Career as a Corporate Treasurer

Transcription

1 Career as a Corporate Treasurer By Riaan Bartlett How the Treasurers role has evolved he role of the corporate treasurer has evolved over time from being a somewhat operational role with a narrow scope to a highly visible role at the heart of the organisation, contributing to corporate strategic planning. The treasurer's role is now seen increasingly important even for the viability of the organisation. This means a broader and higher quality skillset is required for the role of a corporate treasurer. More specifically, corporate treasury has evolved over time, in response to a series of events which includes: Oil crisis in 1973 > Liquidity management essential Internationalisation of financial markets 1980 s > Increased cross border trade resulting in increased exposures to

2 manage Developmentof new derivatives > Exposures can be managed more effectively Limited access to funding > SA companies funding flexibility limited ZAR becomes a free-floating currency > SA companies more exposed to FX volatility Development of VAR and EWRM > Managementof risks over the whole firm Oversupply of liquidity Easy-credit environment > False sense of security i.e. more risk taken on than supported by financial position Corporate bankruptcies in the US > Increased regulation e.g. Sarbanes- Oxley as a catalyst for improved treasury processes Improvements in technology > Decision-making can improve as information improves The global financial crisis in 2008/9 probably had the biggest impact for the treasurer as it lead to increased regulation, greater counterparty risk, increased cash flow volatility, increased scrutiny from the board and the introduction of more formal treasury KPI's to measure and monitor performance. Lessons for the Treasurer from the financial crisis include: Strategic lessons Must have a strong group of banks and access to diversified funding sources Raising finance can be difficult even for well rated corporates Having surplus cash on the balance sheet is prudent (cost of carry is less important) Safety of surplus cash (counterparty strength) is more important than the yield achieved Financial discipline is important especially when there are indications that the market is softening Risk management has become critical (but don't rely just on risk models) Be forward looking by having an upfront plan in place to manage a downside (crisis) scenario Operational lessons Processes must be standardised and automated

3 Management want objective benchmarks in place to measure treasury's performance Stronger focus on cash flow forecasting accuracy Information to support decision-making and exposure monitoring is crucial An increased focus to cut costs across the organisation including treasury (meaning fewer people have to do more) As an example, risk management has become more integrated following the financial crisis. Treasury financial risk management pre-crisis Treasury financial risk management post-crisis Source: Journal of Corporate Treasury Management Responsibilities of a corporate treasurer The typical framework the treasurer operates within can be summarised as follows:

4 The treasurer will have responsibility for the following departments within treasury: Front office deal execution for cash, FX and interest rate transactions Middle office oversight and governance, adherence to limits Back office confirmation and settlement of deals, bank account monitoring Finance / Accounting accounting of treasury transactions, intercompany loans IT / Systems support on and development of treasury systems Corporate finance deal execution related to funding and M&A, strategy, valuations Some of the responsibilities of a treasurer will be 'owned' (e.g. cash, liquidity, debt, funding etc.); whilst others will be 'overseen' (e.g. working capital management is the responsibility of the business but the treasurer must have a high degree of visibility). Below is a more detailed discussion of the treasurer's responsibilities, recognising that it can be different depending on the size, industry and sophistication of the corporate. a) Cash and liquidity management Cash is king - working capital management in combination with accurate and timely cash forecasting process including the input from the business is crucial to any organisation. Practical issues that the treasurer will have to deal with includes; Sufficient liquidity buffer to manage potential cash flow cyclicality amount, period Form of liquidity buffer - cash, commercial paper, committed facilities etc. Pre-funding of cash short falls, or not Maximising cash available at the centre and minimising trapped cash Target surplus cash to hold b) Capital markets & funding This covers the different techniques and sources for raising funding to finance the business, from bank debt to equity finance. The relationships with lenders and investors will need to be built and the company's business and risk characteristics explained to credit analysts and credit rating

5 agencies. Practical issues; How to fund - debt markets vs project financing vs hybrid instruments vs bank debt Negotiating documentation e.g. revolving credit facilities, bond indentures, project finance documents, letter of credit and trade finance agreements, ISDA How to limit or mitigate the restrictive effects of certain clauses in loan facility documentation e.g. cross-default, negative pledge etc. Acquisition facility self arranged or underwritten by banks Determining the optimal number of banks to have in the relationship c) Corporate financial management This answers the fundamental questions as to what assets the business should invest in and what capital and financial structure should be put in place. It is therefore all about ensuring that the financial activities of a company fit with the organisation's business strategy. This means the treasurer cannot operate in a silo from the business. Practical issues; Financial strategy can for example be to target a specific credit rating, or to maintain a buffer for acquisitions, or do share buybacks with all surplus cash generated Determine the priorities of cash flow e.g. pay dividends or capex first Best use of surplus funds e.g. internal growth projects, special dividend, keep as buffer for acquisitions, share buyback, buy back high interest debt etc. Cutting costs (e.g. capital expenditure) quickly to improve the liquidity position. A good understanding of what constitutes discretionary expenditure is important Preparing funding plans and then implementing the funding plan d) Risk management Risk management is about understanding what business and financial risks the company is exposed to and considering whether the returns generated are sufficient to justify taking those risks. The risks need to be evaluated and assessed so that decisions can be made on whether to retain them, to employ techniques to mitigate or transfer risk. Practical issues; Interpreting the results of risk analysis while not solely relying on the model output Understand the extent to which the price or volume of products sold can decrease before there is pressure on the credit rating, liquidity, balance sheet etc. Understand also how this will change if correlation between risk factors (e.g. price of products sold, input cost) is considered Understand thresholds (e.g. interest rates, EBITDA) before covenants in loan facilities are breached Decide on active vs passive management of risk exposures Reducing the pension deficit e) Operations, controls and accounting This is about the running of a treasury function, taking into account the overall policies, the procedures, staffing, systems and controls. Practical issues Treasury location and cost centre or a profit centre Treasury management system best fit or best system on the market Comprehensive policies, procedures and approval framework In-house bank and payment factory Optimal management of bank accounts

