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Spotlight Features

Reverse Repo: A Safe Haven for Cash Amid Financial Turbulence

What the FASB’s Supply Chain Finance Disclosure Rules Mean for Corporates

The Science of FX Exposure Management

Justin Jones
In Banking, Capital Markets, Treasury Management

Tear Down, Rebuild: A Treasurer Lays a Foundation for Best Practices

How a newly hired treasurer revamped her company’s capital structure, banking group and her team. 

Soon after arriving at a fast-growing midsized multinational company, a newly-hired treasurer with extensive experience in loan restructurings and amendments launched a loan compliance cleanup. That was the first step on the path to establishing best practices at a company that had never had a treasurer with experience in treasury.

  • The treasurer described what she did and her thinking at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty and in a follow-up interview.
  • While each company’s situation is different, this member’s experience provides insights for peers committed to implementing new treasury practices, policies and procedures that meet an expanding business’s rapidly changing needs and help set it on a course for more growth.

How a newly hired treasurer revamped her company’s capital structure, banking group and her team. 

Soon after arriving at a fast-growing midsized multinational company, a newly-hired treasurer with extensive experience in loan restructurings and amendments launched a loan compliance cleanup. That was the first step on the path to establishing best practices at a company that had never had a treasurer with experience in treasury.

  • The treasurer described what she did and her thinking at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty and in a follow-up interview.
  • While each company’s situation is different, this member’s experience provides insights for peers committed to implementing new treasury practices, policies and procedures that meet an expanding business’s rapidly changing needs and help set it on a course for more growth.

Triage, fixes, goals. The treasurer’s knowledge of loan covenants, operational limitations in credit agreements, technical defaults and compliance certificates allowed her to quickly conclude that the loan compliance situation needed immediate attention. “I saw there were some things that we needed to fix,” she said. The good news: “There was an understanding at the company that this was an area that needed an upgrade and a fresh set of eyes,” she said.

  • Following a relatively “easy negotiation” with banks over cleaning up the credit agreement, the treasurer set about stress test modeling on the company’s credit facility and reviewing existing covenants.
  • She then seized the moment to initiate significant changes as she engaged with senior management and the board to focus their attention on the strategic importance of capital structure.
  • Before embarking on projects of this scale, “You have to be mindful of the time frame to achieve your goals,” the treasurer advises. Ask yourself, “What can you realistically accomplish within the first 12 to 24 months to get some quick wins?
  • “And thinking to the future, what is it you need over the next couple years to really expand what you’re doing? When you go into these new situations and you’re in a rebuilding mode, you’ve got to show some accomplishments.”

New terms, new flexibility. Her goals set, the treasurer realized “we needed to have more flexibility within our capital structure given the size of the company and the fact that we were much more global than we had been several years prior. And I knew that we needed to work with more than just two banks.

  • “It was all about crafting a credit agreement that would work with not only where the company was, but where it’s going,” she said. “The company had very good financial performance so it was really the right time to lay out what it is we needed, what were the exact terms that we were looking for.”
  • The revamped capital structure now features a five-year credit facility and a seven-year term loan. “It was really structuring this so we could have a good runway for the next couple of years.”
  • As a result, “Our pricing went down and our flexibility went up because I took it out to four or five different banks who came back and presented term sheets to us. We also bid out the international banking business at the same time.” The company used its newfound flexibility relatively soon, she said, declining to elaborate.

The people part. The member also put her stamp on the treasury team. “The positions needed to be reworked, the personnel needed to be switched out, essentially,” the treasurer said. Among her moves:

  • The elimination of an assistant treasurer position, in part because of overlapping capabilities with the treasurer.
  • An “opportunistic hire” of a senior manager of treasury with international experience at a large tech company looking for broader treasury experience.
  • The creation of a cash manager position staffed by someone in the company’s accounts receivable area who had treasury experience.
  • “What worked out well for me is I was able to use a combination of internal and external people. I didn’t go 100% external, and that was important, at least within our organization,” the treasurer said.

In focus now. Having laid a solid foundation for treasury, the member has her team focused on investment policy, cash forecasting and position, assessing foreign exchange risk and other areas requiring “some more refinement,” she said.

  • After tackling big areas like capital structure and bank groups, treasurers have to meet the challenge of showing senior management the value of addressing other areas that may seem less exciting or important.
  • The engagement this requires is made more difficult by the pandemic, working from home and the absence of “informal communication,” the member noted.

Needed: support, hard work. Not surprisingly, the feasibility of entering a new company and revamping the capital structure and the banking group and making other major changes requires the support of senior management.

  • “You’ve got to have the support from your manager to really go in and assess what is existing, what are the positions, what is the structure, what do you need immediately to accomplish your goals,” the treasurer said.
  • Don’t underestimate the amount of work involved in pushing a company to shift gears and adopt best practices. And then make the most of the opportunity.
  • The treasurer told herself, “You don’t get to do this a lot. It’s kind of an unusual experience and even though it’s a lot of work I’m going to take advantage of it.”
  • Sure enough, “It was a lot of work, it took a lot of energy,” she said. “But I think it has paid a lot of dividends for the company.”
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Justin Jones
In Banking, Capital Markets

Borrowing Authority and the Board: How Often Do You Renew?

NeuGroup’s survey results on the frequency of borrowing authority renewals, use of carve-outs for M&A and more.

Nearly two-thirds of the treasurers responding to a recent NeuGroup survey renew their borrowing authority with the board on an ad hoc or as-needed basis, while about one-third do it every year. That’s shown in the first pie chart below.

  • But at a follow-up meeting to discuss the results, the general consensus seemed to be that an annual review made the most sense, as it can be part of the overall conversation with the board regarding capital structure.
  • The second chart shows that for the majority (59%) of companies that responded, the full board grants borrowing authority, with the finance committee of the board playing that role at 29% of the companies.

NeuGroup’s survey results on the frequency of borrowing authority renewals, use of carve-outs for M&A and more.

Nearly two-thirds of the treasurers responding to a recent NeuGroup survey renew their borrowing authority with the board on an ad hoc or as-needed basis, while about one-third do it every year. That’s shown in the pie chart on the left, below.

  • But at a follow-up meeting to discuss the results, the general consensus seemed to be that an annual review made the most sense, as it can be part of the overall conversation with the board regarding capital structure.
  • The second chart shows that for the majority (59%) of companies that responded, the full board grants borrowing authority, with the finance committee of the board playing that role at 29% of the companies.

Context. The importance of borrowing authority flexibility was underscored at another NeuGroup meeting in 2019. The takeaways then included:

  • Winning authority from the board to go to capital markets opportunistically is a best practice. Treasury needs to have authority from the finance committee to refinance or issue debt when market stars are in alignment. This provides the flexibility to act fast, and members agreed it’s ideal for everyone as long as there’s full transparency between treasury and the board of directors.

