own.”

New opportunities. The “other” category in this survey question, chosen by 38% of respondents, featured a variety of other blockchain uses, including some of the applications below. Keep an eye on NeuGroup’s Peer Research page to read the full report, which dives deep into each blockchain use case, and will be released later this month.

  • NFTs
  • Data aggregation
  • Permissioned blockchains
  • Intercompany liquidity management
  • On-demand funding
  • Carbon credits
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Justin Jones
In FX, Talking Shop, Technology

Talking Shop: FX Dashboards Made With Tableau or Power BI

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Context: FX dashboards are an extremely useful tool for treasury teams managing currency risk and shaping the narrative delivered to C-Suite executives about treasury’s ability to hedge the impact of FX rate swings. Well-designed dashboards—some using real-time data—allow risk managers to monitor exposures and dynamically illustrate cash flow, balance sheet and other important areas affected by FX volatility.

Julie-Zawacki-Lucci, leader of two NeuGroup for Foreign Exchange groups, said, “Across the NeuGroup Network, we have seen more and more treasury teams embracing internally built dashboards instead of relying on ‘out of the box’ solutions from treasury and risk management system and software providers.

  • “This is partly because the growing use of data lakes and warehouses allows for tools such as Power BI and Tableau to pull critical information from large amounts of data instead of treasury teams pulling data from multiple sources to manually update spreadsheets.
  • “The customization of dashboards allowed by data visualization tools provides treasury teams access to reports that make the most sense for their workflow, analyses and mandates from executives. Within the FX function in particular, the ability to quickly and efficiently examine hedge coverage ratios alongside market dynamics and various KPIs has elevated the role of the corporate FX professional.”

Member question. “We are looking into creating an FX dashboard either using an FX system or one of the tools like Tableau or Power BI to enhance data visualization and save the time taken to consolidate reports from multiple sources.

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Context: FX dashboards are an extremely useful tool for treasury teams managing currency risk and shaping the narrative delivered to C-Suite executives about treasury’s ability to hedge the impact of FX rate swings. Well-designed dashboards—some using real-time data—allow risk managers to monitor exposures and dynamically illustrate cash flow, balance sheet and other important areas affected by FX volatility.

Julie-Zawacki-Lucci, leader of two NeuGroup for Foreign Exchange groups, said, “Across the NeuGroup Network, we have seen more and more treasury teams embracing internally built dashboards instead of relying on ‘out of the box’ solutions from treasury and risk management system and software providers.

  • “This is partly because the growing use of data lakes and warehouses allows for tools such as Power BI and Tableau to pull critical information from large amounts of data instead of treasury teams pulling data from multiple sources to manually update spreadsheets.
  • “The customization of dashboards allowed by data visualization tools provides treasury teams access to reports that make the most sense for their workflow, analyses and mandates from executives. Within the FX function in particular, the ability to quickly and efficiently examine hedge coverage ratios alongside market dynamics and various KPIs has elevated the role of the corporate FX professional.”

Member question. “We are looking into creating an FX dashboard either using an FX system or one of the tools like Tableau or Power BI to enhance data visualization and save the time taken to consolidate reports from multiple sources.

  • “Does anyone in this group have an FX dashboard currently? Have you created one? Any insights will be highly appreciated.”

Peer answer 1: “I created and maintained an FX dashboard (with Tableau) with a previous employer. I found it was extremely useful in that:

  1. “You could make the dashboard interactive using filters, drop-downs, and ‘actions’ (where you click on a specific bar or line and the rest of that information filters automatically). This allowed two different end users, one who needs a high-level overview and another who wants to get in the weeds, to both find utility in the dashboard.
  2. “You could share a link that, once bookmarked by the user, allowed all interested parties to quickly reference back to the dashboard (as opposed to emailing an Excel-driven model with each new version).

“My advice with this route is to keep automation in mind throughout production, and how long it will take to update the dashboard as a finished product.

  • “Will you need to use data from multiple sources or only one?
  • “How can you map these data sources together if there are multiple? Using a published data source or, ideally, connecting straight to your accounting system if possible may save someone hours a week down the line vs. running an Excel report and manually updating the dashboard each time a new iteration is required.
  • “I have seen dashboards set up for efficiency’s sake become more onerous than the original method of reporting when all is said and done for this reason.”

Member response: “Thanks a lot for the detailed information. We are also looking into Tableau; however, it may take a while for getting IT resources, as our intention is to pull data from multiple systems. Did you rely on IT resources when creating the dashboard?”

Peer 1 response: “Yes, I did. The IT department had one or two individuals in ‘Tableau admin’-type roles. I worked closely with them on connecting to live (published) data sources they had made available, as well as navigating the Tableau server they had created when publishing the finished dashboard. They were also the contacts for granting new end users with licenses that allowed them to view the dashboard once published.”

Peer answer 2: “We are currently in the process of building out some dashboards. We will be using Tableau for the data visualization and an internal data lake to source the data from various sources. Still in the development stage.”

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Justin Jones
In Capital Markets, Risk Management, Technology

Focal Points: Tech and Risk Among Treasurers’ Top 10 Priorities

NeuGroup meetings in 2023 H1 offered unique insights into critical concerns for treasury teams in the months ahead.

Hundreds of members of NeuGroup’s treasury peer groups met during the first half of the year to discuss a multitude of critical topics they face and share their main priorities for 2023. While the groups vary in company size, member titles and geography, 10 themes dominated the conversations in NeuGroup’s singular projects and priorities sessions. Here’s what’s top of mind.

NeuGroup meetings in 2023 H1 offered unique insights into critical concerns for treasury teams in the months ahead.

