How to Manage a Global Treasury: Our Guide

Due to the increasing movement in economic activity from established markets in Europe and North America to developing countries in Africa, Asia, and Latin America, many CFOs are requesting that treasurers increase their efficiency. Too many of them have lagged behind on even fundamental activities in their home markets due to the pace of expansion and regulation: cash management, banking, debt and finance, investments, and risk management for currencies and interest rates.

Such flaws are exacerbated as corporations grow into new areas, where even world-class treasury departments struggle to understand multiple banking protocols, languages, and customs—and frequently lack an operational model and infrastructure to integrate their operations, portfolios, and risks.

The price might be too high. Companies incur added interest expenditures when they overborrow due to poor cash flow forecasts, and they frequently lose money when they do not hedge currency and interest rate risks, commodities prices, or both. They pay excessive taxes when cash flows through tax-heavy areas.

Companies incur financial losses and reputational harm if insufficient controls or divided financial obligations lead to fraud. Those who fail to satisfy their financial covenants with banks or fail to meet liquidity criteria may face credit-rating downgrades, a loss of credit flexibility, or even bankruptcy. That said, here are five moves companies should focus on to improve their global treasury function:

1. Centralising Treasury Management

Businesses with a global presence use a multitude of banks and accounts to conduct their business. Many corporations use a decentralised model to manage the treasury operations of their many divisions. Unfortunately, your worldwide treasury teams do not have an accurate picture of your company's liquidity when they are not operating within a single platform. The first step toward avoiding mistakes and confusion is consolidating treasury functions on a single platform.

This gives you, your department, and your subsidiaries throughout the world a single source of truth for your cash data. It gives you real-time cash data to help you make faster, more accurate decisions.

By employing industry-first Open Banking APIs, open banking solutions automate the aggregation of your cash and bank data. These APIs move your treasury operations away from depending on various TMS across worldwide locations and toward employing a single platform to automate and manage your cash reporting, forecasting, and analysis.

2. Improving Cash Reporting and Forecasting Accuracy with Automation

You can save hours each week with proven fully-automated cash and account reconciliation. One of the biggest challenges facing global cash managers is the cost to reconcile their cash and bank statements. Automating this process significantly reduces the time it takes to process reconciliation, freeing up your time to focus on more strategic or value-added initiatives.

The automated reconciliation also allows you to spend time on more complex analyses and reporting. These capabilities are essential for ensuring that your treasury team generates stable, accurate forecasts and balances, highly valuable in this data-rich environment.

3. Simplifying Analytics and Search

The global treasury department is an essential part of the company's financial and risk management structure. To facilitate compliance and accurate reporting across company and country legal entities, global treasury teams need access to various sources of financial data, including bank accounts, cash balances, and tax rates.

Since this data is located in different systems and spread across various departments, it can be challenging to find promptly. There are several ways to solve this problem, including using a centralised treasury management solution, which provides one platform to manage all treasury data and functionality. This unified platform allows seamless access to financial data and reporting across different locations and systems.

Additionally, companies can utilise an analytics platform to consolidate their data and establish a clean, simple view of all their financial accounts. With these tools, companies can rapidly identify and resolve any issues within their financial portfolios to improve compliance and enhance their overall cash flow performance.

4. Eliminating the Risk of Fraud and Error

Fraud and error can be costly. In some cases, these errors can even be life-threatening. An incorrect balance could result in vendors' delays or even shipments not delivering in time. It could also mean lost revenue and possible long-term damage to your company's reputation.

Automated treasury capabilities allow you to automate a large amount of your cash and balance process, which saves you time and ensures the accuracy of your system. This can be particularly helpful to companies that want to mitigate their risks of fraud and errors while they process their cash and balances.

5. Manage Working Capital in Emerging Markets

Working capital appears to be a straightforward concept: current assets minus current liabilities equals the capital used in a company's day-to-day operations.

However, managing working capital internationally is a challenge, particularly in emerging economies where differences in company culture can complicate the process. Payment periods, for example, might range from 30 days in many industrialised markets to 360 days in some South American and African countries. The absence of automated processes for processing accounts payable and receivable adds to the complexity.

Furthermore, many businesses in both developed and developing markets place too much emphasis on accounting-type measurements such as the cash flow statement or the profit-and-loss statement, rather than creating discipline in cash and working capital management. That concentration overlooks the inner workings of a business and diverts attention away from the core principles of cash optimisation.

For example, the CFO of a multinational industrial company's business unit acknowledged the progress of his treasury's efforts to minimise working capital in accounts payable and receivable. However, he stressed that optimising inventories must still encompass the whole cash conversion cycle.

Many CEOs are astonished to discover that their companies have excessive working capital in places where they are not well-established. Working capital management is complex since it necessitates spending a significant amount of time with business units in different locations to learn how they pay their suppliers and determine consumer behaviour. It is not a simple process. Nonetheless, many treasurers see it as a beneficial approach to increase their profile and identify themselves as the organisation's strategic financial counsel.

What are the Major Foreign Exchange Risks?