Other observations from the more recent meeting:

  • Some companies with a specified dollar amount ceiling for borrowing have carve-outs which do not require additional approval for purposes such as M&A financing, where borrowing needs are discussed during the normal evaluation and approval process.
  • Members do not share details of their borrowing authority with the rating agencies, but rather provide a range of borrowing which might occur in the upcoming year.
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Justin Jones
In FX, Talking Shop

Talking Shop: Net Investment Hedging Programs

Member question: “Anyone have a net investment hedging program? If so, how often are you rolling hedges?

  • “What is your typical tenor? Are you hedging 100% or something less?”

Member question: “Anyone have a net investment hedging program? If so, how often are you rolling hedges?

  • “What is your typical tenor? Are you hedging 100% or something less?”

Peer answer: “We have done some opportunistic NIH hedging in JPY with FX forwards. We generally use our EUR capacity for debt issuances as well. Hedges have been in the two- to three-year range.

  • “We will go up to 100% of capacity (we do not seek to push to the 125% mark that is allowed).
  • “We also believe it should be thought of as synthetic debt—that the currency being hedged should have real underlying cash flows (e.g., would be able to pay off the debt if issued locally).”
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Justin Jones
In Tax, Treasury Management

Learning New Strokes: A Treasurer Adds Tax to Her Skill Set

One NeuGroup member has “had to learn from doing” to tackle tax—and also tap internal and external experts.

When the head of tax at a midsized multinational company left to take another job a couple of years ago, the CFO tapped the treasurer to run tax, too. The treasurer shared some of the challenges she faced and how she addressed them at a recent meeting of the Treasurers’ Group of Thirty and in a follow-up interview.

A difficult beginning. Three of four junior tax staffers also ended up departing, leaving the treasurer with only one other tax person after being in the tax job for just a month. “That was obviously pretty difficult,” she said. “I literally had to do two jobs because we didn’t have many people at first.”

One NeuGroup member has “had to learn from doing” to tackle tax—and also tap internal and external experts.

When the head of tax at a midsized multinational company left to take another job a couple of years ago, the CFO tapped the treasurer to run tax, too. The treasurer shared some of the challenges she faced and how she addressed them at a recent meeting of the Treasurers’ Group of Thirty and in a follow-up interview.

A difficult beginning. Three of four junior tax staffers also ended up departing, leaving the treasurer with only one other tax person after being in the tax job for just a month. “That was obviously pretty difficult,” she said. “I literally had to do two jobs because we didn’t have many people at first.”

  • The exodus also changed the nature of the role senior management had initially intended the treasurer to play in tax. “At the time, they thought that it would be more of a management role for me; whereas with the departure of all those people and a new set of eyes, it became much more of a rebuilding cleanup exercise than a pure managerial exercise,” she said.

A key hire with an accounting background. Senior management combined the roles in part because “there was enough crossover between the two disciplines that it made sense to have a more unified approach,” the treasurer said. But when it comes to matters of tax compliance, GAAP tax provision, tax returns and audit defense, there is little crossover with treasury, she said.

  • “I ended up going out and hiring a really ‘heavyweight’ director of tax,” she said. “And one of my requirements was that they had to have a CPA. Because there’s two types of people out there in the tax world. There’s the CPAs and then the lawyers. We didn’t have enough structuring going on at our company to warrant a legal background. We really needed the accounting background.”
  • Her advice to peers building in-house tax teams: “If you are going to build internally, you need to get someone very heavy underneath you.”

Scaling the learning curve. To learn what she needed to know about tax, the treasurer posed lots of questions to her tax director and, when necessary, the company’s outside tax auditor. And, like a lot of learning, much is done on the job. “I had to learn from doing,” she said, including the analysis of the implications of a tax and legal structure proposed by the company’s outside auditor.

  • “I felt like I was really good at asking questions. And I felt like I could sort of think the way tax people think. But when you just don’t have the fundamental subject matter expertise, that’s where it gets difficult because you haven’t done the tax return yourself.”

The need to pick your spots. Making the transition to running tax and treasury requires deciding how much effort to devote to mastering tax concepts. “The tricky thing as a manager going from treasury to tax is how much time do you invest in that stuff,” the member said. “Because learning about these tax concepts is complicated and most things are not 10-minute discussions, it’s 20- or 30-minute discussions, at a minimum.

  • “I have to pick and choose how much I want to learn. I’m never going to be a tax professional and sit and do a tax return for a multinational company. I have no desire to do that and I won’t do that,” she added.

When wearing two hats pays off. The treasurer’s knowledge of repatriation of cash, global cash forecasting and cross-border investments has proven valuable in her management of this multinational’s tax team.

  • “Whenever there is cross-border, you have to involve tax,” she said. “So as we look at cross-border investments around the world and repatriating cash, now that I know more about the tax elements, I can really represent both areas at meetings and we don’t have to have yet another tax person on the call.
    • “So our tax director can focus on the stuff he needs to be working on and then I can go back to him for clarification or ask him to work on certain things.”

When outsourcing makes sense. The company does most of its domestic tax work in-house, but outsources transfer pricing studies to its outside auditor in addition to having the firm review other complicated, international tax matters. In response to a question from a peer at the meeting, she said, “Outsourcing is very expensive when you talk to the big four firms.”

  • The company outsources more in its operations abroad, including the preparation of tax returns and value-added tax (VAT) payments.

Dividing her time. When the treasurer took over tax, the company was in the midst of a global tax restructuring that required her to spend 80% to 90% of her time on tax. Her goal for 2021 is to spend 20% to 30% on tax and the rest on treasury.

  • “But I’d be happy if I could get down to 50% on average,” she said.
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Justin Jones
In Cash & Working Capital, COVID-19

Sign of the Times: Retailers Say Coin Shortage Worries Persist

Burned by a dearth of coins during the pandemic, many retailers are cautious despite some signs of stability.

“Cash-mageddon” is how one member at a recent meeting of NeuGroup for Retail Treasury described the havoc wreaked by the coin shortage that made life hellish for many retailers last year. And despite signs of normalization and increased production by the US Mint (see below), some members remain unconvinced that the coin supply disruption caused by the pandemic is truly over.

Burned by a dearth of coins during the pandemic, many retailers are cautious despite some signs of stability.

“Cash-mageddon” is how one member at a recent meeting of NeuGroup for Retail Treasury described the havoc wreaked by the coin shortage that made life hellish for many retailers last year. And despite signs of normalization and increased production by the US Mint (see below), some members remain unconvinced that the coin supply disruption caused by the pandemic is truly over.

Cautious about outlook. “The Fed hasn’t really given any new updates, so I would not take your sign down,” one member said, referring to the ubiquitous signs asking customers to use exact change or telling them to use credit or debit cards. One company resorted to giving out gift cards as change.

  • Another member whose company sometimes went weeks without a new coin delivery echoed the caution voiced by her peer.  “I’m uber-sensitive to coin; it was incredibly draining for our stores,” she said. “We’re at a point where it’s stable, but given all the uncertainty, keep your signs up, maybe to save you from having to reprint them.”
  • A third treasurer remarked that because the coin shortage stems from a circulation issue, if Covid protocols send consumers back online and away from physical stores, he “doesn’t see us being through it.”
    • The member said his company is completely reliant on courier services to deliver new coin to brick-and-mortal locations, and if for some reason there is an issue with the courier, the coin shortage would return. “It feels like they don’t have enough built-up inventory, they’re just using up what they have for that day,” he said.