Hundreds of members of NeuGroup’s treasury peer groups met during the first half of the year to discuss a multitude of critical topics they face and share their main priorities for 2023. While the groups vary in company size, member titles and geography, 10 themes dominated the conversations in NeuGroup’s singular projects and priorities sessions. Here’s what’s top of mind:

1. Modernizing treasury’s technology. Treasury teams are on an automation spree: Many are replacing or implementing a TMS, investigating specialized solutions and integrating existing ones, often through an enterprise-wide migration to SAP S/4HANA. Members are also exploring new fintech offerings and technologies such as RPA, AI and ML, in particular for collecting data from diverse source systems, reducing swivel-chair activities and fine-tuning cash forecasting.

2. Data management and governance. Consistent data is the cornerstone of effective process automation and a prerequisite for running advanced analytics methodologies. Members are focused on standardizing data across the enterprise, including integrating multiple finance systems. The first step is establishing a robust data governance strategy and collaborating with IT on ownership and accountability.

3. Capital (re)structure. Borrowing costs and pressure on earnings sparked focus on optimizing companies’ capital structures. Members are exploring deleveraging by buying back debt at discounted prices and considering share repurchase programs and tweaking dividend policies.

  • Debt planning also includes choosing between increasing borrowing flexibility through a downgrade or maintaining an investment-grade rating to cap borrowing costs and considering the use of cash to buy back stock and pay dividends.

4. Capital markets. Treasuries are working on refinancing maturing debt, as well as how to fund acquisitions and spin-offs, including hedging expected issuance and deciding on floating- vs. fixed-rate debt ratios. Members are also recalibrating their relationships with creditors and intensifying communications with credit rating agencies.

5. Bank counterparty credit risk. Silicon Valley Bank’s collapse triggered a review of treasury’s approach to managing bank counterparty credit risk. This focus outlasted the immediate crisis. Treasuries are including new risk metrics, shifting operational funds to MMFs, adding new risk metrics and considering aggregating different types of exposure (e.g., deposits, funding, investments and in-the-money derivatives) by leveraging cloud ERP migration and emerging tools like AI and ML.

6. Financial risk management. Financial market volatility has prompted treasuries to evaluate their FX and interest rate (IR) hedging strategies, with a specific focus on net investment and balance sheet currency hedges. They are also considering introducing greater flexibility into risk management policies to adjust to quickly changing market conditions. More companies are also launching IR hedging programs.

7. Liquidity management. Basel III and new Fed capital requirements put banks under pressure to raise prices on low-margin services, e.g., revolvers, supply-chain finance and LOCs, to maximize internal liquidity and cap the cost of capital holdings. Many treasuries are looking to defray higher future costs by establishing or expanding liquidity centralization projects, e.g., setting up in-house banks as well as notional and physical pools.

8. Cash forecasting. A perennial topic, forecasting gained importance in 2023 against the backdrop of earning pressures and higher borrowing costs. New projects include a review of strategies as well as the use of enabling technologies, such as experimentation with AI and ML.

  • Many are trying to consolidate direct and indirect methods, often in collaboration with FP&A. Another trend is greater use of scenario analysis and predictive models.

9. Talent development. Rising reliance on technology is altering treasury’s talent profile, further complicated by the need to replace team members who left during the pandemic and adjusting to hybrid work. Treasuries are deploying capability assessment models to identify skills gaps and using rotation, shadowing and training programs to upskill existing staff.

10. Operating model. Treasuries are adjusting their organizational structures to prepare for a future of greater automation and rising management demand for decision-support. They are establishing treasury COEs in low-cost locales, leveraging existing enterprise SSCs and outsourcing some activities.

  • Lifting and shifting legacy processes will not yield expected ROI, so leaders are preparing by standardizing and automating the process before migrating to a new operating model.
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Justin Jones
In Risk Management, Talking Shop

Talking Shop: Revisiting Enterprise Risk Categories

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Context: Ted Howard, peer group leader of NeuGroup for Enterprise Risk Management, offered this context on the subject of enterprise risk categories: “When it comes to ERM, companies frequently use a variety of risk categories and standards to build programs tailored to their needs. The specific standards and categories used by ERM teams are based on the organization’s objectives, industry, regulatory environment and overall operational needs.

  • “The main and perhaps most utilized standard framework is from COSO, or the Committee of Sponsoring Organizations of the Treadway Commission. For many companies, COSO is a holistic risk template they would use to construct the foundation of their risk program.
  • “They would then incorporate other standards into that program to address more specific issues like cybersecurity (NIST), IT governance (COBIT), or quality management (ISO 9000).”

Member question: “I am revisiting our current risk categories—strategic, operational, financial and IT (we mostly follow the COSO framework). What categories do you use? I’m also interested if you adopted from COSO, ISO, Gartner, etc.”

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Context: Ted Howard, peer group leader of NeuGroup for Enterprise Risk Management, offered this context on the subject of enterprise risk categories: “When it comes to ERM, companies frequently use a variety of risk categories and standards to build programs tailored to their needs. The specific standards and categories used by ERM teams are based on the organization’s objectives, industry, regulatory environment and overall operational needs.

  • “The main and perhaps most utilized standard framework is from COSO, or the Committee of Sponsoring Organizations of the Treadway Commission. For many companies, COSO is a holistic risk template they would use to construct the foundation of their risk program.
  • “They would then incorporate other standards into that program to address more specific issues like cybersecurity (NIST), IT governance (COBIT), or quality management (ISO 9000).”

Member question: “I am revisiting our current risk categories—strategic, operational, financial and IT (we mostly follow the COSO framework). What categories do you use? I’m also interested if you adopted from COSO, ISO, Gartner, etc.”

  • In a follow-up with NeuGroup Insights, the member explained the timing of her question. “We are finalizing our risk register (basically the list of all of our risks and the definitions) to upload it into ERM technology and therefore are revisiting our risk categories,” she said. She added that “individual risks roll up to risk categories to help broadly bucket them.”

Peer answer 1: “For enterprise risk (which looks at broad strategic risks) we use four broad categories: strategic (which includes risk areas like business model, employees and policy), technology (a very broad category), finance and compliance, and operational risk (which tends to be less strategic).

