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Talking Shop: Interest Rates for In-House Banks

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: “For those that use an in-house bank/cash center, can you share the interest rates you use on the excess funds loaned to the in-house bank?

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: “For those that use an in-house bank/cash center, can you share the interest rates you use on the excess funds loaned to the in-house bank?

“Does the in-house bank/cash center pay the lending entity:

  1. “An overnight rate
  2. “A monthly interest rate
  3. “A rate that matches the rate on the investment made by the In-house bank with the loaned funds?”

Peer answer 1: “We pay an arm’s-length daily rate and have a spread differential between what we pay/charge for deposits/loans. It is a daily rate that compounds monthly on the structures run as cash pools and compounds at the end of the term on fixed-term structures.”

Peer answer 2: 
“From my past experience, the rate used was similar to the rate that an external banking partner would give to a corporate on its deposit account (money market deposit account or similar). This was to ensure commerciality in the IHB structure for tax purposes.”

Peer answer 3: “We set an arm’s-length monthly rate that is applied to loan balances.”

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Mastering Your Data

Data accessibility and availability is at the core of all finance technology transformation.

By Nilly Essaides

Many finance organizations are fast-tracking automation initiatives, aiming to improve process efficiency and build new capabilities to support an increasingly strategic role. The pressure to reduce process cost and head count is intensifying alongside concerns about a global recession.

  • “We are speeding up our digital transformation,” said a member of NeuGroup for Tech Treasurers at the annual meeting at Carmel Valley Ranch. “I just received my budget for treasury for next year, and it’s going to be flat,” she said. “Yet I am expected to do more. That’s speeding up our demand for automation.”

Data accessibility and availability is at the core of all finance technology transformation.

By Nilly Essaides

Many finance organizations are fast-tracking automation initiatives, aiming to improve process efficiency and build new capabilities to support an increasingly strategic role. The pressure to reduce process cost and head count is intensifying alongside concerns about a global recession.

  • “We are speeding up our digital transformation,” said a member of NeuGroup for Tech Treasurers at the annual meeting at Carmel Valley Ranch. “I just received my budget for treasury for next year, and it’s going to be flat,” she said. “Yet I am expected to do more. That’s speeding up our demand for automation.”
  • “In a tight labor market, automation is going to play a critical role,” said Tom Joyce, head of capital markets strategy at MUFG, which sponsored the meeting. “CapEx is overall going down, but the one place we see it holding up is in R&D and technology.”

Breaking data silos. New technologies can reduce cost and deliver new capabilities. However, absent access to enterprise-wide “blessed” data, they cannot produce the insights companies need to make financial and business decisions.

  • Finance is a huge consumer and producer of data, and even within the function it often stores information in disparate systems.
  • Barriers to the flow of data are even taller as finance increasingly needs insight into operational information. An October NeuGroup survey of 30 FP&A executives showed the majority have either adopted or are planning to adopt integrated business planning practices.
  • Meanwhile, treasury teams are frequently frustrated with the difficulty of pulling AP and AR information, as well as inventory in order to optimize working capital. “Working capital is an end-to-end process, and it makes sense for treasury to orchestrate it, although often it is not the process owner,” said one treasurer.

Building bridges. The good news is that technologies like robotic process automation (RPA) and APIs are facilitating the process of creating a data lake that includes different types of data, e.g., financial, customers, supplier and operational.

  • “What we need is a single source of the truth,” noted a member of NeuGroup for Mega-Cap Heads of FP&A. “Right now, data is dispersed throughout the organization.”
  • Another member said, “As part of our digital transformation project, we are building a data lake that will host enterprise data and support multiple applications.” The source systems feed that data lake via flexible “pipes” that can be easily reconfigured.
  • A third FP&A executive said, “We have over 500 robots that, among other activities, fetch data from different systems and push it into the data lake.” Planning, analytics tools or TMS “sit” above the lake, and pull the information they require.

Data governance. One source of data is only as good as the data within it. While IT has an important role to play, because finance uses and generates critical data, it often owns or influences data definitions and governance.

  • In a survey conducted at the start of 2022, 49% of treasurers reported that finance is piloting master data management (MDM) solutions. Seventeen percent said they have implemented MDM tools at scale. Looking forward 12-24 months, the pilot projects are destined to expand to full-scale adoption.
  • On the path toward a comprehensive view of data, “data governance is an essential step,” one FP&A executive said. A recent NeuGroup survey revealed that FP&A organizations at the highest level of maturity are 27% more likely to own MDM compared to peers.

Filtering out the noise. Having all data in one place can have one potential drawback: data overload. With so much information, how can finance ensure it pulls only relevant data points?

  • “Our company has a data lake,” said the treasurer of a large technology company, “so treasury and other functions can draw on the same data.” Finance relies on machine learning algorithms to curate and digest the information it requires, for example to improve the accuracy of the cash forecast.
  • “You need to understand the data in order to use it to make decisions; otherwise, it can be overwhelming,” said a member of NeuGroup for European Treasury at a recent meeting in Geneva.
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People, Prices, Places: Internal Auditors Question Hiring Trends

Internal audit hiring insights: India may be growing less attractive; recruiting talent from the Big Four has downsides.

Top companies in North America have looked to India as a leading location for shared services centers and to potentially place at least some internal audit (IA) staff. They have also used the Big Four accounting firms essentially as a default source of new team members. Both of those trends may be wearing thin.

  • One member of NeuGroup for Internal Audit Executives discussing his company’s rapid growth and accompanying challenges, noted the sky-high compensation packages in North America that prompted internal audit to look at its operations in India to locate some IA staff. Peers’ feedback, however, presented a more complicated picture.

Internal audit hiring insights: India may be growing less attractive; recruiting talent from the Big Four has downsides.

Top companies in North America have looked to India as a leading location for shared services centers and to potentially place at least some internal audit (IA) staff. They have also used the Big Four accounting firms essentially as a default source of new team members. Both of those trends may be wearing thin.

  • One member of NeuGroup for Internal Audit Executives discussing his company’s rapid growth and accompanying challenges, noted the sky-high compensation packages in North America that prompted internal audit to look at its operations in India to locate some IA staff. Peers’ feedback, however, presented a more complicated picture.
  • Tapping the Big Four as a key source of new hires also generated a range of views, with some members saying the gigantic, global firms often produce a check-the-box mentality.

India issues. One member said his company’s “P75” compensation philosophy—limiting compensation to the 75th percentile in a specific market—has prompted the need to locate IA staff outside North America, where talent is scarce and compensation through the roof. The company already has a significant shared services center in India and a recent acquisition will double the number of employees there, so stationing some IA there makes sense. But it’s not without complications.

  • Many tech companies in India require employees to give them 90 days’ notice when resigning. That extended period creates a risk for NeuGroup members recruiting those employees, giving competitors time to snatch the new hire.
    • “It’s not surprising to see rivals offering 60% to 100% increases compared to our company’s offers,” the member said.
  • Another member added that turnover is every two or three years, as employees look for higher compensation elsewhere, and the compensation cost is rising 20% to 25% for each new hire.
    • “There’s the initial entry cost, but there are latent costs your company will have to pay down the road,” he said.
  • The member who prompted the discussion has noticed, at least initially, that while prospective IA hires in India have strong technical skills, some at senior levels lack presentation or soft skills, making it “challenging to put them in front of a global team.”
  • One member offered this warning about going the India route: “Once you give up head count in the US, you’ll never get it back.”

Big Four qualms. The Big Four accounting firms have long been a source of talent for corporate IA, especially in the age of remote work, when the extensive training they provide employees is highly valued. However, one member, apologizing first to peers who likely started out at a Big Four firm, recalled the chief auditor from a major payments company telling him never to hire from the Big Four “because as an external auditor [they often do] a check-the-box type of audit.”

  • A peer noted his own lack of formal auditor training, such as a CPA certification, and said that he prioritizes interviews to ascertain whether candidates have a risk mindset, since hires can be taught to be an auditor if they are naturally curious, good observers and willing to ask the right questions.
    • “I don’t really consider whether they’re from a Big Four or not,” he said.
  • While one member frowned on the Big Four’s strict, process-driven approach, others said it was good as long as it is balanced with real-world perspective.
    • “I need the Big Four mentality to bring discipline, but I also need auditors with business backgrounds to say, ‘Yeah, that’s great, but it’s not how the real world works,’” one said. “IA should have a blend.”

The importance of presentation. Members also noted presentation and communications as important skills in the context of Big Four hiring. A member said he valued job candidates from the Big Four less for their intellectual curiosity and more for their ability to communicate to external stakeholders.

  • “I think we undervalue that,” he said. “For me, it’s that ability to communicate with the stakeholder who often times doesn’t want you there.”
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Talking Shop: Acquisitions in a Foreign Currency

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: “How do you go about making international transactions for acquiring companies traded on an international market with shares in the local currency?”

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: “How do you go about making international transactions for acquiring companies traded on an international market with shares in the local currency?

