Insights

Justin Jones In Compliance, Talking Shop

Talking Shop: Third Parties for SWIFT Attestation Compliance?

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].

Member question: “Are any of you SWIFT corporate members? If yes, SWIFT requires an independent assessment of controls as part of their security attestation compliance that can be done by internal audit (IA) or a third party. Which third-party vendors do you use?”

Peer answer 1: “We are using PwC to perform the independent assessment. We have typically done this internally, but this year we were ‘lucky enough’ to be hand selected by SWIFT to complete the assessment, which requires using an external assessor.”

Peer answer 2: “We found third parties very expensive. Our internal IA group does the assessment and it hasn’t been too burdensome. We have AL2 in-house but would like to move to the SWIFT AL2 cloud version which moves much of the assessment requirements back to SWIFT and off your shoulders. Using a SWIFT service provider does the same thing.”

Peer answer 3: “We used Grant Thornton to do this assessment last year.”

Peer answer 4: “We are looking at Axeltrees for our assessment but have not yet signed the contract.”

Peer answer 5: “Deloitte completes our third-party assessment.”

Peer answer 6: “Our company is a SWIFT member. We are approaching the independent assessment as an internal independent assessment, i.e., compliance group review.”

Peer answer 7: “We also do an internal independent assessment coordinated by our data security/information protection teams.”

Peer answer 8: “We also used our internal audit team to do the assessment in-house.”

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Justin Jones In Crypto, Technology

How to Climb the Crypto Learning Curve

Just-released NeuGroup Peer Research reveals that despite the turmoil in the cryptocurrency market, treasury’s efforts to become crypto-ready remain on track.

The summer of 2022 wrought havoc on the cryptocurrency market; however, the extreme volatility did not undermine corporate treasuries’ resolve to become more crypto-fluent. While the headlines were disturbing, crypto payments have now become an inevitability for companies, and to ignore crypto can mean missing important strategic growth opportunities. In our most recent NeuGroup Peer Research report, A Treasurer’s Guide to Becoming Crypto-ready, produced in partnership with liquidity provider B2C2, we share insight and corporate treasury examples based on dozens of interviews with members in recent months.

Just-released NeuGroup Peer Research reveals that despite the turmoil in the cryptocurrency market, treasury’s efforts to become crypto-ready remain on track.

Emerging stronger. The late spring collapse of stablecoin Terra/Luna sent shockwaves throughout the crypto-verse. But according to Nicola White, USA CEO of B2C2, “The market turmoil has been largely the result of crypto-ecosystem participants prioritizing P&L growth over sound risk management and good governance. The lesson for participants is to choose counterparties carefully and prioritize those that are building for the long term.”

Fast-tracking the exploration process. Our research revealed that many corporate treasuries are accelerating their efforts to become crypto-savvy.

The majority focus on supporting their companies’ strategic objectives, speeding up cross-border payments, and eventually accessing crypto as a funding source and even leveraging investments in digital currencies to pick up yield.
“Many treasury groups are way behind in terms of the back-office operationalization of accepting and paying in cryptocurrencies,” said one treasurer. “Digital assets are the future. We just need to introduce them in a safe and controlled manner.”

Ready. Set. Go. To speed their climb up the learning curve, treasuries are forming “SWAT” teams with the mandate of speaking with vendors, fintechs and each other to prepare for transacting in crypto.

“Working through the governance, compliance and overall strategy for entering the crypto and the digital assets space is important to do before competitors and other market participants build out their own,” said Matt Thomas, who leads NeuGroup’s digital assets working group. “During the bear markets, companies are building, investing and acquiring where they see opportunities.”

Companies are taking one step at a time. Treasuries are inherently cautious, so they are taking a phased in approach to entering the crypto markets:

Phase 1: Mastering the crypto ecosystem. Most corporate treasury teams are currently at the knowledge-acquisition phase.

In our crypto-related sessions, including those of NeuGroup’s digital assets working group, members still have more questions than answers.
To speed up learning, treasury should benchmark against peers, voraciously consume research materials, and collaborate with internal partners such as accounting, tax and legal as well as players in the crypto ecosystem, e.g., OTC dealers, liquidity providers and custodians.

Phase 2: Piloting through a third party. Treasury typically starts by opening an account with a third party – e.g., a custodian or a broker-dealer OTC provider that is connected to others in the ecosystem and provides a one-stop solution for safekeeping, trading and transaction monitoring.

“Right now, our opinion is why build something we can rent? So, we use a third party for market access and pricing. However, the rich fees and cost will drive whether to bring in-house,” one member of the working group said.
“A third party can handle the volatility in prices, which still requires specialized skills,” explained another member.

Phase 3: Holding crypto on the balance sheet. Once treasury becomes more comfortable with accepting crypto payments, investing in crypto and trading cryptocurrencies via an exchange, liquidity provider or OTC broker, they begin to experiment with holding some crypto on their balance sheet as working capital.

In some cases, treasury has a two-way flow that is crypto, e.g., in the case of NFTs. But for now, for most corporates, the short-term holding of crypto is not material to their balance sheet.
Most treasuries immediately convert bitcoin or ether into USD or another fiat currency.

Phase 4: In-sourcing the technology infrastructure. Finally, treasury organizations that have significant crypto holdings and trading volume are beginning to assemble the necessary technology platforms required to transact on blockchain, and hedge exposures with derivatives.

At this point, it is important to address any system connectivity issues between crypto trading and other critical processes such as cash forecasting, trade confirmations, accounting/record keeping and risk management.

Don’t be left behind. The bottom line is that treasury teams must get ready to provide answers to inevitable questions from CFOs and treasurers about crypto opportunities. “Crypto is here to say and corporates have not been dissuaded from participating in the market, despite recent market events,” Ms. White from B2C2 said. “Whether for payments, storing value or unlocking opportunities, institutions are increasingly active in the digital asset class.”

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Justin Jones In Cash & Working Capital, FP&A, The NeuGroup Insights Interview

Keys to Cash Flow Sustainability: Fresh FP&A’s Chris Ortega

An expert’s take on why managing cash burn and liquidity today is more critical than ever for finance organizations.

In a video clip you can watch by clicking here or hitting the play button below, recognized FP&A authority and influencer Chris Ortega shares valuable insights on why treasurers, leaders of FP&A and CFOs managing risk in this time of economic and market volatility need to be “laser-focused” on building paths to cash flow sustainability and optimization.

Mr. Ortega today is leveraging his extensive background in accounting, audit, FP&A and finance leadership at high-growth companies as CEO of Fresh FP&A, a consultancy focused on finance transformation and scalable solutions that provides businesses with fractional CFO, FP&A and finance support.
The first of several keys for finance teams to achieve cash flow sustainability, Mr. Ortega explains in the video, is to focus on answering the question, “how are you bringing the business along in this journey?” The upshot: partnering with business units and bringing them value is a must for effective finance organizations.
In the weeks ahead, we’ll bring you our full conversation with Mr. Ortega about cash burn, spending, cash flow “runways” and more on NeuGroup’s Strategic Finance Lab podcast, available on Apple or Spotify.

An expert’s take on why managing cash burn and liquidity today is more critical than ever for finance organizations.

In a video clip you can watch by clicking here or hitting the play button below, recognized FP&A authority and influencer Chris Ortega shares valuable insights on why treasurers, leaders of FP&A and CFOs managing risk in this time of economic and market volatility need to be “laser-focused” on building paths to cash flow sustainability and optimization.