  • “We benchmark against COSO and ISO; we also looked at 10-Ks from similarly sized companies in the tech industry to identify gaps. We review annually and do a comprehensive review every three years; however, the broad categories have been stable for the last 5+ years.
  • “Like other companies, there are a substantial number of other risk assessments that are tactical or operational in nature conducted by other parts of the organization.”

Peer answer 2. “We follow the COSO framework in general and use the four COSO categories: operational, strategic, financial and regulatory. The COSO methodology maps to a proven control model that is accepted nearly globally. We have other risk assessments that we use for IT, especially following COBIT and NIST.

  • “Some companies are adding a more descriptive topic related to technology to assist in further clarifying types. It’s hard to argue [with that] in this day and age, but the COSO model has not yet been updated to provide this category addition.
  • “It really does not make much difference unless the company wants to add credibility to their ERM program to be based on an approved ERM model. Nearly all companies have the four vs. other, different ones, regardless of the industry.”

Peer answer 3: “We settled on COSO, but my issue is that the COSO taxonomy doesn’t provide any additional insight or perspective. I would like to hear about risk taxonomies that help provide further insight or patterns on the risk categories or guide the treatment of those risks.”

Peer answer 4: “At a high level, we use COSO as a baseline, but modified for our company. Then also use ISO and NIST frameworks in specific circumstances. If there is an ISO standard available for an area and we are trying to get certified, we’ll use that framework for that area. If it is IT/cyber related, we’ll use NIST.”

Peer answer 5: “We generally use strategic, operational and financial, and used Gartner as a baseline which we have modified to fit our own purposes.”

Member wrap-up. After reviewing the peer responses, the member who posed the question said, “the majority of respondents follow the COSO framework, which was helpful to benchmark against.”

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Justin Jones
In Cash & Working Capital, FX, Regional

Argentina: Trapped Cash, Election Tea Leaves, Chinese Currency

Dollar-linked investments are one way multinationals are preparing for a possible devaluation of the Argentine peso.

Multinational corporations closely watching Argentina’s primary elections on Aug. 13 for a preview of the general presidential election in October face significant uncertainty about the magnitude and timing of a possible devaluation of the Argentine peso. Many are seeking ways to hedge their exposure to the currency as they struggle to get trapped cash out of a country with capital controls, spiraling inflation, taxes on imports and a scarcity of US dollars.

  • “The big question mark in the market these days is what is going to happen with the official FX rate after the election,” said Alejandro Haro, CEO of Comafi Bursatil, the brokerage arm of Banco Comafi, which sponsored a recent meeting of NeuGroup for Latin American Treasury held in Buenos Aires. “We think there is a 100% probability of having a sharp movement in the official FX rate in the next year.”

Dollar-linked investments are one way multinationals are preparing for a possible devaluation of the Argentine peso.

Multinational corporations closely watching Argentina’s primary elections on Aug. 13 for a preview of the general presidential election in October face significant uncertainty about the magnitude and timing of a possible devaluation of the Argentine peso. Many are seeking ways to hedge their exposure to the currency as they struggle to get trapped cash out of a country with capital controls, spiraling inflation, taxes on imports and a scarcity of US dollars.

  • “The big question mark in the market these days is what is going to happen with the official FX rate after the election,” said Alejandro Haro, CEO of Comafi Bursatil, the brokerage arm of Banco Comafi, which sponsored a recent meeting of NeuGroup for Latin American Treasury held in Buenos Aires. “We think there is a 100% probability of having a sharp movement in the official FX rate in the next year.”
  • At the official exchange rate, the peso recently traded at about 280 per US dollar; the unofficial “blue-chip swap” rate that is less favorable for corporates sitting on pesos was about 590. The more than 100% gap between the rates is just one sign of the fear of devaluation and further depreciation.

Dollar-linked investments. That outlook is driving more corporates to seek hedges through buying notes and bonds in Argentina’s relatively small debt capital markets. The yields earned on dollar-linked debt help offset the loss in value of a corporate’s cash amid local currency depreciation.

  • “We are seeing huge demand these days from our corporate clients on dollar-linked instruments that are linked to the official FX rate, not the blue-chip swap rate,” Mr. Haro said. “It’s a small market but you can use it to invest some of your pesos.”
  • Comafi Bursatil believes dollar-linked, intermediate investments are attractive, he added, noting that shorter-duration instruments have negative yields. Mr. Haro mentioned a 90-day promissory note recently issued by an Argentine company yielding about minus 12%. “We think that is a very good alterative if you want to be hedged through the elections.” He also cited a local issuer rated AA+ that sold two-year, dollar-linked notes with a yield of minus 9%.
  • During the surge in demand for hedging in Argentina over the last two years, Mr. Haro said, issuers have continued to issue bonds at a 0% rate, but with some now “pushing tenors” to five years, a rarity in the country.
  • As Bloomberg recently noted (see chart below), Argentine companies in industries including energy and telecom have taken advantage of demand by investors for dollar-linked assets, using the opportunity to issue low-rate debt to refinance or raise new capital.

Putting cash to work. One company that presented at the meeting that is committed to putting local cash to work listed several actions for doing that, including investing in dollar-linked securities issued by the government that are held to maturity.

  • But the deteriorating economic situation in Argentina means “it’s been hard now to find alternatives to use all the cash,” the member said.
  • The corporate is also analyzing making dollar-linked loans to third parties as another way to deploy cash that offers a hedge against depreciation.

The China factor. Adding complexity and perhaps opportunity to the calculus facing companies managing risk is the economic role China is playing in Argentina. In addition to investments in Argentina, China is strengthening economic ties through a currency swap line the South American country has tapped to avoid defaulting on IMF loans.