“If, for example, the price is $50M USD but you have to purchase shares in GBP or EUR:

  • “Would you do a big one-time trade ($50M USD to the foreign currency)?
  • “Would you do small trades/tranches at different periods of time to average into the rate?
  • “Would you bid out the $50M trade across multiple banks?
  • “Where would you hold the foreign currency? Do you have specific foreign accounts?
  • “Would you deliver USD to the bank and then the bank delivers the foreign currency to the counterparty?”

Peer answer 1: “Fun one! Where it is large, we prefer to average into rates than be a taker at a particular moment. So we will average into it by buying forward in a few tranches. Where we agree on GAAP-only treatment for the buy forwards and where it is very large, we may start two months in advance.

  • “On the other hand, we may just do it in the two to three days ahead of the transaction. In any case, we normally designate the hedges for tax purposes to avoid any noise there (but then you won’t be able to deduct any losses).
  • “We will normally acquire the currency via the main US entity and then sell it to our in-house bank who will sell it to the entity making the transaction (and do any i/c loans/capitalizations necessary too).”

Member response: “Super helpful. Quick question: So your main US entity has foreign currency accounts where you can hold the currency before making the transaction?”

Peer 1 response: “We will transact with buy forwards so that we would not hold the currency (note, in establishing buy forwards, we would normally algo the spot and then do a swap).

  • “We technically could hold the currency as we do have US-based currency accounts in support of hedging activities but that is not our preference.
  • “At the time of the transaction our main US entity would settle the maturing buy forwards to acquire the currency and then immediately sell to the in-house bank which immediately sells to the entity it needs to get to.”

Peer answer 2: “Similar to [the first answer], where it is large and there is a high degree of deal certainty we would sometimes look to hedge in advance, often from the point where there is considerable certainty about the deal.

  • “For smaller amounts, we would wait and then bid across multiple counterparties or execute an algo and have the proceeds delivered to the seller.”
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FASB Has Issued New Disclosure Rules for Supply Chain Finance. What Do They Mean for Corporates?

The FASB’s disclosure rules will bring transparency to SCF programs but don’t require reclassification of trade payables.

The world of supply chain finance (SCF) is facing a major change. Starting in 2023, corporations that extend payment terms with their suppliers and set up SCF programs so those vendors can be paid early by a bank or other third-party finance provider will have to disclose the terms and size of the SCF programs in financial statement footnotes. “It’s one of the most widely discussed topics in the industry right now,” said Casey Dunn, Global Head of Payables and Inventory Finance at Deutsche Bank. “This is the issue people have the most questions about.”

The FASB’s disclosure rules will bring transparency to SCF programs but don’t require reclassification of trade payables.

The world of supply chain finance (SCF) is facing a major change. Starting in 2023, corporations that extend payment terms with their suppliers and set up SCF programs so those vendors can be paid early by a bank or other third-party finance provider will have to disclose the terms and size of the SCF programs in financial statement footnotes. “It’s one of the most widely discussed topics in the industry right now,” said Casey Dunn, Global Head of Payables and Inventory Finance at Deutsche Bank. “This is the issue people have the most questions about.”

Companies started asking those questions long before the Financial Accounting Standards Board (FASB) issued the final standard in late September 2022. That came after years of deliberations, debate and discussion involving investors, credit rating agencies, accounting firms, banks, regulators and corporates. Fueling much of the global scrutiny and media coverage: several large insolvencies of corporations that had implemented SCF programs. Critics charged that SCF allowed struggling companies to hide debt by classifying it as trade payables.

More Transparency

Until now, there have been no explicit disclosure requirements in generally accepted accounting principles (GAAP) about SCF programs; a corporate buyer can present SCF obligations in accounts payable or in another balance sheet line item. The programs have grown in popularity and are used by many investment-grade multinational corporations.

Corporates that have a SCF program or are considering one are digesting the details of what the FASB’s new disclosure rules mean for them in practical terms, along with their auditors and compliance teams. The treasurer at one NeuGroup member mega-cap company that uses SCF programs across the globe noted, “It’s more disclosure, which is more work. But at least it standardizes disclosure, which is generally good for stakeholders.”

Christian Hausherr, Product Manager for Supply Chain Finance for EMEA at Deutsche Bank, said that more transparency and visibility surrounding SCF programs will benefit corporates as well as their stakeholders—even as it requires time and resources to report the information. “It’s good for them because the analysts and investors who are reading the reports will get a better understanding of the balance sheet and the company’s assets and liabilities. And at the end of the day, they may be more willing to invest.”

The Classification Discussion

What the FASB’s Accounting Standards Update on supplier finance obligations does not do may be almost as significant as what it requires—at least for finance executives at corporates who manage relationships with credit rating agencies. The standard does not mean that a company must reclassify SCF obligations on its balance sheet from trade payables to bank debt—something that could throw off key debt ratios, resulting in lower credit ratings and higher costs of capital.

“Of course that’s a relief,” said the mega-cap treasurer. “We thought it was the right answer. This issue is important. The fact that we don’t have reclassification but have disclosure is a good trade-off. It’s certainly a better result than reclassification.”

How a company classifies SCF obligations is a matter for discussion solely between the corporate and its outside auditors. But Deutsche Bank and other leading financial institutions that structure the programs design them following industry standards, in part so the corporate will maintain trade payable classification—as long as its auditor agrees.

“That’s what helps your balance sheet metric, your working capital, your cash conversion cycle,” said Deutsche Bank’s Mr. Dunn. “If FASB had taken the stance that any portion of these obligations would require classification as bank debt, more corporates may have faced tougher decisions about the future of their programs,” he added.

Mr. Hausherr—chair of the Global Supply Chain Finance Forum—said the FASB’s disclosure rules are not a reason corporate buyers should feel they have to shut down programs. “From the outset, the industry was involved and gave its recommendations. We explained to the accounting bodies what we actually do and provided specific standards they could refer to,” he said. “What we are talking about now is not an accounting debate, it’s a reporting discussion. There may be an indirect impact on the accounting, but if industry recommendations are followed, there’s no need to step into a classification or accounting debate.”

What Must Be Disclosed

Here is the FASB’s description1 of the main provisions of what corporate buyers that use SCF programs must disclose in each annual reporting period:

  1. “The key terms of the program, including a description of the payment terms (including payment timing and basis for its determination) and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary
  2. “For the obligations that the buyer has confirmed as valid to the finance provider or intermediary:

a. The amount outstanding that remains unpaid by the buyer as of the end of the annual period (the outstanding confirmed amount)
b. A description of where those obligations are presented in the balance sheet
c. A rollforward of those obligations during the annual period, including the amount of obligations confirmed and the amount of obligations subsequently paid. [Note: the roll-forward requirement goes into effect in 2024.]

“In each interim reporting period, the buyer should disclose the amount of obligations outstanding that the buyer has confirmed as valid to the finance provider or intermediary as of the end of the interim period.”


1 FASB Accounting Standards Update; No. 2022-04; September 2022; Liabilities—Supplier Finance Programs (Subtopic 405-50)

What To Do Now: A Checklist

And here’s a checklist of considerations provided by Deutsche Bank for corporates reviewing the new FASB disclosure rule and examining an existing SCF program or designing a new one.

  1. Ensure that key stakeholders know the disclosure rule exists and that your auditor is up to speed with all its requirements.
  2. Understand the implications of the regulation and how a payables finance program may be presented ideally in the balance sheet.
  3. Employ sensitivity on contractual design with the bank/SCF service provider and how the payables finance program is set up with respect to the buyer-seller relationship; the buyer-bank relationship; and the seller-bank relationship. These need to follow a certain structure laid out in industry standards.
  4. Corporate buyers—and their procurement teams—must understand the SCF program is optional; no supplier may be forced into a payables finance program.
  5. Ensure that payment terms make sense and fit the industry and region. Make sure the share of overall procurement value or volume run through the SCF program is not excessive.

Looking Ahead

Although some corporates may look for alternatives to traditional supply chain finance programs that do not require disclosure, many will not. “We expect most corporates currently using SCF programs to maintain them,” Mr. Dunn said. “We believe the economic value unlocked for both buyers and their suppliers will outweigh any potential burden created by disclosure for a program.”

He believes the new rules will ultimately benefit the entire SCF industry as well as investors and others who want more information about the programs. “It might even work as a game changer in that it will increase the quality of supply chain finance programs that are in the market because buyers will be more sensitive to applying the appropriate principles and recommendations that are already out there.”

Mr. Hausherr says corporates that fear the new reporting requirements mean they will also have to reclassify obligations as debt are reaching the wrong conclusion. The approach he recommends boils down to two steps: “You need to determine what you actually do in a supply chain finance program and you need to report. And it’s at the absolute discretion of the auditor whether this is trade payables or debt.”

Corporates should not expect finality with the FASB’s new disclosure rule. In Mr. Dunn’s view, “The conversation is probably not over. This is a discussion that’s evolved over the last 20 years with modifications made from time to time. But the general theme is ‘don’t act in a manner that goes against industry standards, right?’ If you’re buying milk, you shouldn’t have 700-day payment terms.”