FX risk management is not a new concept. FX exposures are a simple idea in and of themselves: they come primarily from the need to convert a cash flow or quantity in one currency into another as a result of a transaction or internal transfer. The value of a cash flow in terms of the other currency fluctuates as the value of two currencies changes in relation to each other.

However, while FX risk can offer several obstacles, the possibilities available to those in the know who use the spot and futures markets allow organisations to mitigate the dangers of transferring cash across currencies and profit from each transaction. However, before joining the market, a full examination of various currency risks and currency hedging techniques should be conducted to analyse positions, tactics, and the timing of trades and transactions. FX management entails a host of distinct risks, including economic, transactional and translational risks.

1. Economic risk

Economic risks cause a currency's relative value to fluctuate. Economic risks come in two forms, cyclical risks and structural risks. Cyclical risks stem from the external economic environment—such as dramatic shifts in interest rates, commodity prices, and regulatory changes. Structural risks are based on its internal economic environment, such as political and regulatory uncertainty.

2. Transactional risk

Transactional risk results from time delays and price changes that occur when converting one currency into another. For example, if a company buys raw material from a supplier located in a different time zone, the time it takes for the supplier to receive payment can cause the currency to fluctuate.

3. Translational risk

Translational risk is based on the differences between the functional and transferable currencies: functional currency and transferable currency. A functional currency is the currency in which a company's operations are performed, and revenues and expenses are recorded.

The most common method for hedging foreign exchange risk is through the use of forward contracts. A forward contract is an agreement between two counterparties to exchange an asset or currency at an agreed-upon price on an agreed-upon date. One party agrees to buy an asset, while the other agrees to sell that asset. The exchange of currencies occurs in the future. Forward contracts are typically written on a notional amount.

There are several ways that companies can reduce the risks of foreign exchange. These methods include the use of hedging mechanisms and various strategies that can reduce foreign exchange risk.

Foreign exchange forward contracts can be used to hedge against uncertainty or speculation. The difference between the forward price and the current spot price represents the potential gain or loss from the contract. This is the notional amount.

There are two main types of foreign exchange forward contracts:

Spot contracts are used for hedging against currency exposure. Futures contracts are used for speculation.

The main benefit of FX forward contracts is that they allow you to fix the exchange rate, which helps eliminate the risk associated with changing currency values. It also helps protect you from currency exposure since the transaction costs are fixed.

There are several risks associated with these types of contracts. First, the contract price will vary, depending on the interest rates of the underlying market. Interest rates can rise or fall over the term of the contract. Second, the maturity date is never known, and the contract can be terminated if the parties agree to do so. Both of these factors increase the exposure to the currency markets. Because of this, you should be prepared to take on additional risk if you use forward contracts.

How to Use the Forward Market to Manage Currency Risk

Foreign exchange forward contracts can be used to manage currency risk by reducing or eliminating exposure to those risks. For example, if a company plans to borrow $20 million in the U.S. but needs the funds in 18 months, the company can use a forward contract to lock in a fixed amount of U.S. dollars in 18 months. If the U.S. dollar weakens during that 18-month period, the company will be able to purchase more U.S. dollars with its foreign cash. If the U.S. dollar strengthens, it can purchase fewer U.S. dollars with its foreign cash.

Forward contracts are not always appropriate for hedging foreign exchange risk. To evaluate whether a forward contract is appropriate for hedging your foreign exchange risk, ask yourself the following questions:

1. What is the maturity of the contract? The longer the maturity, the higher the cost of the forward contract but the lower the risk.

2. How liquid is the market? Check whether the forward contract is generally traded; the more liquid the market, the less the cost of the forward contract.

3. Will the company's foreign cash be invested in the same currency as the contract? If so, a forward contract is not necessary.

4. Is the forward contract an effective hedge? Check whether the currency exposure and the forward contract are in the same currency and whether there is a high correlation between the underlying rates and the contract's volatility.

5. Is the underlying instrument itself hedged? If not, how much can the company lose from foreign exchange exposure?

6. Is there a liquidity risk? Liquidity risk is the risk of not being able to sell the currency in the underlying market.

Conclusion

Treasurers must strengthen the corporate treasury function with a worldwide focus and simplify its performance as corporations allocate more tasks to it. This may necessitate an initial expenditure, but the payoff is well worth it.

The global economy translates into more significant exposure to currency and interest-rate risk. Companies can no longer afford to be complacent about the risks associated with foreign exchange and their exposure to foreign exchange risk.

By assessing the main types of foreign exchange risks and knowing the best practices for improving global treasury function, companies can develop a comprehensive foreign exchange risk management strategy that will help them manage their foreign currency while allowing them to take advantage of the opportunities arising from the global economy.

Bound is a specialist foreign exchange hedging firm that offers currency protection for businesses.

We help companies that are at risk of losing money to changes in the exchange rate to protect themselves against these losses.

By using the services that Bound provides, UK companies of all sizes are able to conduct business in foreign currencies with complete certainty about the exchange rates that they will receive. Subscribe to our newsletter or watch a demo of our product today!