  • Some corporates are discussing with advisors the possibility of converting pesos to Chinese RMB and then into dollars. “Now that there’s a deal with China, do we have to maybe go through China to get money out?” one member asked.
  • The inquiring member had previously been converting pesos to dollars using the official rate. But those transactions have not been approved in many months, leading to the decision to try to access the blue-chip swap rate. To do that, a corporate must show it hasn’t accessed the official market in 180 days, and then won’t be able to access it for 180 days following use of the blue-chip swap rate.
  • Doing what the member proposed would also require regulatory approval to invoice in Chinese currency. But all other things being equal, Mr. Haro said, “I think to get a payment abroad in Chinese currency will be of much higher probability than to get it in USD. So if that is something you can do, I think that is a good idea.”
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Justin Jones
In Banking, Risk Management

Scrutinizing Risk: Taking Frequent Looks at Bank Credit Exposure

Downgrades by Moody’s point up the ongoing, post-SVB review of bank risk by investors and corporate treasury.

Moody’s this week downgraded 10 regional banks and took other actions that underscore that a banking crisis ignited by the collapse of Silicon Valley Bank five months has changed how the world—including corporate risk managers—views the creditworthiness of banks. The failure of SVB and other institutions has triggered a widespread review of credit risk policies and led to changes within many finance organizations.

Downgrades by Moody’s point up the ongoing, post-SVB review of bank risk by investors and corporate treasury.

Moody’s this week downgraded 10 regional banks and took other actions that underscore that a banking crisis ignited by the collapse of Silicon Valley Bank five months ago has changed how the world—including corporate risk managers—views the creditworthiness of banks. The failure of SVB and other institutions has triggered a widespread review of credit risk policies and led to changes within many finance organizations.

One indicator of their commitment to this critical cause is how often treasury teams review the counterparty credit risk of their banks. The latest survey by NeuGroup Peer Research, Best Practices in Assessing Bank Counterparty Credit Risk, shows 43% of them review their exposure monthly or more frequently.

  • Many take a two-pronged approach: They scan high-level metrics like credit default swap spreads and bond spreads frequently and perform a more thorough analysis on a quarterly or semiannual basis.

The chart below captures respondents’ current review frequency. The cadence often reflects the size and volatility of the exposure. One treasury team with a significant cash balance pulls data into an Excel template on a daily basis. “I look at the report first thing every morning,” said the member. Any meaningful change triggers further review and potentially pulling money out and shifting it to another bank money market fund.

  • While treasuries are already monitoring their exposures closely, the survey data shows that 13% of them are planning to increase the frequency of reviews, and 15% that currently look at exposures on an as-needed basis are formalizing their process by establishing a set cadence.

In a debriefing session this week covering the full set of survey results, one member said his company leverages third party research from banks, ratings agencies and the Fed. But he said that data isn’t updated frequently enough—regardless of how often his team reviews its metrics.

  • “There is a lot of stuff, but it’s snapshots available quarterly or infrequently,” he said. “They really don’t scratch the itch because it’s so dynamic; you really need the in-between reporting.”
  • “That’s a really good point: a lot of indicators are periodic, regardless of your own review,” said NeuGroup’s Nilly Essaides, who led the survey and the debrief session. “Trying to get regulators and credit rating agencies to be more transparent would be helpful, because they’re very opaque until you see the downgrades after the fact.”
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Justin Jones
In Capital Markets, Investment Management

Gear Shift: Cash Investment Managers Eying Eventual Rate Cuts

With the end of Fed rate hikes in view, some managers are now talking about extending investment duration.

When 2023 began, corporate cash investment teams were battening down the hatches, keeping maturities very short in anticipation of more interest rate hikes. Almost eight months later, the discussion has shifted to when the Fed might start cutting rates, leading to a flatter and eventually steeper yield curve, opening the door to extending duration.

  • “Short-term rates may exceed or be more optimal than investing in one-year securities, but at some point, that’s going to turn,” said one cash investment manager at a recent session of NeuGroup for Cash Investments requested by members. “When it turns, the short-term’s going to get hit a lot harder than longer-term.”

With the end of Fed rate hikes in view, some managers are now talking about extending investment duration.

When 2023 began, corporate cash investment teams were battening down the hatches, keeping maturities very short in anticipation of more interest rate hikes. Almost eight months later, the discussion has shifted to when the Fed might start cutting rates, leading to a flatter and eventually steeper yield curve, opening the door to extending duration.

  • “Short-term rates may exceed or be more optimal than investing in one-year securities, but at some point, that’s going to turn,” said one cash investment manager at a recent session of NeuGroup for Cash Investments requested by members. “When it turns, the short-term’s going to get hit a lot harder than longer-term.”
  • For that reason and others, several members said they are starting a gradual process to lengthen the average maturity of their cash investment portfolios as inflationary pressures cool.
  • Other managers, though, are either waiting until the yield curve steepens or say they’ll stay short in keeping with their mandate to preserve capital, not aim for high yields.

Timing a move. On one end of the spectrum are cash investment managers convinced this is the right moment to start making changes. “This is historically the time to extend duration, where you time the Fed hiking cycle,” said one member. “This is where my mind will be for the next couple of years.”

  • Treasury at this company, which has kept investments “very short,” plans to increase duration over a two-year horizon. The goal is to return to pre-pandemic levels of 60% cash allocated to one- to three-year investments and keep 40% in short-term instruments, the member said.
  • This strategy in part reflects the views of an experienced investor on the company’s board who is pushing treasury to take more risk in the portfolio “if the timing is right.” The rest of the board, the member noted, is more risk averse. “If the three-year is even just a bit lower yield, they will ask us why we invested in that tender.”

Keeping your balance. This member commented that when a corporate puts all its money in cash, it is betting that rates will be higher for longer. Even if you agree with that bet, they said, “you should take a more balanced approach.”

  • Multiple members agreed, with one saying that a barbell-shaped portfolio—with investments in very short-term assets and very long-term assets—is the best way to balance that risk. “We take advantage of very high cash rates, and at the same time can extend the duration of the portfolio,” he said.
  • Another member, who believes the end of the Fed’s tightening cycle is in sight, is being cautious about the pace of policy change. “We have begun extending portfolio duration relative to our underweight positioning that was in place over the last 18-24 months,” he said. “But we are skeptical about the 100 basis points of cuts priced into the market in 2024, and we’re picking our spots on the curve accordingly.”