Mr. Ortega today is leveraging his extensive background in accounting, audit, FP&A and finance leadership at high-growth companies as CEO of Fresh FP&A, a consultancy focused on finance transformation and scalable solutions that provides businesses with fractional CFO, FP&A and finance support.
The first of several keys for finance teams to achieve cash flow sustainability, Mr. Ortega explains in the video, is to focus on answering the question, “how are you bringing the business along in this journey?” The upshot: partnering with business units and bringing them value is a must for effective finance organizations.
In the weeks ahead, we’ll bring you our full conversation with Mr. Ortega about cash burn, spending, cash flow “runways” and more on NeuGroup’s Strategic Finance Lab podcast, available on Apple or Spotify.

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Justin Jones In FX, Senior Executive, Sponsored Content

Answering the CFO’s Call

A soaring dollar is threatening earnings; get ready for more CFO questions.

The dollar’s ascent is causing a lot of heartburn for CFOs and boards. A stronger greenback reduces the value of FX-denominated income. For many US companies, foreign income comprises a large chunk of total revenue; thus, the hit to earnings can be substantial. In recent NeuGroup peer group sessions, the topic of containing the impact of a stronger dollar on financial results has been prevalent and reached far beyond the confines of our two FX Risk Management Peer Groups. ”The rise in the dollar value has triggered a sharp focus on members’ risk management programs,” said NeuGroup Director Julie Zawacki-Lucci, who leads the FX groups. “Members are re-examining their hedging processes. Treasuries are under pressure to explain their results to senior management.”

A soaring dollar is threatening earnings; get ready for more CFO questions.

The dollar’s ascent is causing a lot of heartburn for CFOs and boards. A stronger greenback reduces the value of FX-denominated income. For many US companies, foreign income comprises a large chunk of total revenue; thus, the hit to earnings can be substantial. In recent NeuGroup peer group sessions, the topic of containing the impact of a stronger dollar on financial results has been prevalent and reached far beyond the confines of our two FX risk management peer groups. ”The rise in the dollar value has triggered a sharp focus on members’ risk management programs,” said NeuGroup Director Julie Zawacki-Lucci, who leads the FX groups. “Members are re-examining their hedging processes. Treasuries are under pressure to explain their results to senior management.”

Asked and answered. “Among our clients, we see CFOs asking a lot more questions,” said Chatham Financial’s Jason Peterson, “because the currency landscape is really impacting corporate earnings.” Treasury is in the hot seat. It must respond quickly and clearly to demands for information and report on the effectiveness of the hedging program and explain the correlation between the company’s currency exposures and EPS—by currency. The upshot is that treasuries need a more sophisticated end-to-end FX risk management solution, which provides greater flexibility and advanced reporting functionalities.

Just having the right data is not enough. It’s critical that companies forge a strong partnership with their risk management technology solution provider. At one company, which derives over 50% of its revenue from overseas, a previous standalone tool became outdated, and the vendor ceased making upgrades. When seeking to replace the product, treasury wanted more than just another product. “We were looking for more of a partner with thought leadership and an industry-leading technology product offering,” said the FX manager. “We looked at multiple options outside of our prior system,” she said. “What we found is that Chatham is an organization that is chock-full of thinkers who are really knowledgeable, who can answer any question and have their fingers on the pulse of the market,” she added.

The need for speed. “You can’t tell the CFO or the board that you’ll get back to them in a couple of days,” Mr. Peterson said. Unfortunately, this functionality is absent from many of today’s TMS because they lack the reporting flexibility of a best-of-breed tool like ChathamDirect, which offers dynamic interaction with data. “BI reporting tools (Power BI) are embedded within our product,” he explained. “It’s a lot easier and faster to extract insight and reporting and drill down by currency. Having access to the information and the ability to cut through and produce visualization enables you to quickly answer critical questions that inform management decisions.”

The ability to run analytics and answer management questions at speed is in large part a function of ChathamDirect’s holistic solution. “With Chatham, we have an end-to-end trading solution,” said one member. “At the front end, Chatham Direct is fully integrated with FXall, our trade execution platform,” he said. “Then new trades migrate seamlessly into the solution to enable analytics and hedge accounting reporting.”

Overcoming legacy concerns. An important reason finance and treasury have sought one-stop solutions has been the difficulty of integrating disparate systems. “The market needs to reorient itself away from adopting all-in-one solutions that often lack optimal functionality in specific areas, in particular for risk management,” Mr. Peterson noted. With the advent of APIs, “today’s systems have a much easier time talking to each other.” For example, ChathamDirect provides real-time integration with the ERPs, trading portals, settlements and G/L hedge accounting—all by leveraging APIs.

As treasury knows all too well, the transition from an existing system to a new system can have important data implications. As one company migrated from its legacy solution “we had to move all existing trades to Chatham,” says the FX manager. “It was a nerve-wracking process. The company had to reformat the data and make sure every single trade, of the thousands on the system, got migrated. Chatham made the process less painful. “They were very instrumental in supporting this difficult process, because of their commercial and technology expertise. “We never felt that they were getting impatient.”

Improving the economics. Accurate forecasting is often the most challenging hurdle that risk managers face. Because of the current economic volatility, forecasts may be less reliable. As a result, many treasuries hedge a smaller portion of their exposure, in order to not run afoul of hedge accounting rules. Thus, they create the potential for a significant impact on earnings—with which most CFOs, boards and investors are uncomfortable. Much of the effect on the bottom line is driven by limited TMS hedge effectiveness measurement functionalities – often limited to the critical terms match (CTM). In contrast, ChathamDirect supports multiple hedge effectiveness methodologies. “As organizations reconsider their hedge programs, marrying the desired economics with the accounting constraints can be a challenge,” said Mr. Peterson. “Our regression and triple regression models enable treasury to protect a larger share of its cash flow exposures, from the typical 50%-60% for the near-month to up to 80%-90%,” Mr. Peterson said. “By increasing the hedge ratio and extending the effectiveness window, treasury can produce better economics for the organization.”

“While we still use CTM for hedge accounting, our understanding of the hypothetical derivative method is that it gives you more flexibility with the effectiveness of your hedges,” one FX manager explained. “We are starting to be a little bolder in looking at the program and improving it.” In a recent situation, the company found that it inadvertently over-hedged. “Chatham was helpful in allowing us to understand the guidance on this.”

Designed by practitioners, supported by practitioners. The expanded functionality and greater flexibility provided by ChathamDirect reflect the origins of the tech platform. “It was developed with deep corporate treasury expertise,” Mr. Peterson explained. In addition, because Chatham operates multiple hedge programs on behalf of Fortune 500 companies, it also has first-hand experience in addressing the challenges of corporate risk management programs; that knowledge informed the solution’s design. In addition, customers get more effective support when they need it, because staff is familiar with the process, not just the technology.

This capability was particularly important to one member who joined treasury’s FX group at the start of 2022; the relationship with Chatham Financial enabled him to quickly come up the learning curve. “I have never done FX before,” he noted. “But I’ve been able to schedule calls whenever I need to and leverage their expertise.” He added that Chatham acts as a resource not only from a system standpoint, but also a strategic perspective. “They speak the language and have practitioner experience.” The ease of communication “exposed me to different functionalities as well,” he said. Ultimately, “this is where the technology and your hedging strategy come together.”