Some corporates hope disclosure will curtail companies that push the envelope on payment terms, but hope it does not ultimately result in regulators drawing broad lines in the sand about when a trade payable must be classified as debt. “Will the reclassification discussion die?” asked the NeuGroup member mega-cap treasurer: “No. But what happens is partly dependent how well we regulate ourselves.”

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Clarifying the Vision: A Treasury Priority Road Map Draws Acclaim

Splitting priorities into categories looking forward four years helps align treasury with finance and support business units.

A picture of a treasury road map presented at a recent meeting of NeuGroup for Mega-Cap Assistant Treasurers was worth considerably more than a thousand words, drawing praise and insights from peers. To create it, the treasury team at the NeuGroup member company provided input about their priorities, helping create a vision and road map across four categories of goals.

Splitting priorities into categories looking forward four years helps align treasury with finance and support business units.

A picture of a treasury road map presented at a recent meeting of NeuGroup for Mega-Cap Assistant Treasurers was worth considerably more than a thousand words, drawing praise and insights from peers. To create it, the treasury team at the NeuGroup member company provided input about their priorities, helping create a vision and road map across four categories of goals:

  1. Operational excellence
  2. Global cash and liquidity management
  3. Global risk management
  4. Digital capabilities.

What’s in it. The document below illustrates dozens of initiatives, ranging from those being implemented, such as a Libor transition project, to those requiring experimentation, such as fraud prevention, to those in the exploration stage, including net investment hedging. The document looks ahead four years, starting in 2023.

Living and breathing. Far from static, the document can change throughout the year depending on changing priorities. For example, the company’s broad SAP implementation has pushed some other items further out.

  • Treasury’s priorities must align with the greater finance department and company goals overall. Noting finance’s center-of-excellence goal to increase the use of analytical tools to replace manual processes, the AT said, “We have to make sure our priorities are using the same lens as the rest of finance.”

Support the business. Another member said her treasury team uses a similar approach that includes a fifth category of goals, business support. She said the treasury organization’s lean structure makes it essential for it to understand the business units’ initiatives early on—not after key decisions have been made.

  • For example, a business may decide to change its multi-country credit card program, and treasury taking proactive measures to facilitate the change rather than reacting to it is more efficient, both for treasury but also for the business initiative.
    • “How do we stay ahead of that and get pulled in early enough to help guide some of the choices so they’re less painful and inefficient in the long-run?” the AT said.
  • The presenting member said she would follow suit: “I love adding the additional section to support the business.” Business support is already a treasury priority, the member said, and adding it to the chart will strengthen the document as a tool to help make the case for financing needs.
  • Another member agreed that supporting the business is treasury’s top priority. His team also devotes significant resources to tax-related transactions, indicating tax could be an additional category of treasury goals. “Tax is another constant battle we face,” he said.

Understanding business priorities. To help align treasury’s priorities with those of the operating businesses, the presenting AT said, there are forums throughout the year when treasury members interact with investors to understand where they see the businesses focusing. And monthly and quarterly meetings are scheduled with business leaders to understand their priorities.

  • A member from a company with multiple subsidiaries said his treasury takes a similar approach, determining its own priorities over the next 12 months and then talking to the treasurers or finance heads of the business units to understand their priorities and where there are overlaps.
  • “We all understand we don’t have unlimited resources, so we need to try to prioritize what the next set of initiatives will look like,” he said.
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Kicking the Tires: Investing Cash in Working Capital Finance

Supply chain finance offers attractive yields uncorrelated to other assets, but non-IG funds present an obstacle.

The search for attractive yields uncorrelated with—and more resilient than—other fixed-income investments led the investment arm of a large, privately-held multinational corporation to a fund that invests globally across trade receivable, payable and inventory finance assets.

  • Representatives from Koch Investments Group and Pemberton Asset Management, a specialist alternative credit manager, discussed the benefits of the working capital finance asset class at a recent NeuGroup session organized for members of NeuGroup for Cash Investment.
  • A number of members who work at public companies said that while the potential returns and diversifying nature of investing in a working capital finance strategy are intriguing, investing in a non-investment grade fund could prove difficult under their current policies.

Supply chain finance offers attractive yields uncorrelated to other assets, but non-IG funds present an obstacle.

The search for attractive yields uncorrelated with—and more resilient than—other fixed-income investments led the investment arm of a large, privately-held multinational corporation to a fund that invests globally across trade receivable, payable and inventory finance assets.

  • Representatives from Koch Investments Group and Pemberton Asset Management, a specialist alternative credit manager, discussed the benefits of the working capital finance asset class at a recent NeuGroup session organized for members of NeuGroup for Cash Investment.
  • A number of members who work at public companies said that while the potential returns and diversifying nature of investing in a working capital finance strategy are intriguing, investing in a non-investment grade fund could prove difficult under their current policies.

Working capital assets. “The investment is, traditionally speaking, a fund,” said Pemberton managing director Scott Hamilton in explaining the concept. “A corporate will get their pro rata allocation across all the assets in the fund, so you would be diversified across the entire portfolio of the working capital assets that we have originated.”

  • According to Pemberton’s presentation, those assets include receivables and payables with tenors ranging between 30 and 360 days from companies with average credit ratings of BB-. Additionally, Pemberton offers an insured (single-A credit insurance) share class and note forms.
  • Pemberton sources the assets through its own origination, as well as from banks and supply chain finance platforms. The return for investors comes in part from the difference between the discount and what the buyer ultimately pays Pemberton, net of fees.
  • Mark Hickey, Pemberton partner and co-founder, said that targeted gross returns of Libor plus 250-300 basis points can be achieved while maintaining zero duration risk, low volatility and very low loss rates.
  • Amid extensive global market volatility in the last year, Mr. Hickey noted the relatively low volatility and favorable performance of Pemberton’s strategy relative to comparable credit indices (see chart below).

Alpha additive. Ben Tuchalski, a director at Koch Investments Group, said Koch was encouraged by Pemberton’s credit and underwriting capability, which helped overcome some initial hesitancy about the asset class. The firm approved the investment in early 2021.

  • “We’re starting to focus more on our beta exposure in liquid credit, and this is one that’s alpha generative and alpha additive,” he said. “It’s done what it’s supposed to do, it’s diversified away from our other mandates within this section of the portfolio, and it’s provided us an uncorrelated return stream.”
  • He added, “We’re happy with it, and the proof’s that we’ve provided more capital. It was a no brainer for us.”

Investing obstacles. Member feedback at the session suggested wide acceptance of working capital finance as an asset class has not arrived. Treasury professionals charged with investing corporate cash may have liquidity and safety concerns due to the credit ratings of buyers that participate in Pemberton’s supply chain finance program. Plus, the fund itself is unrated.

  • Mr. Hickey said the fund is “not set up to be a structured finance product with an investment-grade rating, because there are a number of features in structured finance ratings that you need to build in that our fund wasn’t designed to do.
    • “That doesn’t mean we couldn’t do that at some point, but we’d have to set up a separate vehicle to be investment grade.”
  • Accounting could present another obstacle. “It will be part of the leap for a corporate treasurer because the underlying investments are not publicly traded CUSIP assets, Mr. Hamilton said.
    • “They are private in that regard, but liquid and tracked internally on a daily, marked-to-market basis by us, allowing for any payment breaks to be caught in real time.”
  • However, some treasury teams at cash-rich, tech firms allocating more resources to strategic investment are considering adjusting their investment policy to allow for this investment, according to Mr. Hamilton.

Informed perspective. NeuGroup’s Scott Flieger, who facilitated the session, said the development of a capital market for working capital finance programs could ultimately present an opportunity for more corporates, but the asset class may need some time to mature.

  • “It is logical to assume that corporations with large cash balances with a small percentage dedicated to alpha returns would be expected to be the first mover into WCF assets, but with several important caveats,” Mr. Flieger said. “Credit reviews will be intense and understanding precisely how liquid these assets are, especially in volatile markets, will be of paramount importance. Investment policies may need to be modified, as well, to permit investments in non-rated assets.”
  • He added, “A capital market developed for WCF assets may be beneficial for corporations that currently have large supply chain finance programs which rely on their banks for short-term credit. WCF programs provide many benefits around managing working capital and have been described as the gift that keeps on giving. If banks reduce their credit commitments to WCF programs because of regulatory or market forces, having a capital market for WCF assets could prove quite important.”
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Fresh Takes: Cash Flow, Spending Discipline, Profits and People

Timely insights on liquidity and how finance can add value to the business from Chris Ortega of Fresh FP&A.

“Profits are a dream but cash is a reality.” That’s among the timely, on-target insights aimed at CFOs, treasurers and other finance executives in this episode of NeuGroup’s Strategic Finance Lab podcast, which you can hear by hitting the play button below or heading to Apple or Spotify.

It’s delivered by Chris Ortega, the CEO of Fresh FP&A, a consultancy focused on finance transformation that provides businesses with fractional CFO, FP&A and finance support. Mr. Ortega’s insights are grounded in his extensive background in accounting, audit, FP&A and finance leadership at high-growth companies.