Courier issues. Other members who use couriers for cash pickup and delivery said they share similar worries after years of inconsistent service, even before the pandemic.

  • When the coin shortage worsened last summer, couriers were hit hard as well, sometimes going up to 10 days without service for retailers. Though delivery has improved to a level that one member called “stable,” it still is not meeting some corporates’ needs.
  • “I’m being incredibly frustrated by the quality and level of service of these companies,” one member said. “I’m trying to be sensitive to their situation, I’m guessing their business is declining. They’re claiming there are driver shortages due to Covid, but sometimes we are going weeks without pickup.”

An unplanned stress test. One member said because the coin shortage became a large pain point, it served as something of a stress test, showing companies just how much they could take and providing a warning to prepare for all scenarios.

  • Another member said she is now preparing buffers and sensitivity analysis for her company, planning for the possibility of another lockdown.
  • “We’re thinking through a lot of the things we probably thought would never happen,” she said. “I don’t think anyone ever thought that we wouldn’t have coin, so when it stopped showing up, that was devastating to our stores. We had to be nimble and quick.”
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Justin Jones
In Banking, Capital Markets, COVID-19

Calmer Seas: Revolvers Recover, Return to Pre-Covid Pricing, Tenor

Upfront fees are higher, but treasurers renewing facilities see reason for optimism; U.S. Bank is also positive.

Multiyear tenors for revolving credit facilities are now available to investment-grade (IG) corporate borrowers, according to several NeuGroup members who have been talking to their bankers recently. This week, one treasurer said, “Things have normalized a fair amount for solid credits,” citing a large bank.

Upfront fees are higher, but treasurers renewing facilities see reason for optimism; U.S. Bank is also positive.

Multiyear tenors for revolving credit facilities are now available to investment-grade (IG) corporate borrowers, according to several NeuGroup members who have been talking to their bankers recently. This week, one treasurer said, “Things have normalized a fair amount for solid credits,” citing a large bank.

  • This member, who was in the process of renewing his company’s revolver last year when Covid hit, is now deciding when to “pick it back up” and wanted to know what his peers have heard.
  • “Multiyear is back,” said one of them.

Longer tenors. “It sounds like five years is back on the table,” said another treasurer. She works for a company that postponed extending the tenor and raising the amount of its revolver last year.

  • This treasurer—whose company is a “new IG credit”—recently circled back with traditional lenders and said, “The reception’s been good,” noting that she got very little pushback to her plans to restructure the revolver.

Is the price right? The company did not get quotes, but “pricing appears to have settled down,” the member said. Another treasurer said upfront fees remain higher than before Covid, adding “how much you can push that” depends on your relationship with the banks and, of course, the size of your wallet.

  • This treasurer said some banks want funded facilities now that revolver drawdowns have been repaid. They are eager to increase assets and have a healthy risk appetite, he said, adding that they all want higher fees.

U.S. Bank’s analysis. NeuGroup Insights reached out to Jeff Stuart, head of capital markets at U.S. Bank, who keeps close tabs on the revolver market. Here are his observations:

  • The market for large-cap investment-grade revolving credit facilities has largely recovered to pre-Covid levels in terms of both pricing and tenor, with many borrowers executing five-year renewals at pre-Covid pricing levels.
  • U.S. Bank is seeing higher upfront fees pretty much across the board, one to three basis points for the higher-rated names.
  • The market is a bit sector- and ratings-specific, with higher impacted sectors still exacting a pricing premium, and more bank caution around lower investment-grade borrowers.
  • Some sectors, like utilities, have been slower to normalize despite their relative credit quality, with discussions going to five-year tenors only just recently.
  • On the bank side, there seems to be a higher post-Covid emphasis on returns, with a specific focus on available ancillary business, particularly by smaller regional banks.
  • U.S. Bank expects the trend toward a full return to pre-Covid terms on revolving credits to continue amid recovery overall during the first half of 2021. But it will continue to vary by situation and sector.

Sustainability-linked revolvers anyone? Back at the meeting, one treasurer raised the issue of revolving credit facilities whose terms are linked to the company achieving sustainability goals, unlike green bonds or loans whose proceeds must be used for sustainable purposes (see next story).

  • He has not seen the value in the idea, saying the savings for hitting the targets are minimal, a few basis points at most. “The net benefit is not good enough” given the incremental cost, he said. Another treasurer agreed that “treasury is not driving” the move by some companies to use sustainability-linked revolvers.
  • One treasurer drew laughs when he said his efforts to research “green revolvers” with a Google search turned up images of green handguns.

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Justin Jones
In Capital Markets, ESG, Risk Management

Green Hedges: What You Need to Know About ESG Derivatives

Standard Chartered explains the potential value of “use of proceeds” and performance-linked ESG derivatives.

The flood of money pouring into ESG finance—everything from green bonds to sustainability-linked revolving credit facilities—has washed up on the shores of derivatives markets. At a recent NeuGroup meeting of European treasurers, sponsor Standard Chartered dove beneath the surface to reveal what value ESG derivatives may offer. The bank described two types:

  • “Use of proceeds” ESG derivatives that hedge FX or interest rate risks arising from ESG financing and are ring-fenced as hedges referencing a specific loan or bond.
  • ESG performance-linked derivatives that link a payoff with ESG metrics or key performance indicators (KPIs).
    • The sustainability metrics are determined by a third party’s score or index or by the corporate itself.

Standard Chartered explains the potential value of “use of proceeds” and performance-linked ESG derivatives.

The flood of money pouring into ESG finance—everything from green bonds to sustainability-linked revolving credit facilities—has washed up on the shores of derivatives markets. At a recent NeuGroup meeting of European treasurers, sponsor Standard Chartered dove beneath the surface to reveal what value ESG derivatives may offer. The bank described two types:

  • “Use of proceeds” ESG derivatives that hedge FX or interest rate risks arising from ESG financing and are ring-fenced as hedges referencing a specific loan or bond.
  • ESG performance-linked derivatives that link a payoff with ESG metrics or key performance indicators (KPIs).
    • The sustainability metrics are determined by a third party’s score or index or by the corporate itself.

Case studies. Standard Chartered’s presentation included several examples of how ESG derivatives can be used.

  • A company using an FX forward to hedge export pricing in Asia that will receive a discounted FX rate if it meets ESG targets which support the United Nations Sustainable Development Goals.
  • A company enters into an interest rate swap where the credit spread is linked to the corporate’s sustainability performance as measured annually by Sustainalytics.
  • A company enters into a cross-currency basis swap with a bank where either party’s interest rate payments can rise if they don’t meet their sustainability targets.

Any takers? While NeuGroup members expressed interest in the topic, it’s unclear if treasury teams are ready to embrace ESG derivatives since many companies are still figuring out where green bonds or sustainability-linked loans or revolvers fit in their sustainability plans.

