Within most organizations, treasury has two key areas of responsibility: cash management and treasury operations. As the CFO, you will likely be responsible for overseeing these and ensuring that your team delivers each of the necessary outcomes.
In any business, cash is king. No matter how big or small your company is, CFOs need to free up cash and improve their financial position. This helps you allocate more money towards strategic priorities and reduce the pressure to raise new funds. Your cash flow forecasting must be reliable and consider potential upside and downside scenarios.
Companies generate regular cash inflows and outflows across a working capital life cycle, in addition to other routine or one-off activities. It is essential to understand the nature of your cash flows, what you can do to improve them, and to forecast and respond to any shortfalls in cash.
There are many ways that CFOs can free up more cash and optimize working capital cycles, such as improving customer cash collection, negotiating supplier terms, and managing inventory levels.
CFOs should also be regularly monitoring their existing financing arrangements and future requirements to deliver the business plan. For example:
- Are there sufficient plans in place to provide the future debt and capital required?
- Are relationships good with key stakeholders such as banks, investors, lawyers, rating agencies, interest rate and swap currency providers?
- Are you at risk of a potential default on any covenants and margin agreements?
- Are your facilities well-managed and monitored, and could these be better negotiated?
Each of these considerations are essential towards ensuring that your business is appropriately financed within an acceptable level of downside risk.
Robust treasury policies are essential for any company looking to protect its financial stability. By establishing clear guidelines and procedures, CFOs can create a treasury management system that minimizes the risk of financial instability.
CFOs should ask yourself the following types of questions:
- How well is the treasury team managing daily cash flow payments and receipts?
- Are you sourcing enough cash and placing surplus cash in a safe accessible place?
- How robust and effective are your treasury systems?
- What process or technology improvements would improve connectivity and efficiency?
- Are the controls over the risk of operational error good enough?
Your treasury operations should include risk management procedures to cover key areas such as liquidity risk, market risk, credit risk and counterparty risk. A lack of liquidity is one of the most common causes of bankruptcy and is subject to many areas including market and counterparty risk management.
When assessing market risk, you should determine which significant risks to hedge, such as foreign exchange, interest rates, fuel prices and equity market movements. This requires you to implement appropriate policies to control exposures to these market risks within sensible agreed limits.
Implementing a well-organized treasury policy requires careful planning and execution. The key features of a robust treasury policy typically include:
- A clear definition of the treasury function and its role within the organization.
- Guidelines for cash management, investment, and risk management policies.
- Procedures for budgeting, forecasting and financial reporting.
- Protocols for dealing with banking relationships, foreign exchange transactions, and other financial risks.
It is also important to have a process in place for regularly reviewing and updating your policy. Dynamic businesses quickly evolve, and previous policies may no longer be fit for purpose.
An effective treasury function will help to ensure that your company has the necessary funds available to meet its financial obligations, as well as supporting other strategic objectives. It is therefore important that you provide leadership and oversight of this critical area.
Develop your Treasury skills
GrowCFO has plenty of offerings to help you quickly develop your treasury skills:
- Free members should start by read our valued Insights page where we are constantly adding new blogs, podcasts, interviews, guides, polls and research articles.
- As a GrowCFO Premium member, you will have full access to our online governance and control training courses (which includes governance, risk management, compliance, closing the books and treasury), and our mentor-led virtual workshops.
- We also want to remind you about our library of webinar recordings for GrowCFO Premium members that are available to you 24/7. There are some great recordings, such as Improve your month-end close, How to interact with your board and What should I expect from reporting.
Register for GrowCFO Premium to access these valuable resources.