Timely insights on liquidity and how finance can add value to the business from Chris Ortega of Fresh FP&A.

“Profits are a dream but cash is a reality.” That’s among the timely, on-target insights aimed at CFOs, treasurers and other finance executives in this episode of NeuGroup’s Strategic Finance Lab podcast, which you can hear by hitting the play button below or heading to Apple or Spotify.

It’s delivered by Chris Ortega, the CEO of Fresh FP&A, a consultancy focused on finance transformation that provides businesses with fractional CFO, FP&A and finance support. Mr. Ortega’s insights are grounded in his extensive background in accounting, audit, FP&A and finance leadership at high-growth companies.

  • In an interview with NeuGroup’s Nilly Essaides, he makes clear and compelling the need for finance teams to adjust to volatile capital markets and a shifting economic landscape by building paths to cash flow sustainability and optimizing working capital management. It’s all about liquidity.
  • Equally critical for finance leaders: partnering with business units and providing value amid rising inflation, higher interest rates and the likelihood of recession.

And as you’ll hear, Chris Ortega is passionate about urging finance leaders to put “people before the profits,” in part by taking a hard look at what they spend— on technology and consultants for starters—before reflexively turning to head count reductions. “At the end of all your analysis,” he says, “there’s a human element involved.

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Talking Shop: How Much Liquidity Does Your Holding Company Maintain?

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: “We are a multibillion-dollar bank and have traditionally held cash and liquid securities to cover four quarters of holding company expenses, including opex, debt, preferred and common dividends. We set the upstream dividend from the bank to the holdco to maintain that level every quarter.

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: “We are a multibillion-dollar bank and have traditionally held cash and liquid securities to cover four quarters of holding company expenses, including opex, debt, preferred and common dividends. We set the upstream dividend from the bank to the holdco to maintain that level every quarter.

  • “After many years of this practice, the Fed told us best practice was eight quarters, but could not point us to any written guidance. We just moved within the FRB from the Community Bank Organizations to the Regional Bank Organizations supervisory group.
  • “Wondering if the RBO supervisors have a different best practice than the CBO supervisors. Would love to know the current practices of this group.”

Peer answer 1: “There is no written guidance. Pre-Great Recession we ran that ratio at four months. Shortly thereafter, the Fed suggested 12-24 months’ worth was what they wanted to see. We have set the policy minimum at 12 months and probably have never been higher than 20 months.

  • “The other item I still wrestle with, and I’ve pinged this group before, is do you include maturing debt in this calculation?”
  • Member response: “We do include maturing debt in the calculation. We were noodling over 24 months without common dividend, and 12 months with. But the FRB was pretty clear that they were expecting us to get up to 24. So, we’re going to just bite the bullet.”

Peer answer 2: “We hold eight quarters. We have included it in our policy and [it has] never been commented on by either of the regulators.”

Peer answer 3: “We also maintain at least 24 months of liquidity (time to required funding) and assume no access to markets and continuation of dividend payments for 12 months.”

Peer answer 4: “We have a policy of 12-month cash coverage. We usually have more than that. We are Fed at the parent level and OCC at the bank level.”

Peer answer 5: “Our ‘trigger’ is 1.5x annual coverage with a limit of 1x. Also, Fed at parent and FDIC at bank. No criticism or comment and we have had those metric levels for years.”

Peer answer 6: “We have a policy stating the target is four quarters of cash on-hand (with two quarters being the minimum) at the parent company to meet dividends, debt payments, and obligations.

  • “In 2020, the FRB asked that we adopt a liquidity management and contingency funding plan specific for the holding company.”
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The Science of FX Exposure Management

FX volatility and economic uncertainty are putting pressure on treasury to optimize risk management programs and provide management and the business with insight and foresight on how currency moves can impact revenue and the P&L.

FX risk managers are under the microscope. “For the last six months, there’s been more intense attention on what my team is doing than for the past five years,” said a member of NeuGroup for Foreign Exchange.

He is not alone. The US dollar’s ascent, surging inflation and a global economic slowdown have made management of currency risk a top priority for CFOs. For US-based multinationals, a stronger dollar and weaker overseas sales are a double whammy: Lower foreign-sourced income is now translated at a less advantageous exchange rate, adversely affecting earnings and potentially introducing unwelcome volatility into financial results.

FX volatility and economic uncertainty are putting pressure on treasury to optimize risk management programs and provide management and the business with insight and foresight on how currency moves can impact revenue and the P&L.

FX risk managers are under the microscope. “For the last six months, there’s been more intense attention on what my team is doing than for the past five years,” said a member of NeuGroup for Foreign Exchange.

He is not alone. The US dollar’s ascent, surging inflation and a global economic slowdown have made management of currency risk a top priority for CFOs. For US-based multinationals, a stronger dollar and weaker overseas sales are a double whammy: Lower foreign-sourced income is now translated at a less advantageous exchange rate, adversely affecting earnings and potentially introducing unwelcome volatility into financial results.

Meanwhile, members of our two FX risk management peer groups say they continue to struggle on two primary fronts:

  1. Accessing accurate and comprehensive information about balance sheet and cash flow exposures.
  2. Leveraging the data to develop effective risk management strategies, e.g., by analyzing the cost of hedging vs. benefits and selecting hedge tenors, coverage ratios and instruments.

Automation at the core. Treasuries have long struggled to collect reliable data about FX-denominated cash flows and monetary assets and liabilities. At the root of this issue is the lack of data availability and accessibility, a product of incongruous systems and antiquated and manual approaches to collecting exposure information.

  • To get a better read on risk, “we would have to look at our multiple entities and multiple instances of SAP,” said a weary FX risk manager. “In a perfect world, we would have one instance of one ERP.”
  • Even with balance sheet exposures, “hedging often feels like a game of whack-a-mole,” said another member. “We are looking to improve both forecast accuracy and how the book is recorded,” she said.
  • The situation is worse with cash flow exposures: It’s not uncommon to have dozens of business units manually gathering data and emailing Excel spreadsheets with varying degrees of accuracy. Consolidating the forecasts is time-consuming and creates a bottleneck for treasury as it tries to put on the right hedges at the right time.

Advanced capabilities. That is why more NeuGroup members are looking for a dedicated FX solution that goes beyond the capabilities of many of today’s TMSs and ERPs. “With a dedicated tool, business unit finance staff can log in directly to input the data and see the data both locally and at the enterprise level,” explained Chatham Financial’s Jason Peterson. At an October FX risk managers meeting, one member said, “We are analyzing our business requirements and thinking about how a solution could work with our overall systems landscape. For us, that’s priority No. 1.”

The good news is that best-in-breed FX risk management tools—for example, ChathamDirect—can integrate easily with multiple source systems including ERPs and cash management systems. “With ChathamDirect’s end-to-end SaaS solution, you can easily gather and consolidate cash flow forecasts and balance sheet exposures from your global business units to streamline your processes. You can also view and analyze your total exposure anywhere, at any time.” Mr. Peterson said.

A single source of the truth. Collecting the data automatically is a critical first step. However, storing it so it is accessible to different constituents as well as available for running analytics is essential to supporting smart decisions about hedging. Currently, most companies have separate processes for curating the data for their balance sheet and cash flow exposure information. This “split-screen” view hampers the development of holistic, cost-effective hedging programs.

  • “Data-wise, we would like to have all of our info in one place, including balance sheet exposures and cash flows,” one NeuGroup member said. The convergence of the information flows “provides huge opportunities to streamline hedging across the global organization,” he said.
  • “Because ChathamDirect siphons data on both types of exposures and stores them in a single location, it enables treasury to look across the global exposures at a granular level,” Mr. Peterson said.

Extracting more insights. Data is only important when it leads to insight and action. According to treasury leaders, more advanced FX risk analytics features are increasingly important. “We’re looking at a system to do exposure management. We want a tool that will pick up historic rates and run them through different analyses to determine what could impact us,” said one member.

The combination of a big-picture view of risk across exposure types with transaction-level data fuels ChathamDirect’s analytics engine, which enables treasury to:

  • Quickly spot changes in historical trends and drill down to identify root causes.
  • Assess individual subsidiaries’ levels of forecast accuracy to help them improve their processes and drive true accountability at the business unit level.
  • Gauge which subsidiary has updated its forecast (or not) to ensure all exposure information is up to date.
  • Identify and remedy situations where exposure limits specified in company policy have been breached.
  • Review counterparty risk across all derivative trades.
  • Allocate accounting at the appropriate level of the organization.

Finding the efficient frontier. Rising interest rates have also reignited the old debate about whether hedging is worth the cost.

  • “We are looking to understand the efficient frontier,” one risk manager explained. “I’d like to develop something to take to the CFO to demonstrate that we are on that line, by running a comprehensive risk assessment against risk appetite.”
  • ChathamDirect can help here. “With the availability of data, treasury has the capability to balance the desired level of risk reduction with the lowest cost of hedging by reducing the number of trades and selecting the right derivatives,” said Mr. Peterson. This applies to forecasted cash flows as well as balance sheet hedging.
  • “Hedging has become more expensive. We’ve experienced higher forward points, which lead to more questions from the top about whether it pays to hedge,” reported another member. According to Mr. Peterson, “By producing insight into the cost of hedging compared to the overall risk exposure, treasury can have a more productive conversation with the CFO about the effects of hedging.”