A poll at the meeting revealed the low percentage of companies that have given treasury a specific sustainability mandate or have linked ESG to performance (see below).

One of the Standard Chartered bankers said the fact that almost half of those polled expect performance to be tied to ESG initiatives within one to three years was better than he expected and was “encouraging.”

  • An outside risk management consultant asked by NeuGroup Insights about the firm’s clients said, “It’s actually a new enough market development that we haven’t seen a lot of corporates exploring the use of ESG derivatives just yet.” Stay tuned.
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Justin Jones
In Capital Markets, Technology

Fertile Ground: Capital Markets Look Good for Growing Tech Companies

Bank of the West/BNP Paribas sees inviting conditions for young companies raising capital in 2021.

Capital markets bounced back strongly in the second half of 2020, with soaring levels of convertible bond deals and a healthy climate for IPOs and high-yield bonds. Favorable conditions will continue to benefit emerging technology companies this year, according to Bank of the West/BNP Paribas, sponsor of the fall meeting of the Tech20 High-Growth Treasurers’ Peer Group.

Bank of the West/BNP Paribas sees inviting conditions for young companies raising capital in 2021.

Capital markets bounced back strongly in the second half of 2020, with soaring levels of convertible bond deals and a healthy climate for IPOs and high-yield bonds. Favorable conditions will continue to benefit emerging technology companies this year, according to Bank of the West/BNP Paribas, sponsor of the fall meeting of the Tech20 High-Growth Treasurers’ Peer Group. Highlights:

Low high-yields. Volatility due to political tensions and a second wave of Covid cases worldwide put a damper on the high-yield market at the start of the fourth quarter, but the market quickly strengthened following the November election.

  • High-yield deals had reached a record $453 billion through mid-December, nearly twice the levels of 2019.
  • Yields are in record low territory, around 4.3% vs. 2019-2020 average of 6.41%, Bank of the West/BNP Paribas said, a favorable environment for high-growth companies.

Cool convertibles. The US convertible bond market hit near-record issuance levels in 2020, reaching over $100 billion, with tech companies issuing nearly half of all convertible debt (see below).

  • Even with investor-friendly deals made at the onset of the pandemic, last year had the highest conversion premium and the lowest average coupon in the last decade, creating an ideal environment for issuers.
  • The bankers said market confidence has sparked the return of 24-hour marketing periods, as opposed to pre-market launches for same day pricings.

IPOs made easier. Constructive market conditions and a faster, easier process have made initial public offerings increasingly attractive for developing companies.

  • Many members shared their positive experiences with virtual roadshows, which can take under an hour and require no travel expenses. They also give growth companies access to a broad range of US and international investors.
  • “It’s hard to see a world post-Covid where investors fly to Europe to attend investor meetings,” one member said. “I think it’s here to stay.”
  • The lag between public filing and pricing an IPO rose to a month or more, a growing pipeline that the bankers described as “a sign that issuers have more confidence in the stability of markets.”

SPACs surge. Special-purpose acquisition companies (SPACs), an alternative to IPOs, surged last year, a trend that some analysts say is likely to continue in 2021.

  • Hedge funds looking for money market alternatives in a low-yield environment boosted demand for SPACs, a positive for growing tech companies.
  • Between the high-profile success story of Virgin Galactic and a willingness of target companies to go public via a “de-SPACing” acquisition rather than a traditional IPO, SPAC issuance in 2020 alone exceeded the previous decade combined.
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Justin Jones
In COVID-19, Technology, Treasury Management

Bridging a Skills Gap Facing Finance Teams as Businesses Transform

Data from The Hackett Group show more companies plan to launch talent development initiatives this year. 

The good news is that more finance teams are placing a higher priority on aligning the skills and talents of their members with changing business needs amid digital transformation. The somewhat bad news is that many of those teams currently lack the abilities necessary to make that alignment a reality.

Data from The Hackett Group show more companies plan to launch talent development initiatives this year. 

The good news is that more finance teams are placing a higher priority on aligning the skills and talents of their members with changing business needs amid digital transformation. The somewhat bad news is that many of those teams currently lack the abilities necessary to make that alignment a reality.

  • Those are among the takeaways from survey data collected and analyzed by The Hackett Group and presented at several NeuGroup 2020 second-half meetings by Nilly Essaides, senior research director for Hackett’s finance advisory practice.

Progress report. Finance teams looking ahead ranked aligning skills and talent with changing business needs among their top 10 priorities in Hackett’s 2021 Key Issues Study. That’s a sign of progress, Ms. Essaides said, given that talent development did not crack the top 10 a year earlier.

  • That fact provides context in which to evaluate the significance of 42% of finance organizations reporting they plan to launch a talent development initiative in 2021—one of several findings presented in the graphic below.
  • “I see more and more finance teams that want to own staff development rather than hanging on the coattails of HR,” Ms. Essaides said. “There’s more interest by CFOs to develop these programs.”

Pushed by the pandemic. The prioritization of skills development is also significant as it comes amid the pandemic and plans by many finance teams to cut costs and enable remote work through process automation—the number one initiative on the function’s transformation agenda for this year. 

  • “Covid has really intensified the need to go digital,” Ms. Essaides said, adding that Hackett is seeing increased use of robotic process automation (RPA) and cloud-based applications, among other signs.
  • More than 20% of the organizations surveyed plan to hire more RPA specialists, data architects and scientists, and digital transformation managers.

Falling short. The graphic also shows that more than half of those surveyed (54%) see a big gap between current and desired analytic skills. More broadly, Hackett data show that finance organizations ranked their staffs’ lack or deficiency of critical skills second among the hurdles to making “transformation progress,” Ms. Essaides noted.

  • Those critical skills include analytics, emerging technologies, process redesign, design thinking and change management.
  • Technology and process complexity ranked first on the list of hurdles and organizational resistance to change came in third.

It’s not all about analytics. It’s critical to remember that in addition to technical and analytical skills, finance team members must possess the “ability to tell a story,” as one NeuGroup member put it.

  • Other NeuGroup members and Ms. Essaides agreed on the need for so-called soft skills that form the basis of communication, the ability to negotiate and influence and bring groups together.
  • Hackett calls these “core skills,” in part to counteract the perception that soft is somehow less important than the hard skills that often overshadow qualities that are essential for leaders in finance and every other function.
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Justin Jones
In COVID-19, Cyber risk, Technology

Locking Up: Preventing Cyberfraud Attacks by Identifying Weaknesses

NeuGroup members share successes and failures keeping their companies secure amid the shift to an all-digital workforce.

The all-digital work from home environment has left treasury teams more connected to their devices than ever, but also left them—and their companies—more vulnerable to fraud. But by identifying weaknesses early, teams can resolve issues before fraudsters even have a chance to strike.

NeuGroup members share successes and failures keeping their companies secure amid the shift to an all-digital workforce.

