A Tale of Treasury Management, Spend, and a Shut-Down Blast Furnace
Originally Published December 2, 2022 – Updated December 20, 2022.
“I remember when the lockdown came in the country and thinking, ‘Well, we’re not going to be impacted too much because no one can stop a blast furnace just like that,’” recalls Jeremy Hamon at Primetals Technologies, a U.K.-based world leader in metallurgical plant solutions and a full-line supplier across the entire value chain. He’s the Head of Group Finance at Primetals Technologies and CFO of the financial entities in the group. “You’d do it only every 20 years or so. In steel production, stopping a blast furnace essentially means that steel residue would solidify. And trying to restart it afterward is extremely difficult. And you know, as I was making that statement, we heard on the news that yes, in fact, the blast furnace was going to shut down. And I remember telling myself: ‘We’re going to have to stop building revenue, but we still have people — we still have our fixed costs.’”
A large part of treasury management is preparing for the future — anticipating what will happen next and steering toward a good outcome. But it’s impossible to predict every challenge. Disruption takes many forms, and it’s becoming increasingly frequent and severe. How quickly and capably corporate treasury teams respond to adversity greatly depends on the levers that corporate treasurers and cash managers can pull at a moment’s notice.
For Primetals Technologies, Jeremy Hamon’s treasury team relied on its cloud-based treasury management platform to support decisions such as the timing of liquidity injections into specific local entities, and building a centralized bank account structure for both cash payments and incoming cash (in other words, all incoming cash directed to a single bank account, and all payments out of a separate bank account), thus simplifying the tracking of each. Though effective, steps like that are essentially one treatment for one particular symptom of uncertainty or adversity. Another company would have responded differently because every company is different in terms of business models, industry infrastructures, and market demands. Leading corporate treasurers and cash managers, however, all operate with a similar strategy: They help their businesses prepare for the future by getting ahead of things today.
The impact of constant crisis mode on treasury management
The questions corporate treasurers typically ask themselves every week or every month become so much more urgent when a crisis hits:
- How much cash is available, and where?
- How quickly can cash be accessed and transferred to where it is needed?
- What is the forecast for both the group and for the individual business units across different locations, in terms of cash requirements over the next days, weeks, and months?
In some cases, liquidity planning can change by the hour. But as our May 2022 survey revealed, corporate treasurers and cash managers don’t always have the treasury management tools they need to make the right decisions, fast:
• 75% require multiple systems to identify cash on hand.
• 51% lack full access to real-time spend and financial data, group-wide, and third-party data.
Smart liquidity and risk decisions in treasury management — in good times and in hard times — also involve looking beyond “pure cash.” Corporate treasurers and cash managers should consider:
- What is the liquidated value of all of our assets and how quickly can we liquidate them?
- How high are the cash outflows in connection with repaying short and medium-term borrowings, and what alternatives do we have (if any)?
- What credit facilities are in place and how reliable are they, taking covenants and other factors into consideration?
When corporate treasurers don’t have full, real-time visibility into cash, treasury management can’t perform as well as it could — and not just in terms of cash forecasting. Cost control is another good example. One of a corporate treasurer’s many mandates is to reduce costs arising from funding, money transfers, trade finance, or other types of deals with financial intermediaries. If treasury teams cannot see where to draw working capital from or how to optimize it, they run the risk of not being able to negotiate better borrowing terms and, in turn, pay higher interest rates and borrowing fees. Other areas of impact include:
- Yield management. How well is our long cash position managed in terms of interest earned, versus our debt/borrowing the rate paid to borrow?
- Risk exposure. How quickly can scheduled payments be stopped if, for example, regional sanctions go into effect? Is enough liquidity in place to ensure business continuity during and after a cyber-attack?
Yesterday’s treasury management technology isn’t designed for today’s uncertainty
When so much emphasis is placed on anticipating the future, it can be tempting to gloss over the here and now. But one of the best ways to set up a company to thrive later on is to bring its financial house in order today. Think of it this way: If you don’t know exactly how much cash your corporate treasury has right now, how will you ever be able to predict changes down the road — let alone have any idea of how to respond to them?
“You can’t have good risk management without good cash management.” — Jeremy Hamon, Head of Group Finance and CFO at Primetals Technologies
The first step is to obtain real-time and comprehensive visibility into your company’s bank accounts along with assets and financial obligations (such as payments) and liabilities. It sounds like a straightforward process, but conventional treasury management systems often grapple with:
- Legacy operational processes and solutions that rely on manual, slow, and error-prone workflows
- Data silos that work in isolation and prevent collaboration
- A limited view of financial health, including visibility into upcoming payments
Uncertainty is unforgiving. It doesn’t grant corporate treasurers and cash managers days to determine the cash position. It doesn’t care if decision-makers don’t have insight into how procurement teams are budgeting for and sourcing, say, personal protective equipment, how supply chain teams are managing struggling suppliers, or how finance teams are handling changes to capital expenditures.