This developmental aspect was also critical for another FX manager, who experienced significant turnover in her group. “Their willingness to bend over backward helped me sleep at night,” she said. The turnover complicated the team’s domain knowledge. “It was good to know that FX was in good hands.”

Sponsored by:

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Justin Jones In FX, Pension and Benefits

Avoiding a P&L Punch Packed by Nonqualified Deferred Comp Plans

Methods for hedging NQDC liability gains to avoid the pain of being hit by financial statement surprises.

Nonqualified deferred compensation (NQDC) plans allow companies to offer executives the opportunity to defer taxes and earn market-based, notional returns on the deferred amounts while the company gets access to additional capital. That’s all good.

The complication is that executives usually choose from a menu of market-based “notional” investments whose gains directly affect compensation expense and the P&L unless they are hedged. Depending on the plan size, volatile markets can result in those gains swinging back and forth by tens of millions of dollars.
Acknowledging that challenge, a member of NeuGroup for Pensions and Benefits queried peers about their hedging strategies.
There are different ways to hedge NQDC plans, with total return swaps (TRSs) standing out as an efficient approach.

Methods for hedging NQDC liability gains to avoid the pain of being hit by financial statement surprises.

The complication is that executives usually choose from a menu of market-based “notional” investments whose gains directly affect compensation expense and the P&L unless they are hedged. Depending on the plan size, volatile markets can result in those gains swinging back and forth by tens of millions of dollars.
Acknowledging that challenge, a member of NeuGroup for Pensions and Benefits queried peers about their hedging strategies.
There are different ways to hedge NQDC plans, with total return swaps (TRSs) standing out as an efficient approach.

TRSs and de minimis mismatches. One assistant treasurer said the $350 million liability of his company’s deferred compensation plan can swing by $20 million to $50 million, but using TRSs to offset those swings has resulted in quarterly mismatches of just $1 million to $2 million.

“It’s so small that it doesn’t matter,” the AT said, adding, “We’ve been able to do it cheaply and effectively.”
His team looks through to all the individual investment elections and aggregates them into large-cap, small-cap and international equities, as well as fixed-income, and hedges those positions using a TRS.
The team rebalances the positions monthly based on data it gets from the benefits department.

Be wary of consultants. The AT noted that some consulting firms offer soup to nuts solutions to hedge deferred compensation liabilities.

“They’ll tell you all the problems with doing it yourself and they’ll try to charge you a massively exorbitant fee,” he said. “We do it ourselves. We’ve had no tax problems and it’s worked perfectly.”

Hedge accounting? Another member asked the AT if his firm gets hedge accounting treatment for the TRS transactions.

“No, we don’t want hedge accounting,” he responded, noting that the TRS offsets the fluctuations of the marked-to-market liabilities in the P&L, and his team makes sure that both positions appear geographically in the same financial statement line item.

COLI hedging. Another member said his company’s deferred compensation plan holds a corporate-owned life insurance policy (COLI), and his team matches monthly whatever participants choose as investments in the COLI.

“There’s a line item mismatch, and it’s a little more complicated, but that also works,” he said.
Another AT said his firm had taken a similar approach, investing in the underlying assets and then rebalancing regularly through a so-called rabbi trust. However, the financial statement mismatch could at times be significant, so it switched a few years ago to TRS hedges.
“There are a lot of benefits to TRSs,” he said, including better financial statement alignment and tax benefits.

Collateralized? Roger Heine, senior executive advisor at NeuGroup, asked whether the mark-to-market value of the TRS must be collateralized.

The AT said the swaps net against the company’s entire portfolio and barely register amidst the company’s several billion dollars of posted collateral. “We settle monthly, so the marks never get too big and they’re usually a nonfactor,” he said.

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Justin Jones In Banking, Technology

The Need for Speed: How APIs Simplify Bank Connectivity

Real-time bank connectivity is the future—but NeuGroup members have yet to embrace APIs.

In a recent NeuGroup member survey, 64% of respondents said they currently do or plan to have real-time connectivity to bank data, but only 16% said they’re currently using bank APIs—one critical key to real-time data.

This is likely due to the overwhelming number of APIs that different banks use, and a lack of standardization. As you can see in the chart below, 29% of members that do use bank APIs employ more than eight.
There are some innovative aggregation solutions to solve for the number of APIs, developed by fintechs like FinLync, which presented at a recent session of NeuGroup for Retail Treasury.
Some NeuGroup members would like banks to come together and agree on a standard API protocol, an outcome corporates could push them to achieve faster. Skeptics say don’t hold your breath waiting for most banks to embrace an API standard that requires them to share proprietary information.

Real-time bank connectivity is the future—but NeuGroup members have yet to embrace APIs.

This is likely due to the overwhelming number of APIs that different banks use, and a lack of standardization. As you can see in the chart below, 29% of members that do use bank APIs employ more than eight.
There are some innovative aggregation solutions to solve for the number of APIs, developed by fintechs like FinLync, which presented at a recent session of NeuGroup for Retail Treasury.
Some NeuGroup members would like banks to come together and agree on a standard API protocol, an outcome corporates could push them to achieve faster. Skeptics say don’t hold your breath waiting for most banks to embrace an API standard that requires them to share proprietary information.

Pain points that APIs can solve. A presentation at the session from Mitch Thomas, FinLync’s head of solutions engineering for the Americas, laid out several obstacles that APIs can overcome. Among them:

1. Time-consuming reconciliation

One member, who recently completed a real-time data project using bank APIs, said the ease of payment reconciliation alone made the project worth it.
Legacy bank connections require downloading static data from bank portals or file-based (AKA host-to-host) connectivity, like SWIFT. Reconciliation in file-based connectivity is a time-consuming, multistep, manual process in which a corporate’s treasury team downloads a batch of data from a bank and matches each payment in the ERP to the company’s invoices.
What corporates need, Mr. Thomas said, is the ability to go out to banks and bring data in with APIs. “The detailed order information joined with the bank information creates a perfect storm of reconciliation, allowing line item detail to be automated with AI and machine learning without any manual effort,” he said.

2. Payment traceability

With legacy bank connections, once a bank processes a payment, the corporate loses track of its status. But bank APIs allow end-to-end tracking similar to package deliveries.
“For a cross-border transaction, I can track a payment through three different countries and know exactly when that counterparty receives funds,” Mr. Thomas said.

3. Uncertainty around cash visibility

“Consistently being able to make decisions based off of accurate data has been a big pain point for long time,” Mr. Thomas said, especially when it comes to generating a forecast. Improved cash visibility and up-to-the-second data that can be refreshed as frequently as needed can have an instant impact for corporates that generate frequent forecasts.

Lean on me. The issue that members say holds them back from fully embracing bank APIs is that many banks use unique API formats that, when built in-house, require a heavy lift on integration.

Though fintechs like FinLync can aid in multi-bank API aggregation by providing a single endpoint for all bank connectivity, the lack of standards keeps some API-curious treasury teams on the sidelines.
A bank representative that worked with the member who implemented real-time connectivity compared the state of APIs to the development of file-based connectivity, which was significantly improved by regulation and payment standard like SWIFT.
- “There is a drive to do that, and everyone recognizes that it’ll make it easier for overall integration to have standards,” she said. “It’s just an area where there’s got to be more collaboration. In the file space, it wasn’t a quick turnaround either.”