The all-digital work from home environment has left treasury teams more connected to their devices than ever, but also left them—and their companies—more vulnerable to fraud. But by identifying weaknesses early, teams can resolve issues before fraudsters even have a chance to strike.

  • Members at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty discussed their approaches to prevent the threat, one that continues to worsen.
  • Fatigue caused by working from home led to a communication breakdown for one member’s company, but others reported success through their preparation.

Success stories. Many NeuGroup members reported recent close calls with cyber breaches and have implemented processes to prevent future issues.

  • One member nearly fell prey to a fraud scheme when a phishing email included highly detailed information about the company, which could have fooled an employee into providing secure information.
    • This happened because one employee innocuously posted an update on LinkedIn about the company’s goings-on, and the scammers are growing more and more advanced.
    • The member suggests encouraging employees to only share what is necessary on social media to keep malicious third parties in the dark.
  • Another member had an issue with hackers accessing the company’s internal instant messaging system, allowing them to imitate employees with “no way to verify it was them.”
    • Some members use a series of steps to authenticate accounts before accessing sensitive information, including callbacks from verified phone numbers.

“A breakdown in communication.” One NeuGroup member had this type of system in place, but a series of internal mistakes led to a loss of nearly $10,000; thankfully, the member said they were able to recover the stolen cash.

  • When a new employee was hired at the member’s company, fraudsters hacked the digital account of an actual vendor that the company uses and corresponded with the new employee from a seemingly authentic  email address.
  • Though the member’s company does use a callback authentication process, he said there were application errors “on multiple levels” and plans more frequent audits and training to identify and prevent these weaknesses in the future.
    • “Fatigue is a real issue,” another member said, recommending smaller, “bite-size” trainings for employees to prevent burnout and ensure employees apply the knowledge they learn.
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Justin Jones
In Compliance, Risk Management

Why Internal Audit Needs to Blow Its Own Horn

Like other functions, internal audit needs to publicize its value to senior executives and the broader corporation.

After the completion of a lengthy process audit at a multinational company, the chief audit executive (CAE) reported results to the owner of that process. After a cursory review, the process owner, also a senior executive, asked, “What else have you done?”

  • The CAE was somewhat taken aback. The audit took several months and ate up lots of FTE hours. But since it only resulted in a few findings, the audited executive thought there must be more that audit was working on.

Like other functions, internal audit needs to publicize its value to senior executives and the broader corporation.

After the completion of a lengthy process audit at a multinational company, the chief audit executive (CAE) reported results to the owner of that process. After a cursory review, the process owner, also a senior executive, asked, “What else have you done?”

  • The CAE was somewhat taken aback. The audit took several months and ate up lots of FTE hours. But since it only resulted in a few findings, the audited executive thought there must be more that audit was working on.

A need for self-promotion. This led the CAE to question how familiar management is with audit’s work. “We have not done a good job of selling audit” to management, he said, adding that his task now was to “reeducate the management team about the value of internal audit.”

  • To be sure, audit departments do not need to prove or explain themselves to management. Most, if not all, report directly to the audit committee of the company’s board. Their budgets in most cases are growing and not shrinking.
  • Still, administratively they typically report to the CFO, so there is some explaining to do when it comes to budget allocations. Nonetheless, this auditor felt that management needed to know more about what internal audit (IA) does and the benefits it can bring.

Stepping up. At another company, the auditor has seemingly cracked the code when it comes to showing IA’s benefits. This company, a serial acquirer with a tight fist when it comes to budgets across the company, wanted to cut its external auditor budget by 15%. When its external auditor balked at the request, IA stepped up to fill in any gaps. This saved the company millions of dollars.

  • This same auditor took a close look at the company’s licensing relationships and found many of the deals out of date or companies out of compliance with the terms of their contracts. Thus, the IA team was able to claw back several million dollars in fees. The same was done with supplier performance agreements.
  • All of these efforts were well received by senior management and, best of all, the chief executive.

Best foot forward. While some IAs have struggled with promoting their skills and value to the rest of the company, in some cases, Covid has allowed them to shine. Many IAs, forced to change audit plans at the outset of the pandemic (not stopping or canceling audits, but slowing timelines), have been able to do extra work outside of their purview.

  • This includes assisting with Covid response, data analytics, accounting or lending out FTEs to help in other functions where there is a need. This showed other parts of the organization all the good IA can do.
  • Consulting is on the docket in 2021 for the first auditor. He said IA is going to work on and highlight “what the value is we can bring beyond the X amount of audits and findings,” which he hopes to accomplish by doing more consultative projects. 
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Justin Jones
In Compliance, FX, Talking Shop

Talking Shop: Derivative Regulatory Compliance in Hedging Programs

Member question: “Our hedging programs have trading entities in multiple jurisdictions requiring continual monitoring of derivative regulatory compliance regulation. This is mostly handled internally, leveraging external counsel to advise on specific topics and questions.

  • “How do others manage derivative regulatory compliance such as EMIR (European Market Infrastructure Regulation), FMIA (Financial Market Infrastructure Act) and others? Do you outsource, handle internally, hybrid solution or is it not applicable? Are there advisors that you would recommend?”

Member question: “Our hedging programs have trading entities in multiple jurisdictions requiring continual monitoring of derivative regulatory compliance regulation. This is mostly handled internally, leveraging external counsel to advise on specific topics and questions.

  • “How do others manage derivative regulatory compliance such as EMIR (European Market Infrastructure Regulation), FMIA (Financial Market Infrastructure Act) and others? Do you outsource, handle internally, hybrid solution or is it not applicable? Are there advisors that you would recommend?”

Peer answer 1: “My company is similar; predominantly navigated internally with legal’s assistance as needed.”

Peer answer 2: “Response from our derivatives manager:

  • “We monitor internally in treasury and at our regulated financial units (typically through either internal legal or accounting/compliance groups, and this in the past has sometimes been a reactive position rather than proactive).
  • “Sometimes the banks may notify us of a change; I’ve seen this in the onshore highly regulated markets due to the local complexities/language/access to regulation, etc.—Brazil, India, China, Thailand.
  • “For the US and European market regulations, there are a few representatives that have actively participated in the Coalition for Derivatives End-Users run by Gibson Dunn.”
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Justin Jones
In Tax, Treasury Management

Learning a New Language: Tax Experts Who Become Treasurers

Insights and advice from a tax professional who left her comfort zone to become treasurer. 

A “steep learning curve” is how one member of NeuGroup’s Treasurers’ Group of Thirty (T30) who has extensive experience in tax described what she encountered in taking on the added responsibility of treasury at her company at a recent meeting sponsored by Standard Chartered.

Insights and advice from a tax professional who left her comfort zone to become treasurer. 

A “steep learning curve” is how one member of NeuGroup’s Treasurers’ Group of Thirty (T30) who has extensive experience in tax described what she encountered in taking on the added responsibility of treasury at her company at a recent meeting sponsored by Standard Chartered.

  • She is one of several members in the group who previously led tax teams and are relatively new to leading treasury. Below is a Q&A the treasurer had with NeuGroup Insights following the meeting, edited for space and clarity.