No time for timing. On the other end of the spectrum at the NeuGroup session were cash investment managers who will not be extending duration because it’s at odds with treasury’s mandate to protect principal and ensure liquidity—not to chase higher yields.

  • “We’ve been using that same policy for close to two decades,” one said. “The curve won’t change our strategy; we’re not a hedge fund.”
  • Another member equated trying to figure out how many more rate hikes there may be before the Fed starts cutting to a game he’s not willing to play. “It’s a magic eight ball issue,” he said. “I’m not good at those.”
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Justin Jones
In Risk Management, Technology

Generative AI’s Promise and Peril Weighed by ERM, Internal Audit

Analyzing interviews, drafting reports and auditing expense reports are among AI use cases for auditors and risk managers.

At recent peer group meetings of NeuGroup for Enterprise Risk Management and NeuGroup for Internal Audit Executives, members interested in harnessing the power of generative artificial intelligence tools discussed use cases as well as potential data security risks posed by AI. Several member companies have contracted with OpenAI—creator of ChatGPT—or Microsoft to set up in-house, large language models (LLMs) while others are considering the move.

Extra work now for less later. One member of the ERM group is using an in-house LLM to streamline his review of the nearly 100 risk interviews he is responsible for annually. He’s working with his company’s data analytics team to train the AI on past data and a glossary of jargon. All identifying information about individuals in the company was stripped out before uploading interview transcripts.

Analyzing interviews, drafting reports and auditing expense reports are among AI use cases for auditors and risk managers.

At recent peer group meetings of NeuGroup for Enterprise Risk Management and NeuGroup for Internal Audit Executives, members interested in harnessing the power of generative artificial intelligence tools discussed use cases as well as potential data security risks posed by AI. Several member companies have contracted with OpenAI—creator of ChatGPT—or Microsoft to set up in-house, large language models (LLMs) while others are considering the move.

Extra work now for less later. One member of the ERM group is using an in-house LLM to streamline his review of the nearly 100 risk interviews he is responsible for annually. He’s working with his company’s data analytics team to train the AI on past data and a glossary of jargon. All identifying information about individuals in the company was stripped out before uploading interview transcripts.

  • Wringing new efficiencies from the tool required increased legwork on the front end, the member said. “The problem is I just created more work for myself this year because I’ve got to manually go through and look at what the tool says versus what we say and see if it’s reasonable.
    • “Otherwise, do you just trust it? How do you audit it unless you do all the manual work? So now we’re doing twice as much work in hopes that next year we’ll be doing half as much work.”
  • In an ideal world, the member said, “I’m hoping it will be near real-time so that we can do an interview, and either right after the interview or within a few hours, the interviewee gets a note that says, ‘Here are the meeting notes. This is what we believe the key points were. Please comment.’ That would save me a whole lot of time.”

Drafting reports. Across the two groups, the most common use case being discussed involves the drfafting of audit or risk reports. While reports produced by generative AI will require revision and correction, they will help get the ball rolling, members say.

  • One member explained why he’s optimistic about the tool. “It seems like the most obvious use case for internal audit is the audit reports or the drafting process.
    • “If ChatGPT was able to pass the graduate management exams at an 80 percent rate, then surely it can come up with [an outline of] a draft audit report that would be meaningful in a way that would save enough time and mindshare to be useful.”
  • He views this as low-hanging fruit but sees more applications including audit planning if it delivers what’s been promised. “Pretty mind-blowing,” he said.

Expense reports. Other use cases include using the technology to assist or fully take over some of the painstakingly detailed work of combing through data that needs to be audited—like expense reports. One member sees a future use case in his company’s continuous audit program, which includes going through mountains of credit card expense reports.

  • He said, “Ideally it would identify things with precision, rather than producing a list of 500 things that could be fraud” that someone would then need to review manually. Another member wistfully added, “You kind of think AI should do your T&E audit for you.”

A hallucinating black box. Several members across the two groups acknowledged that GPT tools function as a black box, raising questions about how to audit outputs from them. As has been widely reported, generative AI also occasionally introduces errors, a phenomenon that has been dubbed hallucinating.

  • The member using the tool to streamline the risk interview process reported back in a recent monthly ERM session on the results of his first foray. “No one knows how this works, so it’s really hard to audit,” was one comment.
  • He also described issues in the initial outputs. “The AI was hallucinating. We tried to limit the creativity factor to make it be more literal. But if you say, ‘here’s a transcript, tell me what the top 10 risks are in this discussion,’ in a 45-minute discussion, some people didn’t mention at least 10. Some mention two over and over again. Well, the tool will try to figure out something from that text to make up 10.”

Managing the risks. In the past few months, some corporates, such as Samsung, have banned the use of generative AI chatbots for employees. The Samsung ban came after an engineer uploaded sensitive internal source code to ChatGPT.

  • And several member companies in the ERM and internal audit groups are prohibiting employees from using ChatGPT or other LLMs until they have a closed system—with most companies eying enterprise licenses from LLM providers including OpenAI. The goal is mitigating the potential risk of IP or other proprietary information finding its way onto the internet.
  • Several companies have some sort of AI committee. One member has an AI council through which business leaders within the organization can make requests to use AI in their function. She discussed with her team possible use cases and said report writing seemed like the most natural choice. “We’re going to log a request to get some kind of approval to just get the discussion going,” she said.

The biggest risk: missing out? Almost every member involved in these conversations sees that perhaps the biggest risk is getting left behind by competitors who adopt and leverage the tool quicker than they do.