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Justin Jones In FX, Talking Shop

Talking Shop, FX Edition: EUR Forwards; Hedging Depreciation

Member question 1: “Going out to one year for EUR, what size tranches are you trading for EUR forwards? Could I trade $10 million-$20 million? $20 million-$30 million?

Peer answer 1: “The one-year EUR forward is pretty liquid, but to keep the spread narrow, we typically keep our size under USD 30 million equivalent per trade.”

Peer answer 2: “Liquidity in one-year EUR forwards is very good. We have traded over $50 million equivalent.”

Peer answer 3: “I would be comfortable trading up to ~$100 million using a straight forward. Above that, we would normally go with an algo and then a swap where the algo can go about as high as you need it and for the swaps we find $200 million-$250 million readily tradeable.”

Peer answer 4: “We have some EUR hedges going out a year in that $20 million-$30 million range for our cash flow program.”

Member question 2: “Do you hedge depreciation as part of operating expense exposures through your cash flow hedging program?”

Peer answer 1: “We only hedge cash items (which makes sense to me). I’d be curious to hear if someone does something different and why.

“I would imagine you should exclude it as the economic event has already taken place and the underlying activity is hitting your P&L at the historical vs. current rate over the item’s useful life. Contrasted against revenue/cost/etc., where you are hedging a future forecasted transaction that hasn’t occurred but is planned.
“Below is a diagram I used to frame the problem.”

Peer answer 2: “We actually do include depreciation in the calculation of earnings that we hedge. The rationale is that it’s a crude placeholder for capex. However, we are long everywhere, so including depreciation decreases how long we think we are. Including depreciation in our earnings assessment is certainly debatable.”

Peer answer 3: “Depreciation is not an FX exposure.”

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Justin Jones In Capital Markets, D&I

Supporting Diversity Firms: Verizon, Morgan Stanley, Wellington

Influential issuers, banks and investors are pushing to give diversity brokerage firms more meaningful opportunities: NeuGroup’s Strategic Finance Lab podcast, episode 7.

In a Strategic Finance Lab podcast you can hear by heading to Apple or Spotify or by hitting the play button below, NeuGroup founder and CEO Joseph Neu leads a panel discussion on the roles corporate debt issuers, investment banks and investors can play in providing more meaningful economics and opportunity to banks and brokerage firms owned by Black people, Hispanics, women and members of other minority groups—so-called diversity firms.

Influential issuers, banks and investors are pushing to give diversity brokerage firms more meaningful opportunities: NeuGroup’s Strategic Finance Lab podcast, episode 7.

In a Strategic Finance Lab podcast you can hear by heading to Apple or Spotify or by hitting the play button at the bottom of this page, NeuGroup founder and CEO Joseph Neu leads a panel discussion on the roles corporate debt issuers, investment banks and investors can play in providing more meaningful economics and opportunity to banks and brokerage firms owned by Black people, Hispanics, women and members of other minority groups—so-called diversity firms.

Watch a video of the podcast’s closing question and answers by hitting the red play button above.

On the podcast panel are:

Scott Krohn, treasurer of Verizon, a leader among investment-grade corporate debt issuers supporting diversity firms. In 2021, Verizon spent $21.1 million on fees to D&I firms, or 13.2% of the total fees the company paid. And in a $25 billion Verizon bond offering last year, all nine D&I firms had an active role and were allocated a combined $487 million in bonds—most likely the largest allocation to D&I firms ever in a single deal.
Betanya Aklilu, a managing director at Morgan Stanley and head of D&I relationships and initiatives within the fixed-income capital markets group at the firm. Under her leadership, Morgan Stanley has served as D&I coordinator on 31 investment-grade bond deals since 2021—the most on Wall Street and more than six times any other bank. D&I coordinators are lead managers on a deal whose role is to support and facilitate active participation by diversity firms.
Keenan Choy, a managing director at Wellington Management, which manages more than $1 trillion in client assets. As a member of the fixed income syndicate desk, which oversees Wellington’s participation in new bond offerings, he works directly with issuers and underwriters, which include D&I brokerage firms.

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Justin Jones In Cash & Working Capital

Getting Religion: Treasury Spreads Reverence of Free Cash Flow

Rigorous control over free cash flow gives treasury a seat at the strategy table.

By working to shorten the cash conversion cycle and making free cash flow a key metric of success, treasury at one NeuGroup member company gained credibility, responsibility and authority as a strategic partner within the enterprise. Its experience offers a road map for other corporates where treasury aims to augment its role in working capital management.

Companies that succeed in this effort will better weather economic headwinds as the Fed fights inflation with higher interest rates, raising the specter of recession and presenting new challenges for finance executives.

Rigorous control over free cash flow gives treasury a seat at the strategy table.

Companies that succeed in this effort will better weather economic headwinds as the Fed fights inflation with higher interest rates, raising the specter of recession and presenting new challenges for finance executives.
A recent survey from The Hackett Group titled “The Great Working Capital Reset” noted that “companies with robust working capital management skills will be best positioned to invest in new capabilities that can fuel recovery and growth.”

Shorten the cash conversion cycle. Several years ago, the NeuGroup member company had a low, non-investment-grade credit rating and faced extremely high funding rates. That prompted treasury to lobby to shorten the cash conversion cycle dramatically. At a recent meeting of NeuGroup for Large-Cap Assistant Treasurers, the head of global treasury explained how a reduction of about 50% was achieved:

Consolidate all cash functions under treasury and give it oversight of and insight into regional teams in accounts payable and the credit and collections departments, even if they do not report directly to treasury. “We centralized cash to ensure we had the right level of understanding on what the ins and outs are,” the member said.
Go after each and every link in the chain. The member recommends “chasing every single” element that affects cash flow—including accounts receivable, payables, inventory and credit terms.
Engrain a cash mindset and a sense of urgency about it into the corporate culture. “Every company shows the Street how revenues grew year over year and quarter over quarter; so the whole philosophy was, why can’t free cash flow be managed like that as well, at the same level of detail and scrutiny,” the member said.
- “The process we follow is similar to the one companies follow for metrics such as revenue and gross margin.”

Obtain buy-in, enable action. The company’s past financial challenges gave treasury extra leverage to pursue the initiative, but an important early step was procuring support from top management, to gain cooperation from other departments. Also:

Free cash flow can be a nebulous concept for corporate colleagues outside of finance, so defining specific actions and setting discrete targets that translate into terms relevant to different departments was critical.
Using the textbook definition of free cash flow—cash flow from operations minus capital expenditures—the metric has been incorporated into employee incentives like other financial metrics such as P&L.
Incentives were designed to coordinate sales and collections in the same quarter, and a matrix was created—now reviewed weekly by the CEO, CFO and COO—to modulate inventories and dampen their impact on cash.

Reap benefits. The member’s company now has a very strong investment-grade credit rating and generates robust free cash flow each quarter. The member said the cash flow rigor and discipline that treasury forged has been retained across the organization, up to the CEO.

Perhaps the greatest benefit and one that should inspire any treasury team: The initiative increased treasury’s credibility within the company as a strategic partner. It now exerts influence across the enterprise, including procurement, operations and sales. “The leadership team realized that treasury has a vantage point to view things happening under the covers that can later affect P&L,” the member said.
Besides elevating treasury to the position of strategic advisor to other parts of the company, having the free cash flow policies and procedures in place helped it quickly decide what to do when the pandemic hit, and business slowed. “We had done multiple tiers of downside scenarios over the years and how to navigate through them,” the member said. “So, for us it was easier to reuse them versus building something brand new.”
Managing free cash flow enables the company to better understand the cash dynamics of each business as well as inventories and supply chains and the amount of cash available. That scrutiny enables it to fund its capital allocation priorities from its balance sheet, rather than approaching a currently volatile debt market.