Q: What has made taking over treasury a tall order for someone with a deep background in tax?

A: While both are financial disciplines, a different language can be spoken and there can be different norms for various interactions, aside from the difference in general education for the roles.

  • I remind myself that I didn’t earn the treasurer role based on my finance background, but rather my ability to build and motivate teams, learn quickly and distill complex topics into understandable language for stakeholders—along with strong communication and leadership qualities.

Q: What are the biggest challenges you’ve faced moving to treasury from tax?

A: Being entirely out of my comfort zone. When presenting to our board on tax matters, I know I’m the expert in the room, which allows a certain confidence.

  • With treasury topics, I’m not the expert and have realized I second-guess myself, which can impact confidence in leading the discussion.
  • And given that I took on treasury in January 2020, Covid was a huge challenge in March/April/May and continues to require ongoing focus.  

Q: How have you scaled the learning curve to get a grip on treasury—peers, colleagues, other sources of information?

A: I was extremely clear with my CFO when agreeing to take on treasury that it was not my wheelhouse and his support and expertise would be critical.

  • He and I work closely together and I also have a very bright and steady assistant treasurer with a finance background. Our styles mesh well and his background is complementary to mine.
  • T30 has been helpful to meet others in similar roles; I’ve sought advice from others which has been very helpful. Our banking group has provided valuable insight and support, too.

Q: How has your tax background aided your transition to running treasury? How do the two areas complement each other?

A: In tax, I learned to be comfortable making decisions with partial (but best available!) information; avoiding analysis paralysis. This arises extremely often in treasury as well, be it cash management, insurance renewals, debt.

  • I work to keep things simple in both areas; if I can’t explain it to the CFO and others clearly and concisely, we need to simplify.

Q: Is there an example of something you’re working on now that allows you to leverage your knowledge of both tax and treasury?

A: Consolidated cash planning/forecasting and cash repatriation. I have a new appreciation of bank account complexity and KYC queries that can arise and have been able to share additional insight from a tax perspective with the treasury team regarding specific structures and nuances.

Q: What advice do you have for other treasurers who have a tax background; and what advice for treasury folks who find themselves running tax? Which is the harder transition in your view?

A:I don’t think one is harder than the other, both have a steep learning curve! A lot of treasurers may have had exposure to tax concepts through cash repatriation work, intercompany loan documentation or structuring external debt.

  • My advice for both sides of the coin: Ask questions—there is no such thing as a stupid question. Your team and advisors are paid to answer your questions, so leverage their expertise!
    • I’ve found a lot of the questions I have are similar to what others want to ask as well.
  • My other piece of advice is around each team—build and maintain a strong team that meshes and communicates well. I rebuilt the tax team and it was critical to eliminate some bad apples; the treasury team I joined works very well together and we recently added an analyst, too.
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Justin Jones
In Cash & Working Capital, Regional, Technology

Raising the Bar: How AI, ML and Big Data Could Fix Cash Forecasts

Asia Treasury members discuss how advanced technology may boost satisfaction with forecasting tools. 

A quick poll at a fall meeting of the Asia Treasury Peer Group sponsored by Standard Chartered underscored both the dissatisfaction of members with their cash forecasting tools and the intensifying scrutiny of cash positions by senior management since the beginning of the pandemic.

  • None of the treasurers polled are highly satisfied with their current set of tools: 60% have low satisfaction and 40% said medium. All of the treasurers said they’re fielding more questions about cash from the C-Suite.

Asia Treasury members discuss how advanced technology may boost satisfaction with forecasting tools. 

A quick poll at a fall meeting of the Asia Treasury Peer Group sponsored by Standard Chartered underscored both the dissatisfaction of members with their cash forecasting tools and the intensifying scrutiny of cash positions by senior management since the beginning of the pandemic.

  • None of the treasurers polled are highly satisfied with their current set of tools: 60% have low satisfaction and 40% said medium. All of the treasurers said they’re fielding more questions about cash from the C-Suite.

Building better tools. In a presentation by Kyriba arranged by Standard Chartered, members heard about the potential for big data, artificial intelligence (AI) and machine learning (ML) to “move treasury into true management of working capital” and improve the accuracy of cash forecasts.

  • As the chart below shows, this vision for building a so-called behavioral model of working capital depends heavily on extracting huge amounts of data from a multitude of sources and collecting it in a data lake.
  • ML allows the model to learn patterns based on innumerable variables—and the effects of one upon another—and then predict future flows with more precision.
  • In breakout discussions, members discussed their data management challenges, including the need to standardize exogenous data before it is fed into a model.

Addressing the AR problem. The presentation included discussion of pain points experienced when forecasting invoice payment dates. “We do not know when our customers are going to finally pay their invoices,” read one example.

  • Another said cash collection “is very blurry,” resulting in a “manual and time-consuming process” to build a cash position for future days, weeks and months.
  • The presentation identified the value proposition as creating an automated process to forecast the payment date of each invoice.
  • Using AI in pilot programs with two corporates, Kyriba said, helped reduce payment forecast variances from 25 days to five days.

Other use cases. In addition to forecasting invoice payment dates, the presentation identified these use cases for companies that use systems built with AI and ML:

  • Assign budget codes to bank movements.
  • Reduce manual cash reconciliations made by users.
  • Detect payment anomalies compared to history.
  • Detect abnormal FX transactions.
  • Suggest financing request to suppliers.
  • Forecast investment and debt.
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Justin Jones
In COVID-19, Technology, Treasury Management

The Post-Covid Playbook: WFH Flexibility and Office Collaboration

The goal is keeping the good parts of work from home, replacing the bad with the benefits of office teamwork.

Corporates looking ahead to a post-Covid world are taking stock of how the shift to work from home (WFH) has changed the ways that teams function—for better and worse. This requires weighing the beneficial flexibility offered by remote work against the detrimental loss of collaboration that is only possible when people are in the same building.

The goal is keeping the good parts of work from home, replacing the bad with the benefits of office teamwork.

Corporates looking ahead to a post-Covid world are taking stock of how the shift to work from home (WFH) has changed the ways that teams function—for better and worse. This requires weighing the beneficial flexibility offered by remote work against the detrimental loss of collaboration that is only possible when people are in the same building.

  • As some companies consider abandoning offices altogether, many practitioners at recent NeuGroup meetings shared how they hope to retain the conveniences that have come with WFH while reestablishing a positive office culture that cannot be replicated virtually.

Technology benefits. The near-universal shift to WFH has accelerated companies’ embrace of technology that can boost efficiency and encourage collaboration, albeit virtually. Those tech solutions are here to stay.

  • Messaging apps and video conferencing platforms such as Slack and Microsoft Teams became crucial for uniting team members spread far and wide. One member said they also “work really well for broader organizations too,” connecting employees who may not have interacted in a physical office, including members of different finance teams.
  • Members also found success with project management tools like Asana and WorkBoard, which they plan to keep using. “They can be really helpful to put specific structure to the workflows you’re tracking,” one member said.
    • “The best part is they provide great visibility to the entire team for what others are working on, and the facets of their work.”