  • One ERM member put it bluntly: “Can a cut-rate, mediocre competitor become a power competitor if they figure out how to use these tools quicker than we do?” Another said, “AI has replaced ESG and work-from-home as a topic that you can’t escape.”
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Justin Jones
In Cash & Working Capital, FP&A

Boosting Agility by Increasing Speed in Budgeting and Planning

Balancing act: FP&A must balance a faster budget cycle with business unit accountability and effective targets.

Agility is about keeping up with and adjusting to the rapid pace of change in market and business conditions. This flexibility often runs counter to FP&A’s deliberate, typically granular, budget-setting process. At a recent session on agility in annual planning, members of NeuGroup for Heads of FP&A discussed how to balance the need for speed with setting effective performance targets and ensuring business unit-level accountability.

Keeping speed in perspective. A shorter budget cycle can enhance agility because it allows FP&A to better capture changes in business conditions and saves time on having to go back and recalibrate numbers before finalizing the plan. An in-session poll showed that 38% of participants complete the budget in 60 to 90 days; a similar percentage have a 90- to 120-day cycle (see chart below).

Balancing act: FP&A must balance a faster budget cycle with business unit accountability and effective targets.

Agility is about keeping up with and adjusting to the rapid pace of change in market and business conditions. This flexibility often runs counter to FP&A’s deliberate, typically granular, budget-setting process. At a recent session on agility in annual planning, members of NeuGroup for Heads of FP&A discussed how to balance the need for speed with setting effective performance targets and ensuring business unit-level accountability.

Keeping speed in perspective. A shorter budget cycle can enhance agility because it allows FP&A to better capture changes in business conditions and saves time on having to go back and recalibrate numbers before finalizing the plan. An in-session poll showed that 38% of participants complete the budget in 60 to 90 days; a similar percentage have a 90- to 120-day cycle (see chart below).

  • However, a shorter cycle time is not always an indication of excellence in efficiency. “I think producing the budget in 60 days may be a false outlier because it is reflective of a less rigorous approach to a very complex issue,” said the member with the shortest cycle time. “In many cases, corporate does not understand the story.”
    • FP&A is working on improving the budgeting approach. “There would be more data analytics involved and more strategic discussions,” the member said. “And yes, that will result in a longer cycle time but a more effective process.”

A broader alignment. A slower cycle can also reflect the breadth of the planning process. “For us, annual planning is highly integrated, which requires a lot of sequential steps,” another member shared. This introduces greater complexity to the process because it involves more stakeholders. “By the time you get to the end, there’s a likelihood of having to make some changes that may require a catch-up, but only in very rare cases,” he stressed.

  • Said another member: “Our process is a trade-off between granularity and top-down.” That is especially challenging because of the company’s exposure to volatility in commodity prices. This FP&A leader appointed a staff member to focus on fixing the ongoing challenge of chasing commodity prices.
  • Finding the right balance between business unit/bottom-up input and faster top-down approaches is hard, in large part because absent local involvement, business leaders do not embrace the plan as their own and may have less accountability.
  • One member is aiming to run long-range planning and the financial and operational plans in tandem. “We want to do both from October to December,” he said. “The initial focus is on the LRP and then cascade it down to the annual plans to avoid redundancies.” The plan is “blessed” in December and locked in. “There is no broad refresh except for FX rates.”

Roll it forward. Another member is enhancing agility by relying on a rolling forecast to seed the budget for the next fiscal year.

  • “We have a rolling 18-month forecast horizon that we update every quarter, which informs the trend for the year ahead,” the member said. “So next year’s plan is the next four rolling forecasts. Target-setting begins midyear when the next fiscal year forecasts are available. The result is a lot less time spent on a parallel budgeting process as well as avoiding the fire drill toward the end of the planning season.”
  • At first, he admits, “the business leaders thought it was just another FP&A Excel exercise. But as it came closer to the end of the year, they started taking it a lot more seriously. This was the first year we did this, and it was quite successful.”

The metrics that matter. Seventy-five percent of the members polled reported they use driver-based planning to cut through the noise in the data, which saves time and produces a more meaningful outcome. The challenge is identifying the metrics that truly move the needle on business performance.

  • “We used to boil the ocean for data; we loved to know the details,” one member said. However, this company has done extensive historical and statistical analysis to narrow down the list of factors that drive the business from over 100 to just two. “We now tell the story about the plan around those two. Ultimately, there were just a couple drivers per unit, which boiled down to volume and revenue.”
  • Among members who use driver-based planning, the number of drivers varied from two to 12. However, the company with 12 drivers is working on narrowing the list.
  • A fully top-down approach carries the risk of reducing business leaders’ accountability, so most are using a hybrid. However, with the right level of education, changes to performance evaluation metrics and senior-management messaging, members have managed to create a consistent message around a smaller set of key drivers.
    • This was not an easy process at one company. “It took us five years of trying to be culturally ready for it,” said the FP&A leader. Several factors helped bring the business leaders on board. First, they needed help in figuring out how to prepare for upcoming levels of extreme volatility in market conditions. Second, the leaders had a voice in determining what the key drivers would be. Finally, “the CEO recognized that this is an important effort.”

Guiding the business. Ultimately, while the plan sets targets for compensation, “we really use the forecast to guide the business,” one member said. “We can make changes to specific business targets due to events outside their control, e.g., a fire shuts down a plant.”

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Justin Jones
In Banking, Treasury Management

Gauging Strength and Progress: Treasury Performance Metrics

Regular monitoring and analysis of metrics can help identify areas of strength and weakness, and ensure efficiency.

Treasury performance metrics are crucial for corporations as they provide a framework for assessing the efficiency and effectiveness of their treasury operations. They serve as a window into how well the treasury team is functioning in a variety of areas, from cash management to payments to foreign exchange. At a recent meeting of NeuGroup for Mid-Cap Treasurers, one member gave an updated presentation on how his team utilizes key performance metrics.

  • The presentation specifically focused on global cash management, bank account reduction, payments, bank fees, collections, FX, credit card processing and insurance. Despite this long list, the member stressed the importance of not overwhelming the team with too much data and regularly revisiting the metrics to ensure they’re useful.