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Justin Jones In Capital Markets, D&I

Opening Doors: Keys to Using Diversity Firms in Bond Deals

Takeaways from a D&I working group session sponsored by Fitch Ratings featuring Loop Capital.

At a recent meeting of NeuGroup for Diversity and Inclusion sponsored by Fitch Ratings, Sidney Dillard, partner and head of corporate investment banking at Loop Capital Markets, moderated a discussion featuring the experience of a corporate treasurer whose company made Loop Capital a joint active bookrunner on a large bond offering in 2021.

Loop’s involvement in the deal is an example of providing more meaningful opportunities to diversity firms in addition to giving them meaningful economics for their roles in capital markets transactions.

Takeaways from a D&I working group session sponsored by Fitch Ratings featuring Loop Capital.

Loop’s involvement in the deal is an example of providing more meaningful opportunities to diversity firms in addition to giving them meaningful economics for their roles in capital markets transactions.
Unlike some deals involving diversity firms, this transaction did not involve a so-called D&I coordinator—one of the lead managers on a deal whose role is to support and facilitate active participation by diversity firms.
The benefits of using law firms owned and run by minorities on deals was discussed by corporate attorney Gopal Burgher, a partner at BurgherGray.

Key takeaways. Here are some insights from the discussion that may aid other corporates that want to expand or improve their use of brokerage firms owned by Black people, Hispanics, women and members of other minority groups.

Wallet issues need to be discussed proactively with the banks in a corporate’s credit facility when diversity firms that are not in the revolver are given active roles in bond offerings. The corporate in this case made use of Loop’s partnership with Bank of China, which is part of the company’s facility but doesn’t participate in deals.
While this deal did not include a D&I coordinator, Morgan Stanley and Goldman Sachs received high marks from members and panelists for performing the role in other transactions.
Track and measure your allocations to D&I firms and communicate your benchmarks.
Speak loudly about your use of diversity firms with investors who are equally committed to D&I.
Consider using diversity law firms as co-counsel on deals.
Move the needle now and don’t wait to be perfect.

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Justin Jones In Technology

Bloomberg Terminal Inflation: ~9% Price Hike on Jan. 1, 2023

Terminal subscriptions will rise $195 per month, Bloomberg tells clients, citing global inflation.

Bloomberg is raising the cost of subscriptions to its financial data Terminal by about 9%, citing rising expenses for labor, materials and “escalating competition for talent,” according to a letter from the company to clients dated Aug. 25.

The increase will bring the total cost to $2,500 a month or $30,000 a year for a single Terminal. Multiple Terminal subscriptions will cost $2,215 a month or $26,580 annually. Bloomberg subscriptions are for two years.
“Starting January 1, 2023, Bloomberg Terminal subscriptions will see a price increase of 9.65% for locations with multiple licenses (8.46% for single subscriptions),” Bloomberg’s letter states.
“The price increase in nominal terms will be $195 per month per subscription. This is consistent with Bloomberg’s historical practice and links our price increase to global inflation,” it adds.
A Bloomberg spokesperson confirmed the price increase but declined to comment.
One NeuGroup member said the increase was not surprising “given the current state of global inflation.” He noted that “pricing is determined by the install date – if a contract is signed on 12/15/22 but the terminal itself is not installed until 1/15/23, then this license will be billed at the 2023 rate.”

Terminal subscriptions will rise $195 per month, Bloomberg tells clients, citing global inflation.

In a move that will affect many corporations and their banks, Bloomberg is raising the cost of subscriptions to its financial data Terminal by about 9%, citing rising expenses for labor, materials and “escalating competition for talent,” according to a letter from the company to clients dated Aug. 25.

The increase will bring the total cost to $2,500 a month or $30,000 a year for a single Terminal. Multiple Terminal subscriptions will cost $2,215 a month or $26,580 annually. Bloomberg subscriptions are for two years.
“Starting January 1, 2023, Bloomberg Terminal subscriptions will see a price increase of 9.65% for locations with multiple licenses (8.46% for single subscriptions),” Bloomberg’s letter states.
“The price increase in nominal terms will be $195 per month per subscription. This is consistent with Bloomberg’s historical practice and links our price increase to global inflation,” it adds.
A Bloomberg spokesperson confirmed the price increase but declined to comment on feedback from clients or to provide data on past price increases.

No big surprise. One NeuGroup member said the increase was not surprising “given the current state of global inflation.” He noted that “pricing is determined by the install date; if a contract is signed on 12/15/22 but the Terminal itself is not installed until 1/15/23, then this license will be billed at the 2023 rate.”

The member said his company does not expect to make any changes immediately in response to the price hike. “Like most companies, we periodically review our service providers and consider pricing together with other service and quality factors,” he said. “We would conduct any service provider reviews as the contract expiration approaches.”

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Justin Jones In Crypto, Pension and Benefits

Window Pain? Looking at the Risks of 401(k) Brokerage Windows

New DOL guidance on cryptocurrency investment options raises broader fiduciary questions for some plan sponsors.

Guidance from the Department of Labor about offering cryptocurrency investment options in 401(k) plans, including through self-directed brokerage windows, sparked discussion about the pros and cons of the windows and the fiduciary duty of corporates at a recent meeting of NeuGroup for Pensions and Benefits.

The DOL guidance issued March 10 warned plan fiduciaries to “exercise extreme care before they consider adding a cryptocurrency option” to a 401(k). Plan sponsors responsible for offering crypto options or “allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty,” it said.

New DOL guidance on cryptocurrency investment options raises broader fiduciary questions for some plan sponsors.

The DOL guidance issued March 10 warned plan fiduciaries to “exercise extreme care before they consider adding a cryptocurrency option” to a 401(k). Plan sponsors responsible for offering crypto options or “allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty,” it said.
Analysis by the law firm Kilpatrick, Townsend & Stockton said, “the DOL’s statement was alarming because it could be read to suggest that plan fiduciaries may be responsible for particular investments offered through a brokerage window.”
Beyond the issue of crypto, members were divided over whether the windows, also called self-directed brokerage accounts, introduced too much potential risk to retirement plans.

Defining fiduciary duty. The director of retirement assets at one corporate said making the decision to offer a brokerage window is a fiduciary decision, one that provides participants more investment options, such as ESG funds and Sharia-compliant funds—without requiring the company to find and approve them. This company doesn’t govern what’s being offered through its brokerage window.

“But with recent guidance from the DOL, that could be in jeopardy,” the director said, adding the company may have to take more responsibility over the investments allowed through its window.
However, the Kilpatrick, Townsend analysis noted that the acting secretary of the DOL’s Employee Benefits Security Administration has said the guidance was not a “backdoor way to regulate brokerage windows in a whole new way.”
The secretary also clarified that the guidance does not say that fiduciaries are responsible for reviewing and approving each individual investment option available under a brokerage window, the law firm said.
But “further guidance is needed to clarify the DOL’s position on the scope of fiduciary responsibility for investment options under a brokerage window,” it added.