The productivity puzzle. One member, echoing others, reported a rise in productivity at the start of the shift to WFH. But as fatigue set in, brought about in many cases by too many hours working, that productivity declined at some companies.

  • Some companies have established specific virtual work hours, but members said they ran into challenges enforcing this, especially after the early days of the pandemic.
  • “Some people just work until midnight because they’re at home and they can have dinner and still be at the office,” one member said.
  • That said, many members are planning to allow part of their workforce to continue working from home to some degree. “We learned that you don’t necessarily need everyone together all the time,” one treasurer said.

Returning to the office. Many members see physical offices as irreplaceable, capable of fostering innovation that can only come through unplanned interactions in real-life spaces.

  • One member said it has become difficult to get employees to think outside the box without in-person collaboration. She looks forward to restarting the company’s whiteboard sessions.
  • “It is really challenging to recreate inter-team communications,” another member said. “Cross-functional problem solving is even harder to replicate.”
  • A third member remarked that “lots of conversations get funneled through management” in the WFH environment, preventing the creative solutions that can come from spontaneity.
  • When it comes to onboarding new employees virtually, one member reported “really uneven” results, saying that many new employees do not settle into the company without interpersonal instruction.
    • In the long-term, the member said, a return to offices will benefit the onboarding process, even if the employee ends up working virtually most of the time.

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Justin Jones
In Banking, Talking Shop

Talking Shop: Allowing Vendors to Directly Debit Bank Accounts

Member question: “What are your policies with respect to allowing vendors to direct debit your bank accounts for invoices due?

  • “Our policy does not support vendor direct debit of our bank accounts. We do have an exception process for situations where vendor stoppage may have material impact (i.e. utilities for a manufacturing plant) or the vendor requires DD and there are no other alternatives (i.e. postal service).”

Member question: “What are your policies with respect to allowing vendors to direct debit your bank accounts for invoices due?

  • “Our policy does not support vendor direct debit of our bank accounts. We do have an exception process for situations where vendor stoppage may have material impact (i.e. utilities for a manufacturing plant) or the vendor requires DD and there are no other alternatives (i.e. postal service).
  • “I think part of our position is a historical perception that it is ‘bad’ to allow another entity to have access to debit your bank account. I am starting to question in today’s technology world if we need to think about this differently. I think we could tighten up our payment processes and gain efficiencies by leveraging vendor DDs more.
  • “When we set up the DD exception with the bank, it has very specific parameters and we are establishing a control processes to monitor to ensure DDs exceptions are current and valid. And we do encourage our customers to allow us to DD their bank accounts! Looking for policies and/or perspective from other companies.”

Peer answer 1: “We recently added an addendum to our global payout policy in which we labeled direct debit as a high risk payout method, and defined our process by which this payment method could be requested.

  • “We have a workflow tool for the request, once approved by financial operations it feeds to treasury for debit filters or mandates or any action needed to allow the debit to our account. We struggled with timely recons with DD, comprehensive payments reporting, and accountability on matured contracts and debit authorizations.”

Peer answer 2: “Direct debit is a hot button item at my company also. Treasury has always had the point of view to not allow direct debits unless it is not profitable or if the risk is high not allowing them (i.e. utilities or certain governmental payments). We have it listed in our internal financial controls to avoid direct debits unless there is good reason for them.

  • Our AP teams are constantly challenging treasury on this topic and we have always been open to discussion. We now have a process where a treasury leader and a controller of the business must both sign off before a direct debit can be initiated.

Peer answer 3: “We’ve recently discussed this as well, mostly related to an ADP process which is daily and manual for the team. We don’t have specific policy but have historically avoided it. We’re also revisiting though due to the efficiencies it can provide. For example:

  • “SCF: Our provider wanted us to open an account at their bank. We prefer they auto debit our treasury accounts rather than have another account to monitor and fund.
  • “Government/utility: We’ve had instances where we do not need to provide a LC or BG if the utility can auto debit our account.
  • “ADP: Currently, a manual wire process; we are investigating whether it’s worth the manual effort versus allowing ADP to auto debit our accounts.”

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Justin Jones
In Cash & Working Capital, Technology

Getting Granular: A Tool to Dig Deeper and Improve Cash Forecasts

How Cashforce built a stronger foundation for one member’s cash flow forecasting and working capital optimization.

Covid-19 shook the foundations of cash flow forecasting and working capital management for companies facing uncertainty about revenues, vendor payments, appropriate inventory levels and adequate cash reserves.

  • At a recent NeuGroup virtual interactive session, one participant impressed others by describing how a fintech solution provided by Cashforce a year earlier allowed his company to dig into the weeds of business operations, examining line-item details of cash flows to prepare for and absorb shocks to liquidity.
  • That ability helped treasury provide real value to the company when the internal spotlight landed on the team during the pandemic.

How Cashforce built a stronger foundation for one member’s cash flow forecasting and working capital optimization.

Covid-19 shook the foundations of cash flow forecasting and working capital management for companies facing uncertainty about revenues, vendor payments, appropriate inventory levels and adequate cash reserves.

  • At a recent NeuGroup virtual interactive session, one participant impressed others by describing how a fintech solution provided by Cashforce a year earlier allowed his company to dig into the weeds of business operations, examining line-item details of cash flows to prepare for and absorb shocks to liquidity. 
  • That ability helped treasury provide real value to the company when the internal spotlight landed on the team during the pandemic.

Digging into details. Cashforce opened a window to a more accurate cash picture by revealing what was going on across the business and how various moving ‘levers’ were rapidly changing, the treasurer said.

  • The technology tracked the granular details of cash flows and highlighted respective drivers that helped identify areas of business behaving normally and those under greater stress from delays in customer receipts.
  • The resulting insights facilitate setting baseline expectations and seeing potential roadblocks so that treasury teams can have productive conversations with operations teams about changes, new products, etc. so that business intelligence is layered into forecasts appropriately.

The velocity and veracity of data. Covid-19 has called more attention to the need for banking APIs and the harmonization of data feeds into a single analytical source. Real-time mandates are now the norm: Everyone wants payment information in real time, with consolidated cash positions at the press of a button. This greater level of urgency has driven the need for cash flow forensics and analytics.

  • 82% of participants polled have accelerated plans to automate and digitize treasury operations since the pandemic (see chart above for details).
  • Cashforce stressed that all processes surrounding cash flow and working capital optimization must be revisited to accomplish real-time goals. Across companies, they are seeing an emergence of a cash culture away from the heavy focus solely on earnings.
  • This shift requires links to AI models so treasury practitioners can determine cash flow drivers not easily spotted by the human eye because they are in the weeds of massive amounts of data.

The data is there; why can’t we get to it? Simply put by one member: Most treasury management systems (TMSs) are not designed to house the magnitude of transaction-level data nor provide the analytic capabilities needed for transparent cash forecasting and best-in-breed working capital analytics.