Regular monitoring and analysis of metrics can help identify areas of strength and weakness, and ensure efficiency.

Treasury performance metrics are crucial for corporations as they provide a framework for assessing the efficiency and effectiveness of their treasury operations. They serve as a window into how well the treasury team is functioning in a variety of areas, from cash management to payments to foreign exchange. At a recent meeting of NeuGroup for Mid-Cap Treasurers, one member gave an updated presentation on how his team utilizes key performance metrics.

  • The presentation specifically focused on global cash management, bank account reduction, payments, bank fees, collections, FX, credit card processing and insurance. Despite this long list, the member stressed the importance of not overwhelming the team with too much data and regularly revisiting the metrics to ensure they’re useful.
  • The quarterly reports generated are used more for operational purposes than for the CFO, focusing on functional units like accounts receivable and accounts payable (AR/AP).

Constant vigilance. In terms of global cash management, the member emphasized the need to monitor weekly performance, track the number of bank accounts closed, the interest earned and invested cash. The analysis also identified a build-up of excess cash that was set aside and used for a major acquisition.

  • The company has been actively reducing its bank accounts through a rationalization project and was able to eliminate 300 in 2018. However, a continuous string of M&A deals over the years kept the number of accounts growing.
  • For example, the above-mentioned acquisition brought 1,100 new bank accounts, which the member and his team have been able to trim to 850. Nonetheless, he said, “we’re back to square one.” The goal now is to continue eliminating unnecessary accounts and banks.

Fee reduction. Payment analysis focused on ACH, checks and wires (see charts above). The aim was to reduce wire payments and increase ACH payments for cost savings. Similarly, bank fees were monitored closely to ensure parity among different banks.

  • The member highlighted the team’s collection efforts and the need to balance various methods and analyze associated costs like lifting fees for international wires. The company had also transitioned some business operations from the UK to Ireland for cost savings.

More cost reduction in FX and credit cards. Foreign exchange was another major treasury concern, with a focus on notional FX and ensuring costs were minimized by using platforms like FXall or Bloomberg for transactions.

  • The company also tracked credit card processing costs, authorization rates and chargeback percentages, aiming to improve key metrics and reduce fees.

Insurance was another area of focus, with a team dedicated to contract reviews and managing insurance certificate requests.

The final discussion touched upon the idea of whether liquidity measures and bond trading status should be included in the performance metric reports. The presenter suggested a separate deck might be appropriate for these more financially oriented metrics.

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Justin Jones
In Accounting & Disclosure, Crypto, Tax

Clearing the Crypto Fog: Experts Offer Clarity on Tax Questions

TaxBit joined NeuGroup’s digital assets peer group to make sense of crypto tax and accounting.

A revised cryptocurrency bill proposed by US Sens. Cynthia Lummis and Kirsten Gillibrand last week would provide much-needed clarity on issues including definitions for stablecoins, decentralized finance and—crucially—brokers. The bill joins proposals from the IRS, FASB and the Financial Stability Board, and yet-to-be-implemented standards from the Bank for International Settlements.

  • However, at last month’s meeting of NeuGroup for Digital Assets, members shared that, despite a great deal of proposed crypto regulation, a lack of policy that’s actually been adopted is creating headaches, especially around tax and accounting.

TaxBit joined NeuGroup’s digital assets peer group to make sense of crypto tax and accounting issues.

A revised cryptocurrency bill proposed by US Sens. Cynthia Lummis and Kirsten Gillibrand last week would provide much-needed clarity on issues including definitions for stablecoins, decentralized finance and—crucially—brokers. The bill joins proposals from the IRS, FASB and the Financial Stability Board, and yet-to-be-implemented standards from the Bank for International Settlements.

  • However, at last month’s meeting of NeuGroup for Digital Assets, members shared that, despite a great deal of proposed crypto regulation, a lack of policy that’s actually been adopted is creating headaches, especially around tax and accounting.
  • Two representatives from meeting sponsor TaxBit offered relief for the pain: Aaron Jacob, VP of enterprise accounting, and Erin Fennimore, VP of tax and information reporting, demystified uncertainties and untangled misconceptions around digital assets.
  • TaxBit, which makes accounting software for digital currencies and NFTs, also provides advisory services to clients. In the session, Mr. Jacob and Ms. Fennimore offered answers to these questions:
    • What is taxable?
    • Do I need a money transmitter license?
    • How do I account for the value of a digital asset like an NFT?
    • What if I work with a third party that assumed the crypto risk?

What exactly is taxable? “Everything has tax and accounting consequences.” That phrase is how Mr. Jacob kicked off the session, emphasizing the importance of “not being caught in a foot fault” by regulators. The first step, he said, is to know what actions are taxed as defined by a 2014 IRS ruling that stated digital assets are property. He shared the list below:

  • Selling a digital asset for fiat.
  • Exchanging a digital asset for property, goods or services.
  • Exchanging or trading one digital asset for another.
  • Receiving a new digital asset as a result of a new blockchain’s creation via a so-called hard fork.
  • Receiving a new digital asset as a result of mining or staking activities.
  • Receiving a digital asset as a result of being sent a free digital token through what’s called an airdrop.
  • Receiving or transferring a digital asset for free (without providing any consideration) that does not qualify as a bona fide gift.

Do corporates need a money transmitter license to transact in crypto? The answer is no for most companies, as they are not brokers.

  • As defined by the 2021 Infrastructure Investment and Jobs Act, brokers include exchanges, platforms and digital wallet providers that transact on behalf of third parties. Ms. Fennimore added that the broad definition will need to be narrowed by regulators.
  • Any brokers as defined by the Jobs Act, including crypto payment processors and NFT marketplaces, must obtain a so-called BitLicense from the State of New York if they want to do business in the US. BitLicenses require paying quarterly fees to maintain, which vary by broker.