Proceed with caution. One session participant said when his team talks to consultants about brokerage windows in DC plans, they tend to be cautious, expressing concerns about plan participants potentially making investment decisions that materially worsen their retirement plans.

One assistant treasurer said, “We’re scared out of our minds about a brokerage window, because of what the plan participants could do within it.”
He said that his company’s approach has been to offer a relatively small number of investment options that, aside from some target-date funds, are passive and very low cost. “So a brokerage window would be inconsistent with that,” he said.
Last year, one treasurer expressed dismay at the underperformance of investment portfolios held by many participants who use the window his company offers. And he shared his view of fiduciary duty: “Fiduciary isn’t simply a legal obligation or responsibility, it’s a moral one,” he said.
He added, “Shouldn’t I inform people from my seat that in the majority of cases, self-directed trading, overtrading and timing [the market], largely underperforms in the long run?”

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Justin Jones In Insurance, Regional, Risk Management

When To Buy Political Risk Insurance—and When It’s Too Late

WTW’s Laura Burns discusses policies that insure losses caused by geopolitical crises not covered by traditional insurance.

Companies including McDonalds and ExxonMobil have reported billions in losses from shutting down business and other events related to Russia’s war in Ukraine. Some of that financial pain may have been avoided if corporates had purchased political risk insurance long before the crisis started, according to Laura Burns, who heads the political risk practice for WTW, formerly known as Willis Towers Watson.

In a video you can watch by hitting the play button below, Ms. Burns explains the benefits of political risk insurance, which covers specific exposures—excluded from traditional property insurance policies—that arise from investment or trade involving other nations.
“Political risk insurance picks up where other coverages drop off,” Ms. Burns explains. “It provides coverage for the types of perils which [corporates] wouldn’t be afforded with the rest of their property casualty insurance program.” WTW is a broker and advisor for coverage including political risk insurance.

Don’t wait until it’s on the front page. The topic, no surprise, is generating increased interest among risk managers as the war in Ukraine enters its seventh month and amid escalating US tensions with China over Taiwan and other issues. In the video, Ms. Burns discusses soaring rates for coverage related to Taiwan—underscoring the need for corporates to consider buying political risk insurance before there’s a clear and present danger.

Corporates that follow developments in a country and try to “time the market” may end up waiting to buy insurance “until the window has closed and it is unattainable,” Ms. Burns said, citing Ukraine and other crises.
“Our recommendation to multinational organizations is to think a couple chess moves ahead and to take out the insurance before you may think you even need it,” she said. “Once it’s on the front page of the Wall Street Journal, it’s essentially too late.”
And stay tuned: In the weeks ahead, we’ll bring you our full conversation with Ms. Burns on NeuGroup’s Strategic Finance Lab podcast, available on Apple or Spotify.

In a video you can watch by hitting the play button below, Ms. Burns explains the benefits of political risk insurance, which covers specific exposures—excluded from traditional property insurance policies—that arise from investment or trade involving other nations.
“Political risk insurance picks up where other coverages drop off,” Ms. Burns explains. “It provides coverage for the types of perils which [corporates] wouldn’t be afforded with the rest of their property casualty insurance program.” WTW is a broker and advisor for coverage including political risk insurance.

Corporates that follow developments in a country and try to “time the market” may end up waiting to buy insurance “until the window has closed and it is unattainable,” Ms. Burns said, citing Ukraine and other crises.
“Our recommendation to multinational organizations is to think a couple chess moves ahead and to take out the insurance before you may think you even need it,” she said. “Once it’s on the front page of the Wall Street Journal, it’s essentially too late.”
And stay tuned: In the weeks ahead, we’ll bring you our full conversation with Ms. Burns on NeuGroup’s Strategic Finance Lab podcast, available on Apple or Spotify.

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Justin Jones In Financial Planning and Analysis, Technology, Treasury Management

Transformation and the IT/Finance Partnership

Collaborating with IT is essential for transformation success, and new tech solutions may precede process redesign.

Finance transformation goes way beyond automation and the implementation of new tech solutions, to include process redesign and talent development. Its goal is to build new finance capabilities, by optimizing processes and reducing the time it takes to collect, compile and cleanse data. The upshot is that staff can focus on higher level activities, such as business partnering and strategic planning.

But the modernization of finance’s technology stack is often the driving force, and most potent enabler, of the emergence of finance as a valuable decision-support, forward-looking organization.
For years, companies have been advised to take the time to reform processes before implementation of a new solution. But this is a legacy notion that is unfeasible in today’s environment of quick-paced and unrelenting change.

Collaborating with IT is essential for transformation success, and new tech solutions may precede process redesign.

But the modernization of finance’s technology stack is often the driving force, and most potent enabler, of the emergence of finance as a valuable decision-support, forward-looking organization.
For years, companies have been advised to take the time to reform processes before implementation of a new solution. But this is a legacy notion that is unfeasible in today’s environment of quick-paced and unrelenting change.
Instead, companies are embracing agile approaches to transformation by running simultaneous workstreams, implementing in spurts, then scaling up.
As cloud ERPs and planning solutions evolved to include embedded best practices, it is not uncommon to lead with the technology and adjust the process to it—to save time and instantly upgrade legacy processes.

Stuck in the queue. Some (lucky) finance functions have a resident IT group that supports use-case identification, system selection, implementation and maintenance. However, those are in the minority. Most finance organizations must rely on corporate IT departments to provide these services, and that can be frustrating.

“IT is busy,” one NeuGroup member said recently. Finance has to “get in line” and is not always IT’s first priority. Systems that enable operational efficiency and effectiveness can get first dibs on IT’s time. Competing with revenue-generating and cost-saving applications requires a strong business case.
Typically, IT/finance collaboration goes only one way: finance has to make the call. “How many times has IT ever come to you with a solution?” one member in a recent meeting of our FP&A peer groups shared. “If you want to get tools, you must find them yourself.”
In addition, IT does not always “get” finance’s business needs. “IT has no idea about the problems you’re solving for,” said another member.

Getting IT on board. “IT [collaboration] is a key theme of conversations I’ve had in the last year,” said another member. “There is a focus on data and more broadly on IT, bringing common systems to match up with common processes. While FP&A needs to work with different process owners (SG&A functions), “the relationship with IT is the most critical.”

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Justin Jones In Talking Shop, Technology

Talking Shop: Recommending a Workflow Tool for Bank Services

Member question: “We are interested in knowing if anyone is using a workflow tool to manage processes such as bank account openings. Our current process can involve a number of manual interventions between receiving a request for banking services from a business unit to working with the bank on documentation requirements.”

“We use ION’s IBAM tool for housing all of bank accounts and related details and signatories, etc. There are approval processes in place for authorizing certain entries (record creation and anything to do with users as well as other tasks requires an approver; some fields to existing records can be updated by a single user).
“But it does not have a robust workflow process built in to help us actually manage a bank account opening process (and in the future, other processes) from start to finish, so we are looking to build one to help improve the efficiency of the process.
“We are putting together business requirements at the moment to see what tool might be configured to meet our need, and one of our requirements is that it produce some kind of record that can be uploaded into IBAM as the record.
“If anyone is using such a tool (either commercially available or custom built), we would be interested in learning about your experience.”

Peer answer 1: “We utilize FiServ BAweb for our bank administration application. We use the application for tracking our bank accounts, bank contacts, bank account signatories, bank contracts + bank documentation (open/close bank accounts, signatory changes, etc).