Continuing business insight. The benefits of a dedicated and comprehensive risk management tool go beyond hedging efficiency and effectiveness. Visibility into global, subsidiary-level information also offers treasury a unique lens through which to view the performance of each business.

Changes in exposure patterns can act as an early warning system—a leading indicator of shifts in market conditions. “ChathamDirect’s analytics functionalities allow treasury to get to the root cause of changes in sales forecasts and leverage the insight to inform more productive conversation with business partners and leadership,” Mr. Peterson said. “The ability to quickly access data across both programs is essential to making impactful decisions.”

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Sending More Cash Out of China Using Pools in Free Trade Zones

Unpacking a member’s cash pool in China in a free trade zone where window guidance put no limit on cash outflows.

Many NeuGroup member companies face a challenge getting cash out of China—in part because of rules limiting outflows from cash pools set up under a so-called nationwide scheme to 50% of the net equity held by a company’s entities in the country. But not all multinationals have this problem.

  • At a recent session of NeuGroup for Global Cash and Banking, one member intrigued peers by describing how his company is taking advantage of free trade zones (FTZs) established in China that do not have specified limits on outflows, where corporates rely on unpublished “window” guidance provided by regulators.
  • That prompted the member’s company to set up a special cross-border, physical RMB pool, based in Shanghai, which sends cash via intercompany loans to a multicurrency notional pool based in Singapore, which is pooled under a dollar header account and sent to the US.

Unpacking a member’s cash pool in China in a free trade zone where window guidance put no limit on cash outflows.

Many NeuGroup member companies face a challenge getting cash out of China—in part because of rules limiting outflows from cash pools set up under a so-called nationwide scheme to 50% of the net equity held by a company’s entities in the country. But not all multinationals have this problem.

  • At a recent session of NeuGroup for Global Cash and Banking, one member intrigued peers by describing how his company is taking advantage of free trade zones (FTZs) established in China that do not have specified limits on outflows, where corporates rely on unpublished “window” guidance provided by regulators.
  • That prompted the member’s company to set up a special cross-border, physical RMB pool, based in Shanghai, which sends cash via intercompany loans to a multicurrency notional pool based in Singapore, which is pooled under a dollar header account and sent to the US.
  • “China is a big entity for us, with trapped cash,” the member said. “We’d been studying this for the past year.”
  • One of the members who was unaware that companies could send more than 50% of equity out of China said he would immediately contact his team to look into following suit.

How it works. To benefit from the relaxed outflow rules governing free trade zones (FTZ), the member company set up a cross-border cash pool made up of three accounts (see graphic below):

  1. A pool header operating account, onshore in China, which consolidates cash from all the corporate’s RMB subaccounts in the country.
  2. A special cross-border account in the Shanghai FTZ that sweeps domestic cash and retrieves overseas cash. This requires an application and approval from the People’s Bank of China (PBOC), which the member said can take one to two months.
  3. An offshore header account in Singapore that receives the cash, sent in CNY and received in CNH.

Another corporate’s liquidity director told NeuGroup Insights his company has a similar, special pooling account, also based in Shanghai. “Under the terms of this pooling structure, we can move unlimited amounts of cash, the only major requirement being that at least one time per year we have to have a zero balance for the sweep—meaning we have to repay all of the funds sent out of country for one day,” he explained.

A true team effort. The US-based member who described the structure at the meeting said setting it up was relatively complex as it required government approval and a very hands-on team in Asia, starting with a regional treasurer in Singapore.

  • He said the Singapore team obtained approval from the PBOC and worked with a local bank to set up the accounts. “We’re stepping in now to coordinate from the US side to make sure that we provide liquidity, interest rates, deposits, and make sure we’re fully covered,” he said.
  • The regional treasurer said that because China is “very paper-based,” she depended on a China-based treasury manager to propose banks for corporate approval, set up the facility’s infrastructure and get approval from regulators. The treasury manager followed guidance from the PBOC and the State Administration of Foreign Exchange.
  • “He is the one who is running around, talking to banks, talking to peers—this takes time and expertise,” the regional treasurer said. “If you do not have suitable people in country, it’s not easy; you wouldn’t be able to do it if you’re sitting in Singapore.”

Why not do it? Some multinationals that use the nationwide pooling scheme and have not opted to take advantage of the increased flexibility offered in China’s FTZs simply don’t have operations in the special regions necessary to set up a pool header account.

  • “The free trade zones are not everywhere,” one member said. “So if your company is in Shenzhou, you cannot do the free trade zone version. The FTZ is intended to attract people to concentrate imports into certain areas.”
  • They said in addition to having a FTZ designation, an eligible corporate considering the special pooling structure should have multiple entities in China. A corporate with only one account in the country may use repatriation via a dividend to move cash out of the country.
  • A NeuGroup member at a company using the nationwide structure told NeuGroup Insights: “We are aware of the other schemes, and continue to evaluate.  We have had a positive partnership with regulators in developing and operating our existing structure and it has largely met our needs. We also believe this nationwide scheme offers the greatest stability and predictability, which is important to us both locally and globally as we manage liquidity.”

Words to the wise. Indeed, the regional treasurer warned corporates weighing the benefits of pools in an FTZ to be wary of ever-changing window guidance from the PBOC.

  • “I want to put a disclaimer that this was a chance for us to take advantage of China opening up because of how the economics have evolved,” she said. “But there is a chance that, even tomorrow, they could change the regulation—and they don’t have to give advance notice.”
  • And don’t expect to get parameters documented in writing. For guidance on FTZ RMB pool outflows, “even the bank won’t write an email to you, they’ll only tell you over the phone,” the team member in Shanghai said.
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Sizing Up APIs: the Right Piece to Solve a Treasury Data Puzzle?

APIs offer flexible connectivity between systems, but widespread adoption by treasury faces several obstacles.

Treasury organizations are hungry for data, but visibility into it is hampered by a fractured system environment and lack of standardization, both within finance and with external partners. Short of implementing a single ERP with built-in modules, finding a way to access enterprise information on a real-time basis has been difficult for often resource-starved treasury organizations.

APIs offer flexible connectivity between systems, but widespread adoption by treasury faces several obstacles.

Treasury organizations are hungry for data, but visibility into it is hampered by a fractured system environment and lack of standardization, both within finance and with external partners. Short of implementing a single ERP with built-in modules, finding a way to access enterprise information on a real-time basis has been difficult for often resource-starved treasury organizations.

A new bridge for data. While complete system consolidation is not realistic, there are ways to mimic integration by implementing new technologies—by using APIs, for example. APIs can deliver flexible connectivity with other internal systems and external providers, like banks. They are a modern take on middleware, without all the technical debt and hard-coded flows. Banks have been using APIs in the retail market successfully, e.g., to offer 24/7 access to account information. However, each bank has its own set of APIs, designed to enhance customer “stickiness.”

On the commercial side, banks have pursued a similar strategy with a similar objective. However, the lack of standardization has slowed down corporate adoption significantly. Only 16% of respondents to NeuGroup’s recent Cash Forecasting Survey report using bank APIs.

  • Treasury does not typically have the technology resources to build user interfaces with multiple APIs.
  • Another obstacle is the debate about the value of real-time bank information. “If you are not going to make a decision based on it, why do you need it?” said a member at a NeuGroup for Retail Treasury meeting, hosted by Starbucks and sponsored by FinLync.
  • Plus, companies already using a treasury management system (TMS) wonder about the upside. A TMS can be programed to pull account information directly from bank portals, saving treasuries hours of data collection. “Why fix something if it’s not broken?” asked another member.

Owning the cadence. The benefit of APIs is that the company controls the frequency of data uploads. “It’s no longer the banks pushing your files, pushing payments or taxes,” said Tim Kane, head of sales at FinLync. With APIs, corporates can get real-time information on demand and then make decisions based on it.

  • “With legacy file formats, you’re essentially always playing catch-up, trying to get timely information based on the schedule that a predecessor agreed upon years ago,” Mr. Kane said.

Getting IT bandwidth. Even companies eager to implement bank APIs are facing major obstacles. Treasury is not first in line for IT investment. Plus, IT organizations are often focused on modernizing the broader finance and enterprise tech architecture. A panel discussion at the meeting offered pointers on how to get the CFO’s buy-in for allocating IT investment.

  • “If we can remove legacy technology debt by using APIs by getting rid of some of this old middleware, then treasury can get more help from IT to install new technologies to make it more efficient,” said the former treasurer of a major technology company who is now a managing director at JPMorgan Chase.
  • A senior director of treasury who participated in the panel recommended that treasury overcome limited IT resource challenges by attaching API implementations to larger technology upgrades, e.g., the roll-out of a new ERP.