  • For example, not all TMSs are able to take in various data streams or extrapolate trends to build cash flow patterns into a cash forecast. For companies with multiple ERPs, the complexity and volume of data becomes exponentially difficult to manage and impossible to analyze manually.
  • Algorithms designed to roll up your sleeves for you and dig into transaction-level detail to predict trends and flag anomalies provide a structure for cash optimization and a safeguard for deviations that threaten liquidity. 
  • Measure KPIs to move the needle. Automated calculations and daily reporting on key indicators through Cashforce tools allow for expedited metrics that enable smart decision making and facilitate improving working capital through analytics.

Wedded bliss: Marrying short-term indirect to long-term direct cash forecasts! Treasury and FP&A forecast disconnects are common sources of reconciliation tension across companies.

  • Cashforce uses a “rules engine” that takes ERP data to transform the indirect P&L components into direct cash flow drivers and calculate timing parameters based on historical trends.
  • One member inquired about the possibility of forecasting by purchase order and was pleased to hear that once the purchase order details were transferred into the system, algorithms calculate cash amounts and timing for both “open ended or closed” purchase orders, taking the headache out of what is often a guessing game.

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Justin Jones
In Cash & Working Capital, Regional

The Right Steps on the Path to Optimizing Working Capital Management

MUFG presents a working capital road map for technology companies at NeuGroup’s AsiaTech20 pilot meeting. 

At the inaugural meeting of NeuGroup’s AsiaTech20 Treasurers’ Peer Group, sponsor MUFG led a session titled “Optimizing Working Capital (in Uncertain Times)” and participants discussed challenges including how to get vendors to extend payment terms, the need for efficient collections processes and developing KPIs around working capital.

MUFG presents a working capital road map for technology companies at NeuGroup’s AsiaTech20 pilot meeting. 

At the inaugural meeting of NeuGroup’s AsiaTech20 Treasurers’ Peer Group, sponsor MUFG led a session titled “Optimizing Working Capital (in Uncertain Times)” and participants discussed challenges including how to get vendors to extend payment terms, the need for efficient collections processes and developing KPIs around working capital.

Working capital cycle. MUFG’s presentation identified four areas, and goals for each, in the working capital cycle.

Big Picture. The presentation also set down a path for companies starting on the path to optimizing their working capital management programs. It requires:

Senior attention.

  • Working capital improvement is an ongoing process led by the most senior stakeholders within the company.
  • Holistic organizational transformation requires close cross-functional coordination.
  • Change in culture and organizational buy-in by all stakeholders is necessary.

Organizational change management.

  • Buy-in is needed across various departments, including treasury, sales and procurement teams.
  • Working capital solutions require a deep understanding of systems and processes supporting the company, legal contracts and payment terms affecting working capital, and financial tools used to improve and gain efficiency.

Steps. Here are four steps to take on the path to an optimized working capital management approach, according to MUFG:

Observations from North America. MUFG’s presentation said that over the course of 2020, “companies have seen substantially higher amounts tied up in working capital. Furthermore, several key working capital metrics deteriorated during the year.” In addition:

Pricing pressure.

  • With liquidity scarce and credit concerns, we have seen significant repricing movement across the broader market.
  • Pricing levels have varied from program to program with new pricing around 25 to 50 basis points higher.
  • The industry segments hit hardest by Covid-19 faced the most pressure with significant premiums needed to maintain funding.

Term or tenor extension.

  • Buyers are delaying payments and/or forcing extension of terms to preserve cash.
  • Terms continue to get extended with 90- to 120-day terms becoming more common and customers absorbing higher product costs from suppliers in exchange. In some cases, terms have approached 360 days

Usage and volume.

  • Seller-led programs have had growth in usage over LTM due to longer tenors while volume has decreased.
  • Buyer-led (payable) programs have had an increase in usage as volumes have increased as suppliers are looking for more liquidity.
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Justin Jones
In Banking, Capital Markets

Banks Craving Yield Hear Case for Lightly Structured Corporate Notes

An option for members of the Bank Treasurers’ Peer Group coping with excess liquidity amid rock-bottom rates.

Many members of the Bank Treasurers’ Peer Group (BTPG) find themselves looking to their investment portfolios as they search for yield in a manner that complies with policy risk parameters—a theme heard at other NeuGroup meetings in the second half as interest rates fell.

An option for members of the Bank Treasurers’ Peer Group coping with excess liquidity amid rock-bottom rates.

Many members of the Bank Treasurers’ Peer Group (BTPG) find themselves looking to their investment portfolios as they search for yield in a manner that complies with policy risk parameters—a theme heard at other NeuGroup meetings in the second half as interest rates fell.

  • Banks face the added challenge of tepid loan growth amid a surge in deposits driven by a flight to safe havens and businesses parking cash received through the Paycheck Protection Program.
  • “We have all this cash and nowhere to invest,” one bank treasurer said.
  • One suggestion from the sponsor of the BTPG H2 meeting: Buy lightly structured investment-grade corporate bonds, in addition to US treasuries, federal agency debt, MBS, ABS and municipal bonds.

Structured notes. According to the sponsor, lightly structured bonds can offer a significant yield pickup and be customized to meet portfolio needs. Structured correctly, these securities can be a capital-efficient investment from a risk-weighting perspective. Structured notes issued by US depositary institutions or qualifying foreign banks can have the same risk-weighting as a federal agency or MBS investment.

  • The sponsor was that clear structured notes, if appropriate, would still only comprise a relatively small percentage of a bank’s securities portfolio, primarily because they can be less liquid than other investments, especially during times of high volatility and stress in the financial markets.
  • That said, these investments can be customized by issuer, tenor, rating, fixed versus variable interest payments and call feature.
  • Additionally, more highly structured notes can allow the portfolio manager to express views on inflation or the shape of the yield curve, again, if appropriate.

Caveat emptor. The search for yield does not come without risk, of course. But for investment portfolios that have a buy and hold approach to at least a small portion of their holdings, they may have merit.

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Justin Jones
In Risk Management, Talking Shop

Talking Shop: Remittance Verification Options for Treasury Payments

Member question: “How do others handle remittance instruction verification for treasury payments? Callback? Third-party service? Any ML or technology?

  • “We are reviewing our verification process for remittance instructions for payments processed through treasury. Today, we require it to be on the bene’s letterhead, or bank letter, or imbedded in the contract, but have not implemented a callback. Who does the verification in your organization? Are you looking at any third-party services or ML-type models for additional controls?”

Member question: “How do others handle remittance instruction verification for treasury payments? Callback? Third-party service? Any ML or technology?

  • “We are reviewing our verification process for remittance instructions for payments processed through treasury. Today, we require it to be on the bene’s letterhead, or bank letter, or imbedded in the contract, but have not implemented a callback. Who does the verification in your organization? Are you looking at any third-party services or ML-type models for additional controls?”

Peer answer 1: “We conduct a callback for all new or changes to existing beneficiary payment instructions.”

Peer answer 2: “Our company also does a callback verification.”

Peer answer 3: “My company does callback verifications for changes to existing beneficiary instructions or new beneficiary instructions for treasury payments.”

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