Is an NFT taxable? Yes, but it’s complicated. Although an NFT sale is taxable, Mr. Jacobs said the act of creating an NFT, or minting, does not qualify as a taxable event. However, minting an NFT on the ethereum blockchain incurs gas fees, which are fractions of ether used to pay for the validation on the blockchain—which would be considered a taxable event.

  • The virtual tokens are accounted for by adding the cost of minting plus a valuation of the newly minted digital asset. If the NFT is immediately up for sale or auction, the taxable value is the lowest price, or floor, at which it’s listed.
  • If the NFT is not immediately available to purchase, one member at a crypto-native company suggested using the value of a comparable asset for sale. For example, if an individual mints an NFT tied to a famous athlete but doesn’t want to sell it, the corporate can use the price of other NFTs tied to a major sports figure, which would be comparable.
  • “There’s just not a lot of authoritative guidance on NFTs, from FASB or IRS, and plenty of gray area to navigate,” Mr. Jacob said. “Companies should clear their approach with internal policy teams and potentially even auditors.”

How are taxes affected if a corporate, looking to avoid having crypto on the balance sheet, works with a payment processor? Some payment processors, including Mastercard and PayPal, offer services that allow individuals to pay with crypto, which is immediately converted to fiat before being sent to a retailer. In most cases, normal sales tax rules would apply, eliminating any need to worry about crypto accounting regulations.

  • One member who works at a payment processor presented on his company’s tax and accounting infrastructure, which is built using TaxBit tools. This service assumes the accounting responsibility for the company and its clients; it also has a dashboard that provides real-time gain and loss information, with advanced reporting capabilities.

Questions on the horizon. Mr. Jacob and Ms. Fennimore said that, over the next year, enforcement and policy action is expected in much of the crypto industry, as regulators continue to navigate the new world of digital currencies.

  • Earlier this year, FASB published a proposed update to its accounting standards which included accounting for cryptocurrency assets at fair value. A TaxBit explainer on the proposal said this update would remove “frustrating impairment charges” for crypto assets within the scope of FASB’s proposed guidance. Alongside a graphic shared at the meeting (see above), Mr. Jacob said he anticipates an update to FASB’s standards by the end of 2023.
    • And in March, the IRS sought feedback on NFTs potentially being taxed as collectibles. TaxBit called the proposal and request for comments “good news as it represents much-sought collaboration from regulators on digital asset questions.”
  • “Over the next six months, regulators will be all about enforcement,” said NeuGroup peer group leader Matt Thomas, who leads the digital assets group. “Once that’s done, then expect policy from FASB, with Congress moving forward in the meantime.”
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Justin Jones
In Talking Shop, Tax

Talking Shop: Tax Withholding Methods for Restricted Stock Units

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Context: Restricted stock units (RSUs) are a form of equity-based incentive compensation awarded to employees. They allow corporates to delay dilution caused by issuing stock until a vesting period is complete, often linked to the employee’s performance or their time at the company. Like with other forms of compensation, RSUs require the employer to withhold payroll taxes, in this case when the shares are delivered to the employee.

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Context: Restricted stock units (RSUs) are a form of equity-based incentive compensation awarded to employees. They allow corporates to delay dilution caused by issuing stock until a vesting period is complete, often linked to the employee’s performance or their time at the company. Like with other forms of compensation, RSUs require the employer to withhold payroll taxes, in this case when the shares are delivered to the employee.

Picking a method. The treasurer of one NeuGroup member technology company explained to NeuGroup Insights the tax withholding decision facing companies that issue RSUs: “You have a choice as to how you want to fund the payroll taxes. Assume an employee is getting 100 shares and that the tax rate is 40%:

  • “Sell to cover. This means that you deliver 60 shares to the employee and you sell the other 40 shares in the open market to raise funds for the payment. If you have a lot of stock awards being issued at the same time, this can add a lot of selling activity in your stock on one day.
  • “Net share settlement. This means you deliver 60 shares to the employee and fund the tax payment out of corporate cash. This means you don’t have to issue equity to fund a tax payment and you don’t have the selling pressure on your stock like in sell to cover. The downside of this is that it uses up cash.”

That downside means companies that want to conserve cash may prefer to use sell to cover, a point made by Deloitte in 2020 amid the economic downturn sparked by the pandemic: “Companies that currently utilize net share settlement procedures for equity award tax withholding and have a need for additional cash could consider shifting to a ‘sell to cover’ arrangement whereby some of the stock underlying the equity award is sold to cover the withholding tax. Such a change would obviate the need for the company to use its own cash to satisfy the tax withholding obligations.”

Member question: “For employee RSUs, have other members recently considered switching from net share settlement to sell to cover?

  • “We partner with Shareworks [owned by Morgan Stanley] and are evaluating switching from net share settlement (withholding a portion of shares for taxes) to sell to cover (at vesting, sell a portion to cover taxes). If this is something your firm has recently analyzed or executed, I would appreciate the opportunity to compare notes or takeaways.”

Peer answer 1: “My company has used the sell to cover approach for [at least] the past three years.”

Peer answer 2: “We went the opposite way and switched from sell to cover to net share settlement last year. I am happy to talk about the analyses that we did.”

Plenty of cash: In a follow-up email exchange, the member doing the opposite of what the questioner is considering explained why: “There are many reasons, but simply, we have plenty of cash to pay the tax. In general, I don’t think you want to issue equity just to pay a tax bill as equity is the most expensive form of capital.

  • “Most tech companies issue RSUs on a quarterly basis where all the employees receive their awards on the same day; thus if you sell to cover, you will have four days a year with heavy selling pressure due to stock compensation.
  • “There are also employee experience issues with sell to cover. The employee gets the tax amount calculated on the day before the grant. Then they get the stock in their brokerage account on the day of heavy selling, which likely brings down the stock price; and if they sell, they are selling stock at a price lower than the price their taxes were calculated. That causes a lot of grief for employees.”
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