Considering the cost. Convincing management to allocate funds also depends on whether the APIs can reduce treasury cost. The answer, according to this treasury director, is “it depends.”

  • Her bank does not charge for so-called front-end data calls because corporate clients are already paying for back-end services, such as accounts management and various treasury solutions.
  • Pricing can vary from bank to bank, similar to API formats, as institutions compete to gain market share in this new area.
  • In addition, replacing antiquated middleware with APIs can be an enormous cost-saver. For example, APIs’ connectivity takes away the need for lengthy calls with banks about missed payments or data.

Even API proponents agree that banks are unlikely to standardize their APIs any time soon. But that does not mean treasurers give up. Instead, they should put pressure on their banks to collaborate with each other and develop common APIs that would promote widespread adoption, reducing costs and facilitating the flow of information.

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Talking Shop: Verifying Payment Instructions for Vendors

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: “What does your company do to verify payment instructions for new vendors and changes in instructions for an existing vendor?”

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: “What does your company do to verify payment instructions for new vendors and changes in instructions for an existing vendor?”

Peer answer 1: “Our organization spends a significant amount of time validating changing or new banking information via phone calls. We are in the process of rolling out a service offered through a banking partner that will allow us to do this through an application they offer, but the database they use will not include every vendor.

  • “The bank we are using is U.S. Bank. They provide us an interface through their SinglePoint system to perform validations of banking information. My understanding is they use a system that all banks can have access to called Early Warning.
  • “This is a database that was created by a number of banks pooling banking information together to allow for validation and other inquiries. Another group we looked at was GIACT.
  • “We decided to use U.S. Bank because we already had a relationship with them and had access to their SinglePoint system. It was also more cost effective for us.”

Peer answer 2: “Accounts payable performs a vendor callback prior to setting up the vendor’s banking information in the ERP. Payment requests to treasury that flow outside of the ERP must be accompanied by proof of a vendor callback from the requestor. There are some exclusions to this policy.”

Peer answer 3: “We do verification calls to talk to a different person than the one that sent the wiring instructions. Exceptionally, if this is not possible due to time zone differences, language barriers, etc., we send a penny test and ask them to confirm the amount and send a screenshot from the vendor bank account statement.”

Peer answer 4: “We also do verification calls to a known contact at the vendor before setting electronic funds transfer instructions as well as before changing payment instructions. In addition, we utilize GIACT’s account validation services.”

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Overexposed to Fixed-Rate Debt, Not Ready to Swap to Floating

Inflation and uncertainty about interest rates leave many corporates waiting to add more floating-rate exposure.

Discussions and polling about fixed- to floating-rate debt ratios among corporate issuers at a recent meeting of NeuGroup for Capital Markets sponsored by Deutsche Bank made clear two key points:

  1. The overwhelming majority of companies are overly exposed to fixed-rate debt relative to what they consider ideal and what historical data suggests will reduce interest rate expense over the long-term.
  2. Volatile financial markets and uncertainty about inflation and interest rates have kept many of those companies from entering into interest-rate swaps to increase their exposure to floating rates. A few, though, are taking steps to reduce their exposure to fixed rates.

Inflation and uncertainty about interest rates leave many corporates waiting to add more floating-rate exposure.

Discussions and polling about fixed- to floating-rate debt ratios among corporate issuers at a recent meeting of NeuGroup for Capital Markets sponsored by Deutsche Bank made clear two key points:

  1. The overwhelming majority of companies are overly exposed to fixed-rate debt relative to what they consider ideal and what historical data suggests will reduce interest rate expense over the long-term.
  2. Volatile financial markets and uncertainty about inflation and interest rates have kept many of those companies from entering into interest-rate swaps to increase their exposure to floating rates. A few, though, are taking steps to reduce their exposure to fixed rates.

Fixed-rate debt dominates. A striking 89% of the companies polled at the meeting said that more than 75% of their debt is fixed rate. Several members said 100% of their debt is fixed. USD floating-rate swaps are how 42% of the corporates prefer to get exposure to floating rates, while 33% would rather issue commercial paper (see graphics).

  • The heavy weighting to fixed rates reflects both an extended period of historically low interest rates that encouraged corporates to lock in rates as well as a surge in fixed-rate issuance as they increased liquidity at the beginning of the Covid pandemic.
  • The reluctance of many companies to swap to floating reflects a belief that rates will continue to rise and that by waiting they will receive a higher swap rate on the fixed-rate leg of the swap, said Scott Flieger, who leads the NeuGroup capital markets peer group. “Companies have already benefited from waiting as rates have risen, following the age-old advice to ‘let the trend be your friend,’” he said.
  • “The argument for doing something now is that maybe, just maybe, interest rates are near their high point and you don’t want to miss the market. Or maybe you just want to be prudent and do some hedging now and average your way into it,” he added.

Obstacles to swapping to floating rates. One member’s company has traditionally taken a programmatic approach to interest rate hedging but paused its program earlier this year as the Fed began hiking rates. Prolonged inflation and rate hikes have complicated the decision about when to restart gaining exposure to floating, he said.

  • Typically, an economy facing recession, like the US appears to be, would provide a lower-rate environment where floating-rate debt is cheaper than fixed-rate debt and thus help lower interest expense during a business slowdown, the member said. However, today’s sticky inflation has thrown off that logic and forced the Fed to raise rates and increase the cost of floating-rate debt in the midst of a potential business slowdown.
  • Another member, whose company began issuing fixed-rate debt at the beginning of the pandemic, is starting a programmatic interest rate hedging program. But launching it will in effect be a form of market timing, difficult in the current environment. “How do we get started?” he asked.

Challenges with timing the market. This member said pitching to senior leadership a negative carry (i.e., adding interest cost) on a swap-to-float trade in the current market is a “difficult conversation” given that corporate earnings face headwinds from supply chains, inflation, FX and other factors—“even if the long-term view remains the swap will have a positive outcome over the life of the trade.” He added:

  • “While rates are rising, there is upside from collecting higher yields on invested cash.
  • “Volatility is high with big, daily swings: a few months ago, some banks were telling us clients were waiting to swap when the 10-year Treasury hit 3%. Now we are at 4%! There is an aversion to putting on a trade only to find a large negative [mark to market] a few months later.
  • “Of course, the peak of the Fed cycle is the ideal time to transact and at some point you’ll have to trust the thesis behind having floating-rate exposure and begin averaging into a position.”

Easing back in, Europe first. Here’s how one company is slowly getting back in the floating-rate exposure game after unwinding all of its swaps and being 100% in fixed, according to the member attending the NeuGroup meeting:

  1. The board approved a strategy to target floating-rate exposure between 20% and 30% going forward, which is lower than the historical approach of 40% or more.
  2. Treasury first plans to layer in euro-denominated floating-rate swaps to align with the company’s debt in euros, about 30% of its total debt. The relatively lower risk of prolonged rising rates in in the eurozone relative to the US and a positive initial interest expense benefit underlies this timing.
  3. The company will begin layering in US dollar swaps over four to five quarters as the Fed rate hiking cycle winds down, perhaps beginning in Q1 2023.
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Crunch Time: A Rising Emphasis on Cash Forecasting Accuracy

Management is putting greater focus on cash forecasting accuracy. Some in treasury wonder whether the extra work is worth it.

After a decade of cheap money, liquidity is once again at a premium. Because it costs more to borrow, and pays more to invest, treasuries are under pressure to improve cash forecasting accuracy. In this environment, “treasury has three important mandates: don’t run out of cash, don’t run out of cash and don’t run out of cash,” one member said.

  • “From a treasury perspective, this is the time when the rubber hits the road,” another treasurer said. “The organization looks to treasury for guidance. Whereas FP&A’s cash flow forecast becomes completely irrelevant.”

Management is putting greater focus on cash forecasting accuracy. Some in treasury wonder whether the extra work is worth it.

After a decade of cheap money, liquidity is once again at a premium. Because it costs more to borrow, and pays more to invest, treasuries are under pressure to improve cash forecasting accuracy. In this environment, “treasury has three important mandates: don’t run out of cash, don’t run out of cash and don’t run out of cash,” one member said.

  • “From a treasury perspective, this is the time when the rubber hits the road,” another treasurer said. “The organization looks to treasury for guidance. Whereas FP&A’s cash flow forecast becomes completely irrelevant.”

Treasuries are feeling the pressure. At a recent NeuGroup meeting, 86% of participants said they are experiencing significant or moderate pressure to get it right (see chart).

  • Especially in this environment, the forecast must provide meaningful insight that can lead to action, e.g., tightening working capital management to reduce external borrowing and minimize idle cash and take advantage of higher yields.
  • One treasurer, recalling the 2008 liquidity squeeze and the early days of the pandemic said, “Some treasury staff have not lived through a real liquidity crisis.”

Getting over short-term volatility. The problem treasuries face is that producing the cash forecast remains a tall challenge. NeuGroup’s May 2022 Cash Forecasting Survey found that the primary hurdles to producing the forecast are lack of visibility into cash (88%) and access to data about cash (50%). Absent accurate and up-to-date information, treasury is hamstrung in fine-tuning forecast accuracy.