“We also use the tool for SWIFT eBam (open/close client bank accounts administered by us). The application has some built-in workflow, but it didn’t meet our needs. We built a customized workflow tool, utilizing SharePoint, for our bank administration processes.”

Peer answer 2: “We use eBAM and the FIS bank administration platform. This application houses our bank account information, mandates and documentation. Unfortunately, it does not have a workflow module to track pending administration on accounts (opening, closing, signer changes etc.).

“So we have built a ServiceNow workflow to manage all bank account management requests. We assign the tickets to our analysts to work requests with our banks. We also have built a BI dashboard off of the ServiceNow requests to monitor status to completion.
“It is not as dynamic as a workflow tool as you describe, but it allows us to track, organize and escalate requests that have been pending for some time.”

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Justin Jones In FP&A, Senior Executive

Business Partnering Must Be a Full-Time Job

To prepare for increasing demand for business decision-making support, FP&A needs to review its business partnering model.

When the business landscape is foggy, FP&A shines. Facing a period of economic and market volatility, FP&A leaders are preparing to provide more hands-on support to the business: A recent survey of NeuGroup’s Mega-Cap and Large-Cap FP&A peer groups showed that 100% of members anticipate (or are already sensing) a rise in demand for help from business leaders.

Operational leaders are going to ask a lot more questions about how a recession will impact the bottom line. That impact will vary by line of business, so it’s essential that FP&A runs multiple scenario analyses.

To prepare for increasing demand for business decision-making support, FP&A needs to review its business partnering model.

Operational leaders are going to ask a lot more questions about how a recession will impact the bottom line. That impact will vary by line of business, so it’s essential that FP&A runs multiple scenario analyses.
It also means FP&A will need to provide faster, better and more forward-looking insights to enable management to make smart business decisions about head count, cost reduction and investments.

Partnering best practices. Ensuring an effective partnering model is critical in today’s environment. A productive collaboration underlies “FP&A’s ability to help the company understand the challenges it’s facing and where it needs to pivot,” one member said. In group conversations and several in-session polls, NeuGroup identified three critical business partnering success factors:

Dedicated partners. While finance organizations frequently talk about the importance of business partnering, not everyone is walking the walk. One way to gauge the true level of engagement is to see whether the function has full-time staff devoted to partnering with business units and other SG&A functions.
1. A poll taken during a July 27th joint meeting of the FP&A groups revealed that 100% of respondents have dedicated business partners. By making business partnering a full-time job, FP&A can leverage its “intellect, horsepower and knowledge all across the board,” one member said. “If it’s a part-time job, it just doesn’t work because it gets less attention and doesn’t build the right level of credibility within the business,” said Nilly Essaides, NeuGroup’s managing director of research and insight.
A clear engagement model. The other best practice is establishing a formalized interaction model between the business and its finance partners. NeuGroup research shows that most members have institutionalized collaboration between business and finance: 40% reported it is highly formalized.
1. “You have to establish a process if you want there to be communication between and the business and the finance organization. ” Ms. Essaides said. This may include incorporating an FP&A review of all business cases, establishing a regular cadence of meetings, and ensuring there is an FP&A rep at all strategy meetings.
2. Sometimes, the collaboration can start with a joint project. A recent cross-functional initiative to improve data visibility brought another member’s FP&A team closer together with other SG&A functions, which he said has increased the broader financial acumen of business partners.
Support from the top. Successful collaboration with the business and other functions helps to provide a complete view of enterprise performance to the CEO. But for this to work, it’s crucial that FP&A is viewed as a strategic partner by leadership from the start.
1. “Our CFO and CEO see how finance is strategic,” one member said. “It’s hard to force yourself in [to business conversations] if operational leaders don’t want you in.” That is why strong buy-in from senior management is critical.

An added bonus. Effective collaboration between finance and the business is not only the best way to deliver FP&A expertise, but also a way to develop and retain FP&A talent. Because employees in these roles have an immediate impact on business decisions, they enjoy their work. “These roles have broad benefits and high job satisfaction,” said one member. “It’s not just number crunching; it’s a more strategic partnership, and it helps keep these employees engaged,” she said. “Partnering is the beauty of it all.”

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Justin Jones In Technology, The NeuGroup Insights Interview

Treasury, Tech and Tennis: Cloudflare Treasurer Christine Jensen

Christine Jensen’s vision for a top-notch treasury at Cloudflare: NeuGroup’s Strategic Finance Lab podcast, episode 6.

Christine Jensen brought 15 years of experience working at corporations including eBay and Johnson Controls to Cloudflare last August when the fast-growing cloud platform and cybersecurity company hired her to run treasury. To build a top-notch treasury team, she’s drawing on best practices and perspective learned at other corporates in the US and abroad, her proven ability to thrive under pressure (she’s a three-time Illinois high school state tennis champion) and her determination to make treasury a true strategic partner at Cloudflare.

In a Strategic Finance Lab podcast interview you can hear by hitting the play button below or by heading to Apple or Spotify, Ms. Jensen discusses with NeuGroup Insights editor Antony Michels how her experiences working at large companies help her meet the challenges and opportunities facing a high-growth tech firm that went public in 2019; why cryptocurrency may represent an important opportunity for some treasury teams; key areas where treasury can add significant strategic value; and one vital skill that some top tennis players may need to develop to win big in the business world.

Christine Jensen’s vision for a top-notch treasury at Cloudflare: NeuGroup’s Strategic Finance Lab podcast, episode 6.

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Justin Jones In Cash & Working Capital, Technology

Better Accuracy, Smarter Insights: Digging Into NeuGroup’s Cash Forecasting Survey

Members benchmark and share approaches to making forecasts more accurate and more valuable.

A recent debriefing session analyzing the results of NeuGroup’s May 2022 Cash Forecasting Survey made clear that beyond discussions of methodology, accuracy, technology and the effort required, lies this fact: Treasury needs to clearly define the purpose of a cash forecast and identify the audience who will use it to make decisions that help meet strategic goals. In other words, if the information in a forecast is not effective at driving decision-making or triggering an action, it should be reevaluated.

Members benchmark and share approaches to making forecasts more accurate and more valuable.

Here are five takeaways from the debrief that address the details of creating forecasts that serve a clear purpose:

Know where to get the right data. The biggest cash forecasting obstacle is a lack of visibility or predictability of future cash flows, cited by 88% of survey responses, often related to lack of access to cash data. Member discussion in the debrief session suggested that the difficulty in producing the forecast is as much about knowing whom to go to for the data; or even knowing where to go to find out who knows the most about it.
More is not necessarily better. NeuGroup’s analysis reveals there is no direct correlation between the number of items included in the forecast and its accuracy. This raises the question of whether treasury needs to collect so much granular information, which can extend cycle time if the process is not fully automated. Currently, 93% use Excel to compile the data and generate the forecast, and of them 50% also rely on their TMS.
1. One way to reduce the number of items while maintaining forecast effectiveness is to identify the key drivers of cash; this driver-based forecasting approach is widely used in the FP&A function and can be adapted to treasury’s needs.
1. “Using Excel—even with the help of the TMS—can make it difficult to collect and analyze more than 50 items, so driver-based forecasting is a better option,” said Nilly Essaides, NeuGroup’s managing director of research and insight.
2. As the forecasting process becomes more highly automated, it is possible to collect and analyze larger data sets. “If you use artificial intelligence or machine learning to model, you can initially look at hundreds of data points without increasing cycle time.” Ultimately, as the algorithms learn by identifying important patterns, it’s possible to whittle down that number to the KPIs that truly drive cash flow.
Some who came to treasury through FP&A cited a failure in their eyes of FP&A to delve into the KPIs—and an overfocus on P&L that incentivizes them not to—leading them to take ownership of cash forecasting on the treasury side.
1. When FP&A at one treasurer’s company owned the long-term forecast, “it was just a metric model.” Treasury has since taken over both forecasts at the company, which the member said is an improvement because treasury “actually understands the math.”
Using direct and indirect forecasting allows for cross-validation, reconciliation and stress testing across the forecasting models for both, which leads to better cash insight and accuracy. Nearly 80% of members said they intend to own both the direct and indirect forecasts in an in-meeting poll. While FP&A produces its own, typically indirect and longer-term forecast, it’s important that treasury continues to use both approaches.
1. “It’s important for us to keep both,” one member said. “At the end of the quarter, we run both models, using the indirect forecast from the income statement and direct forecast from the cash flow. This is great because we can reconcile the models.”
The cash-forecasting approach is highly driven by whether the company is cash-rich or highly leveraged. “With cash forecasts, given the focus on managing working capital as efficiently as possible, a lot depends on how low investment grade you are. You probably see a greater emphasis on accuracy and short-term direct results on below-investment grade companies,” one treasury director said.
1. Non-investment-grade companies, which have limited access to external liquidity, must be significantly more disciplined in their cash forecasting process to ensure they are cash positive so they can pay their bills and make good on interest payments, as well as comply with bank covenants and liquidity ratios demanded by rating agencies.
2. Plus, investors are increasingly looking at the statement of cash flows, as opposed to solely looking at profitability, to make investment decisions.

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Justin Jones In FX, Talking Shop, Technology

Talking Shop: Benchmarking Cash Flow Hedging

Member question: “Here are some benchmarking questions about cash flow hedging:

1. “What percentage of cash flow exposures do you hedge?
2. “What instruments do you use to hedge?
3. “How far into the future do you hedge?
4. “Given the current strength of the US dollar, are you contemplating changing your FX hedging program?”

Member question: “Here are some benchmarking questions about cash flow hedging:

Peer answers, question 1 (hedge ratio):

a. “We follow a layered and rolling approach that goes from 80% in the nearest quarter to 70% two quarters out, down to 10% eight quarters out.”
b. “Most currencies are 70%-80% hedged. There is one high-cost currency that we hedge 50%-60%.
c. “For us it can go as high as 95%.”
d. “We hedge up to 85% for the nearest quarter and as low as 25% for four quarters out.”
e. “We hedge about two-thirds of foreign earnings, primarily through seven key currencies.”
f. “Our goal is a rolling, layered approach, getting up to a hedge ratio of 80%-100%.”

Peer answers, question 2 (instruments):

a. “We use a combination of forwards and option collars. This allows us to have the flexibility to choose the instrument that will best protect us. We also have a small budget for option collar premium cost, so we can play around with strike rates based on where we want the protection and/or participation to be.”
b. “Primarily forwards, with some zero-cost collars fairly soon.”
c. “We use FX forwards only, but are in discussions on incorporating options to the program.”
d. “We use forwards and put options mostly. Options are used on the longer tenors.”
e. “We’re aiming for a base case of forwards, with the ability to use purchased options or zero-cost collars based on a framework around spot relative to long-term fair value, as well as skew, carry and vol.”

Peer answers, question 3 (time frame):

a. “Three years.”
b. “We layer out, with our longest hedge about 15 months.”
c. “Tenors are out 18 months, with most of the program in place for the year before we issue guidance.”
d. “Two years maximum.”

Peer answers, question 4 (program changes):

a. “Given USD strength, we are considering making some changes. We are looking at hedging foreign expenses out at least six quarters, instead of the normal four, and at an initial higher hedge ratio coverage. And we are considering increasing our premium cost to create a more favorable strike rate band on our billings and revenue hedges.”
b. “We hedge expenses, so the current market is quite favorable, relatively speaking.”
c. “Our current hedging program is not adjusted based on market dynamics, but that’s something we are considering changing.”
d. “We have been following our existing layering schedule but continue to analyze whether to make any changes.”
e. “Under our proposal, the instrument we select could possibly change based on the level of USD, but not the overall strategy.”
f. “No fundamental changes are being contemplated at the moment.”

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Justin Jones In Cash & Working Capital, Technology

The Undiminished Prominence of Excel

Why the overwhelming majority of treauries producing cash flow forecasts still use Excel and won’t likely stop anytime soon.

Despite decades of technological advances, Excel remains the predominant tool that treasury teams use to generate cash flow forecasts, according to the results of NeuGroup’s May 2022 Cash Forecast Survey (see chart below). That includes teams that have a treasury management system but use Excel along with it because the TMS doesn’t offer the same degree of modeling flexibility.

Yes, a TMS is a more effective solution to automating the collection of data than Excel, which is a lot more cumbersome and prone to error. But “the TMS does not have enough flexibility in analysis, scenario planning and reporting,” a member of NeuGroup for Growth Tech Treasurers said.

Why the overwhelming majority of treasuries producing cash flow forecasts still use Excel and won’t likely stop anytime soon.

Yes, a TMS is a more effective solution to automating the collection of data than Excel, which is a lot more cumbersome and prone to error. But “the TMS does not have enough flexibility in analysis, scenario planning and reporting,” a member of NeuGroup for Growth Tech Treasurers said.
Given that cash forecasting efficiency and effectiveness has been a perennial challenge, many in treasury are disappointed by the lack of progress by TMS vendors. However, many are also skeptical about vendors’ ability to provide more robust functionalities.
- The survey revealed that less than half of treasury teams expect to invest in new forecasting technologies in the next year, either because they already implemented a TMS or they don’t intend to.

The opacity of data. One reason it has been so hard to automate the curation of data to support the cash forecasting process is that cash data resides in disparate source systems.

While some data can be pulled from banks and ERPs, this approach provides only a limited picture because additional data resides outside of those sources. There is also the issue of “black box” areas, e.g., international accounts that are outside the cash pooling or IHB structures. Another is M&A.
“Our main challenge is visibility. Access to actuals is a very big impediment because it involves the automation of collection of data from multiple sources’ systems,” one survey participant said.
That’s why treasuries continue to use a combination of direct and indirect forecasting methods. While treasury would prefer a direct approach, it needs to fill in the gaps with information from the business and other systems.

In real time? For TMS vendors and users of other solutions, there is good news. While system connectivity and data “fetching” had traditionally required expensive integrations, with the advent of APIs, some data compilation can be more easily automated.

Current applications of APIs are primarily related to gathering actual information, e.g., bank balances. They have not yet developed into supporting the forecasting process, e.g., by building a direct link to analytics solutions.

The next generation. Technologies are catching up with treasury’s complex forecasting requirements. A handful of respondents to the survey have already deployed AI and machine-learning tools to facilitate data collection, develop more reliable models that continuously learn from experience, and produce customized reports.

While the use of AI/ML may be rare, this is a good time to present treasury use cases. “You have to take advantage of the entire company’s digital transformation process and resources,” said one member.

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