Uncertainty also affects the entire business. Corporate treasury can no longer ignore the positive impacts of managed business spend on resilience. At Coupa, we call this approach Business Spend Management (BSM). Though it has its roots in procurement, BSM is a discipline that’s also helping corporate treasurers and cash managers transform the way they survive a crisis in the short term and thrive once the crisis has passed. (CFOs and other finance leaders can learn more about the origins of BSM here.)
Business Spend Management (BSM) helps modern treasury management establish a single source of financial truth
But doesn’t a treasury management system (TMS) and its interface with an ERP provide that view already? Every day, corporate treasurers and cash managers rely on their TMS to carry out crucial activities in cash management, cash forecasting, and risk management. More often than not, however, the financial data in use is from a business’s direct spend. While having visibility into direct spend is essential to understanding financial health, direct spend alone is only part of the picture.
BSM completes the picture of financial health because it grants corporate treasurers and cash managers visibility into indirect spend. This is a category of spend that typically goes unmanaged and can make up anywhere between 20% to 40% of a company’s overall spend. Spend not under management is spend data that corporate treasurers and cash managers can’t account for in their cash positions and forecasts.
When companies commit to a BSM approach, they also equip their treasury management team to help move the company out of crisis mode faster when adversity does strike. Spreadsheets and paper-based financial processes are digitized and automated to speed up workflows, eliminate errors, and create richer datasets. Data silos dissipate, allowing teams to collaborate better and more often. And forecasts are easier and faster to compile and adjust since they’re based on a complete and real-time look at the company’s financial health.
Stay in control of cash with smart treasury management
You might not be able to predict where disruption will strike next, but you can be quite certain that when it does, you’ll need to quickly identify which entities need a liquidity injection and then allocate those funds and fulfill general receivables obligations. There’s no room for guesswork.
With cash management powered by BSM, you can make smart liquidity decisions faster than you ever could by using paper or spreadsheets. Other ways to improve global cash liquidity include:
- Making sure automated reporting is enabled and synced company-wide
- Receiving short-term estimates from local subsidiaries periodically through your treasury system
- Establishing clear cash positioning workflows that all subsidiaries follow
It’s essential to stay in control of cash, especially during a crisis. Even though you may need to move large sums of money quickly, your treasury management system must enforce rigorous controls, such as approval thresholds and segregation of duties. These are built into a BSM platform and actually scale as your organization evolves.
BSM also gives you greater control over cash by harmonizing data from areas across the business in real time. Corporate treasurers are quite familiar with, for example, ways to preserve liquidity by optimizing treasury payment runs and timing. Another evergreen concern is FX volatility management, where interest rates can rise at different speeds in different countries. But consider this: Would your response to disruption be any different if your treasury management system accessed and synthesized financial data from procurement?
From a historical perspective, treasury and procurement have done well enough in their silos. That era is over. BSM makes it easy for you to access and interpret data on financial processes within procurement, which ultimately informs better liquidity and risk management decisions. A BSM-powered treasury management system can help you:
- Leverage flexible payment dates to pay later and maximize yield on liquidity
- Use excess liquidity to take advantage of early pay discounts provided by suppliers and vendors as a way to generate a higher cash-on-cash return
- Minimize exposure risk by revealing at-risk suppliers
Prepare for the future with the power of the treasury management community
Crises and uncertainty have a way of bringing people together. It’s the same in treasury. Rolling your treasury management system into a BSM ecosystem frees you from the burden of making significant liquidity and risk management decisions all on your own. We’re helping corporate treasurers harness the power of predictive insights using data-driven artificial intelligence and nearly $4 trillion of cumulative spend data from across the Coupa BSM community. To learn more, head to this blog post.
“Technology also allows us to be prepared for the next crisis. If you use Coupa’s technology to, say, prove a process works, and implement it ‘during good times,’ then you’re better prepared for bad times because your team can support projects faster and create better reports. And then you’re set up to deliver added value to top management — that’s what really matters in uncertain times. You’re the rock that provides crucial information and insight because at the end of the day, you have to have enough cash on your accounts to pay all the bills. As long as you can ensure this, you will survive any crisis.” — Peter Helming, Vice President of Treasury & Working Capital Management at Huf Group
When things go from bad to worse, not everything can be within your control. You can’t stop the blast furnace (or other proprietary equipment) from shutting down, the markets from falling, or demand for your company’s products spiking or plummeting. What’s within your control is how you prepare your treasury management.
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