  • As the chart below shows, the forecast-to-actual variance gets smaller as the horizon gets longer. That reflects greater volatility in shorter-term forecasts because of uncertainty about the timing of incoming and outgoing cash. While treasury may expect $500 million in receivables in Q1, some of the revenue may come at the end of the quarter (which is why for quarterly forecasts, some teams forecast monthly for months one and two and weekly for the last month of the quarter).

Does accuracy matter? Given these obstacles, some treasurers wonder whether trying to shrink the variance is worth the effort. “The ROI just does not make sense,” one member said.

  • “This is a case where the 80/20 rule applies: As long as we are directionally correct, I am OK with that.” His company reported a variance between forecast and actuals exceeding 10%.
  • Another company sets a minimum liquidity threshold for its subsidiaries, so forecast precision does not really matter.

Driving action. But several treasurers argued that accuracy is essential to driving funding and investment decisions, especially in this environment.

  • “If you can’t make a decision based on the forecast, then why are you even forecasting?” one member asked.
  • At another company, cash forecasting accuracy and discipline are a big focus. Because cash has been plentiful, some organizations have loosened their grip, according to this member. “But cash forecasting is like a muscle: You have to exercise it to stay fit.”
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FX Dashboards: Essential Tool to Manage the Volatility Narrative

Real-time dashboards help treasury risk managers tell the FX story, but collecting front-end data remains a challenge.

Extreme volatility in foreign exchange markets has underscored the importance of technology tools, systems and solutions that enable companies to better monitor and manage their FX exposures. And for multinationals with far-flung operations, nothing beats a real-time dashboard to keep on top of the FX narrative, experts at Chatham Financial said at a recent NeuGroup for Mega-Cap Assistant Treasurers meeting.

  • The key for companies with global operations and treasury teams managing numerous currency pairs—one NeuGroup member has more than 50—is to take charge of the FX narrative by illustrating key metrics, program drivers and insights using dashboards that aggregate and display FX information in real time, said Jason Kirwan, director with Chatham’s risk-management platform, ChathamDirect.

Real-time dashboards help treasury risk managers tell the FX story, but collecting front-end data remains a challenge.

Extreme volatility in foreign exchange markets has underscored the importance of technology tools, systems and solutions that enable companies to better monitor and manage their FX exposures. And for multinationals with far-flung operations, nothing beats a real-time dashboard to keep on top of the FX narrative, experts at Chatham Financial said at a recent NeuGroup for Mega-Cap Assistant Treasurers meeting.

  • The key for companies with global operations and treasury teams managing numerous currency pairs—one NeuGroup member has more than 50—is to take charge of the FX narrative by illustrating key metrics, program drivers and insights using dashboards that aggregate and display FX information in real time, said Jason Kirwan, director with Chatham’s risk-management platform, ChathamDirect.
  • APIs and other tools have greatly facilitated straight-through processing (STP) and the flow of FX data from the front-end to the back-end and the implementation of a dashboard. But challenges remain, members noted.

Storytelling. Dashboards that dynamically illustrate cash flow, balance sheet and other important areas affected by FX volatility, in as close to real-time as possible, allow treasury to take control of the dialogue about the company’s current exposures and the hedging programs in place to mitigate swings.

  • “If treasury doesn’t tell the story, then C-Suite executives will find a narrative from someone else, and all of a sudden treasury is no longer in control of the financial situation,” Mr. Kirwan said.
  • Overlaying its FX program with real-time data, rather than flipping between the program and Bloomberg, empowers treasury to identify the company’s exposures quickly, explain them in the context of the company’s FX program and make recommendations to management, he added.

Easier STP. Transmitting the necessary FX-related data to and from enterprise resource planning (ERP) systems, especially when acquisitions have resulted in multiple ERPs, has traditionally been a challenge.

  • A renewed focus on those integrations, Mr. Kirwan said, has been fueled by the advent of APIs and other tools that have significantly reduced the time and resources to pursue STP.

Ongoing challenges. The biggest challenge for many firms today, Mr. Kirwan said, is making sure the data digested on the front-end is comprehensive and accurate; taking extra steps to ensure its quality and coverage provides abundant rewards downstream.

  • Members acknowledged the difficulty in refreshing their companies’ FX exposures frequently enough to trade on a daily basis, much less intraday, especially in jurisdictions where staff may lack expertise. One noted having the luxury of having implemented one instance of SAP systems across the company, enabling treasury to view exposures in real-time.
  • Another said his team improved a Brazilian subsidiary’s daily hedging by shifting members of the accounts receivable team stationed at an offshore location, to reduce costs, back to sit with the local treasury. They now post invoices within 24 hours, bolstering the accuracy of reports the FX team pulls.
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Valuing Crypto with Fair Value Accounting: Game Changer?

How will FASB’s decision to require companies to report gains and losses in value influence corporate crypto plans?

The FASB’s decision in mid-October to require companies to use fair-value accounting for certain crypto assets (i.e., not NFTs) produced a generally favorable response from corporates that follow developments affecting crypto accounting and regulation. Whether it changes how other corporates consider crypto use cases is another question.

How will FASB’s decision to require companies to report gains and losses in value influence corporate crypto plans?

The FASB’s decision in mid-October to require companies to use fair-value accounting for certain crypto assets (i.e., not NFTs) produced a generally favorable response from corporates that follow developments affecting crypto accounting and regulation. Whether it changes how other corporates consider crypto use cases is another question.

  • Until the FASB’s tentative board decision, companies treated crypto held on balance sheets as indefinite-lived intangible assets that must be written down if they decline but whose value can’t be raised until the asset is sold.
  • Under the FASB’s decision, corporates will be required to recognize gains and losses of crypto assets in comprehensive income during each reporting period; and to recognize certain costs incurred to acquire crypto assets, such as commissions, as an expense (except in certain cases).

Fundamental rethink. “This is a constructive change insofar as corporates willing or desiring to hold crypto would no longer be exclusively exposed to downside P&L risk,” one member whose company holds crypto assets said.

  • “Marking it to market, rather than treating it like an intangible asset, seems intuitive but also represents a fundamental rethink of the accounting treatment,” they added.
  • Michael Saylor, the founder and former CEO of MicroStrategy—which has purchased about 130,000 bitcoins worth about $2.5 billion—tweeted that the FASB’s move is “a major milestone on the road to institutional bitcoin adoption.”
  • Another member, whose company is active in the NFT space, said, “I don’t think it would be the primary driver to change the corporate mindset when thinking about NFT and metaverse initiatives; however, it will help to provide better guidance from a risk management perspective.”

Volatility as deterrent. One member said a corporate’s view of the FASB decision likely depends on the business case: “If their plan was to invest in crypto, then this ruling may definitely deter them from investing because of the volatility and the complexity of creating a robust accounting/controls environment to capture the changes in fair value, which may take a while to implement.”

  • They added, “Not to mention potential complexities around taxes for gains/losses, etc. External auditors would also put a lot of scrutiny around the corporate’s controls/processes to account for crypto.”
  • However, “if the corporate’s plan was to transact in crypto (including cross border payments) and not hold any on the balance sheet, then this ruling may not change their mind. The timing of crypto being held over month-end is something corporates would have to consider.”

Looking ahead. The FASB will next consider what will have to be included in disclosures about crypto assets and how companies should inform investors. The two topics will likely be discussed by the end of the year, according to a FASB spokesperson, and the board would then vote on whether to issue a proposal. They declined to comment on when that might take place.

  • And although this decision meets what some corporates had hoped for, it won’t necessarily change the opinion of crypto skeptics. One member said that while the accounting change “would solve one unattractive aspect of holding crypto, I don’t think this changes certain corporates’—and their shareholders’—inherent aversion to highly-speculative assets.”
  • The topic will be discussed at future meetings of NeuGroup’s working group on digital assets and Web3 strategies. You can find information on the group here. And to download a copy of A Treasurer’s Guide To Becoming Crypto-Ready, click here.
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The Importance of Timing When Buying Political Risk Insurance

Laura Burns of WTW explains the benefits of policies that insure losses caused by geopolitical crises in episode 10 of NeuGroup’s Strategic Finance Lab podcast.

Russia’s escalating war with Ukraine and rising tensions between the US and China are two big reasons why multinational corporations might want to consider buying political risk insurance—in other regions of the world, where it’s not too late to find coverage.

  • To learn what corporates need to know about political risk insurance, hit the play button below or head to Apple or Spotify and hear insights from Laura Burns, who heads the political risk practice for WTW, formerly known as Willis Towers Watson. She joins NeuGroup Insights writer Justin Jones on the latest Strategic Finance Lab podcast, recorded in August.

Laura Burns of WTW explains the benefits of policies that insure losses caused by geopolitical crises in episode nine of NeuGroup’s Strategic Finance Lab podcast.

Russia’s escalating war with Ukraine and rising tensions between the US and China are two big reasons why multinational corporations might want to consider buying political risk insurance—in other regions of the world, where it’s not too late to find coverage.