6 How to measure the treasury (and treasurer) performance Given there will continue to be increased scrutiny on the treasurer, it is important that proper KPI's are set so that senior management and the Board can determine how successful the treasurer is. Typical KPI's to measure performance can include: Cash visibility - % of total cash available at the centre, % of payments released on time, total number of bank accounts Cash forecasting and liquidity management business unit forecast accuracy, time taken to prepare consolidated cash forecast, absolute cash balance error Cash mobility daily pooling and sweeping benefit Funding liquidity buffer, cost of funds, diversified funding sources, provide liquidity Investment maximum amount invested per counterparty, maximum tenor Exposure management limit per instrument, impact of hedging, fixed vs floating mix Operations number of limit breaches, number of late settlements Risk management counterparty limit usage, net exposure to each counterparty Compliance number of unresolved or material audit issues Other support business units in the execution of their strategies, lowering the cost of borrowing Attributes required for a corporate treasurer From the previous sections it is clear that a treasurer must have a very broad knowledge base and that he has to wear many 'hats'. The treasurer must be a specialist but also a generalist to be most effective. Some of the key attributes the treasurer must have are: a) Hard or technical skills

7 Accounting knowledge does not need to be an expert or CA qualified, but a strong understanding of basic accounting principles is important as well as being able to read financial statements and work with numbers. Controlling experience this will enable the treasurer to understand the flow of numbers as well as financial control and budgeting. Financial strategy and working capital knowledge managing the balance sheet and cash flow is one of the key tasks; finance experience in the business units will give a good understanding of the supply chain, cost management and managing working capital. Finance education highly recommended to have a formal finance degree or at least relevant experience; formal training in financial markets or instruments will be an advantage for example a treasurer may not be expected to price an option, but he should know how and when to use it; a formal treasury qualification is highly recommended as long as it is practical. Business knowledge a treasurer is often criticised for not being close to the business, not contributing to the bottom line or being too specialised; a role at a business unit will provide business knowledge if not possible, the treasurer should stay close to business CFO's and ensure people from the business get rotated through Treasury so that they can share their knowledge. Strong market awareness a strong awareness of how changes in the market will affect the corporate and therefore the strategy is important. The treasurer must be able to communicate potential implications of different market scenarios in a reliable way to all stakeholders. b) Soft skills Trustworthy personality and political awareness the treasurer will be the face of the corporate to the banks, rating agencies and debt investors. Interaction within the company will also be at the Board level. A treasurer that has credibility with the markets and the Board is invaluable to any organisation. Strong managerial skills the treasurer will execute large and complex transactions therefore strong managerial skills are essential, including managing and developing teams, collaboration in cross-functional teams, negotiation, project management etc. Vision about the business and future this is a key attribute as the treasurer needs to ensure treasury can support the corporate's strategy, regardless of the market conditions. The mindset must be forward thinking and pro-active, not short term. Relationship building: Internal - the treasurer must have good relationships with his peers, senior management (including the Board) and also the CFO's of the business units. He will liaise extensively with other departments e.g. tax, accounting, investor relations, secretariat, legal. Relationship building: External - banks, rating agencies, debt investors critical to foster good relationships and trust as the support of these parties will be critical for a company's success (especially in terms of adverse market conditions). Excellent communication skills important given the wide interaction with parties internally and externally. More importantly, the treasurer must be able to explain complex concepts in simple language to get support. Adaptable the treasurer needs to react quickly should circumstances change and must be able to think on their feet. Career route There are different ways to progress to a corporate treasurer. It can be from within the treasury department itself (moving up the ladder), from the business (CFO, finance manager) or other group function (e.g. controller). An option is also to start your career in treasury to get good experience, then move to a business unit (and not another group function such as accounting or investor relations), and then move back into treasury. It is not easy to become a corporate treasurer of a large company. My view is therefore that in order to move into a treasury role, your chances of success are better if you have proven treasury experience, have

8 been in a senior position in the business (controller, finance manager, business unit CFO), have a proven ability to interact with senior management and executed complex transactions. Experience in dealing with banks and investors is important and a banking background will be a bonus given how much the treasurer deals with banks or bank related products. Some companies prefer to hire in a treasurer in order to bring in fresh ideas. The natural progression for a treasurer is CFO. My view is that a CFO with treasury experience is better than a CFO with controller experience, especially in times of crisis when cash is constrained and the company has pressure on its liquidity position. The future Mitigating risk, creating greater efficiencies and staying close to the business units will remain a key focus of the treasurer going forward as will taking responsibility for important but difficult decisions. The importance of the treasurer is now such that he should have a seat at the table in CEO level strategic meetings and brainstorming sessions. If you want an exciting career, then a treasurer role is for you!