  • To learn what corporates need to know about political risk insurance, hit the play button below or head to Apple or Spotify and hear insights from Laura Burns, who heads the political risk practice for WTW, formerly known as Willis Towers Watson. She joins NeuGroup Insights writer Justin Jones on the latest Strategic Finance Lab podcast, recorded in August.
  • Political risk insurance policies fill gaps in traditional property insurance policies, picking up where other coverages drop off, Ms. Burns explains in the podcast.

Ms. Burns also discusses how growing up in Bermuda with family in the insurance business provided an up-close view of innovations in insurance policies and, along with a lifelong enthusiasm for international affairs, made political risk insurance the perfect job for her.

  • “I discovered this little niche called political risk insurance, and I thought, ‘well that’s interesting, marrying the family business with my particular interest in geopolitics,” she says. “I would say this is the best-kept secret in the business.”

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Connecting the Dots

Why the level of connectivity among people, processes and systems is the key to unlocking finance’s true value.

By Nilly Essaides

Finance used to sit in an ivory tower.

Over time, brick by brick, we have been dismantling the walls that kept the finance organization separate from other functions and business operations. However, there remain barriers to connecting finance professionals, processes and systems within the function and throughout the enterprise. These structural impediments create unnecessary friction and information gaps that reduce process efficiency and effectiveness and prevent the finance organization from unlocking its full strategic value.

Why the level of connectivity among people, processes and systems is the key to unlocking finance’s true value.

By Nilly Essaides

Finance used to sit in an ivory tower.

Over time, brick by brick, we have been dismantling the walls that kept the finance organization separate from other functions and business operations. However, there remain barriers to connecting finance professionals, processes and systems within the function and throughout the enterprise. These structural impediments create unnecessary friction and information gaps that reduce process efficiency and effectiveness and prevent the finance organization from unlocking its full strategic value.

  • Clearing roadblocks through peer-to-peer knowledge exchange is critical to NeuGroup’s mission of connecting every finance professional who wants to share and learn. Now more than ever, it’s vital these exchanges take place between and among finance functions but also with business partners across the corporation.

Confronting Pain and Frustration

We hear about the pain created by siloed approaches from NeuGroup members in multiple contexts. During a recent FX peer group session, one member shared his frustration with the difficulty of extracting exposure data from business units and segment-level finance teams. His problem was compounded by an Excel-based data collection and analysis process that involves multiple sources of information and sits outside of the rest of the finance organization’s tech stack.

  • In one case, this member recalled, the wrong value was pasted in a spreadsheet, leading to significant over-hedging and resulting in a significant P&L hit. “I had to explain that, and it wasn’t fun,” he said wearily.
  • He also emphasized the importance of soft skills in creating trusted relationships with the various constituents who, for P&L reasons, may be reluctant to divulge a complete exposure picture.

Members of our mega- and large-cap FP&A peer groups have expressed similar frustration in accessing operational and financial data to build forecasts and annual plans. With a mandate to forecast cash flow and the P&L, these members face data coming from divergent systems and through different pipelines that not only slows them down but also introduces more friction into the process. That, in turn, hampers their ability to monitor and manage enterprise performance and support strategic decision-making

In another context, respondents to our May 2022 Cash Forecasting Survey ranked lack of visibility into data as the No. 1 reason that cash forecasting remains a huge pain point for treasury.

A Connective Tech Tissue

Let’s start with the prevalent technology landscape: Most finance teams currently operate within a fractured system environment with different ERPs and different instances of the same ERP. In addition, many have legacy applications that are hard coded into the source system. In a recent NeuGroup survey of 25 companies’ FP&A groups, we found most are also still relying on Excel for data collection, analysis and visualization.

Finance executives have long yearned for a one-stop solution, and corporates spent billions trying to achieve this nirvana. While cloud-based ERPs are gaining a growing share of the market and helping to streamline core system’ integration, their level of functionality often falls short of the finance organization’s requirements.

The dream of a single solution is being supplanted using maturing technologies like APIs and RPA. They can link up cloud systems quickly and cheaply to construct a finance ecosystem that includes the automated flow of data among systems and into an enterprise data warehouse.

Breaking Organizational and Process Barriers

A key benefit of a cohesive technology ecosystem is that it enables finance to connect processes within finance and across finance and operational processes and construct a more agile operating model. At the core is a single source of data, overlayed by fit-for-purpose solutions, e.g., for planning or FX risk management. At the heart of this structure is a common set of data definitions and a single source of the truth, increasingly a data lake or warehouse.

  • By breaking barriers between different areas within finance and finance and operations, e.g., treasury and AR or FP&A and business finance, executives can gain an end-to-end view of core processes such as customer-to-cash, account-to-report and procure-to-pay. The E2E view supports better insight into enterprise cash and performance, thus delivering greater insight to aid in decision-making.
  • By standardizing data definitions, information can be shared and understood, across the organization, driving greater insight and foresight.
  • The emerging tech stack also allows FP&A, treasury, accounting and other areas to share new functionalities, e.g., analytics. Everyone can access the data and take advantage of advanced analytics to make smart decisions. Leading finance organizations are also establishing analytics centers of excellence, which can build algorithm libraries and deliver analytics support to different parts of the organization.

Building a Connected Community

Enabling partnerships is essential to leveraging a coherent tech stack and standardized E2E processes. While data must be exchanged, so do best practices and expertise. The importance of personal relationships between people in different parts of the finance organization and outside of it cannot be underestimated.

We see this trend most noticeably in the connection between FP&A and the business. In a quick poll at our July FP&A summit meeting, 100% of participants said they have dedicated business partners who are embedded in the operations. By working side by side:

  • Finance and business managers can develop mutual trust and establish credibility.
  • Finance professionals can build up their business acumen and identify key drivers, to better assess performance and provide advice on possible courses of action.
  • Business managers can evolve their financial understanding to foresee the financial repercussions of business decisions.
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Debt Issuers, Don’t Doubt the Fed’s Resolve to Fight Inflation

Insights from Chatham Financial about pre-issuance hedging and tail risk.

Companies that anticipate issuing debt should not underestimate the Federal Reserve’s resolve to fight inflation, Chatham Financial executives told members of NeuGroup for Mega-Cap Assistant Treasurers at a recent meeting sponsored by the risk management advisory and technology firm.

  • In light of the Fed’s determination to get inflation back to 2%, Amol Dhargalkar, Chatham’s managing partner and chairman, raised several issues for treasuries to consider as they lay the groundwork for debt offerings.

Insights from Chatham Financial about pre-issuance hedging and tail risk.

Companies that anticipate issuing debt should not underestimate the Federal Reserve’s resolve to fight inflation, Chatham Financial executives told members of NeuGroup for Mega-Cap Assistant Treasurers at a recent meeting sponsored by the risk management advisory and technology firm.

  • In light of the Fed’s determination to get inflation back to 2%, Amol Dhargalkar, Chatham’s managing partner and chairman, raised several issues for treasuries to consider as they lay the groundwork for debt offerings.

Factor in tail risk. Interest rate increases in the US have already exceeded a move of two standard deviations compared to what was anticipated a year ago, Mr. Dhargalkar said, and several factors make more unexpected moves possible.

  • Given the risk that rates could move significantly higher, Chatham recommends placing extra emphasis on considering the potential for tail risk and hedging it.
  • “We’re not trying to say that rates are going to 7% or 8%,” he said. “But in your scenario analysis and planning, we highly recommend you spend a bit more time on the tail risk scenario.”
  • One factor not yet priced into the market, he added, is China at some point eliminating its “zero-Covid” policy. That may reduce supply chain bottlenecks but also “reinvigorate the local economy, stimulating demand across the country, thereby increasing demand for a variety of raw and finished goods.”
    • That includes “increased energy consumption that can drive oil and gas prices higher in the short term, further stoking inflationary concerns across the global economy.”

Pre-issuance considerations. More sophisticated approaches to gauging the impact of rate increases, including Monte Carlo simulations or statistical shocks to forward curves, may be warranted, rather than a static analysis of rates rising by a certain amount, Mr. Dhargalkar said.

  • Pre-issuance hedging remains popular because companies can de-link the underlying rates at the time of issuance from the rates locked in through hedging, he added, noting that in a volatile market dollar cost averaging the hedge can help lower future issuance costs.

Debt offering anyone? Responding to a query about how members plan for future debt issuance in light of today’s rate risk, a few members mentioned management’s tight controls.

  • One said her company pursues relatively short-term pre-issuance hedges, and only if senior management judges the offering eligible for hedge accounting.
    • “I would add that if you’re doing [pre-issuance hedging] for the first time it’s really good to be right, since it puts everyone at ease that going ahead this will be an asset and not a liability,” she said.
    • Mr. Dhargalkar added that in order to manage expectations internally, it is important to help stakeholders understand the intent of hedging to create predictability in outcomes.

More to read on pre-issuance hedging. To read a 2020 NeuGroup Insights article on pre-issuance hedging based on analysis from Chatham, click here. And to see an article on the topic by Chatham published earlier this year, click here.

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