Guerilla Treasurer

From the Secret Guerilla Treasurer Academy

A Treasury policy without work instructions is like a list of cake ingredients without the actual recipe. You know that you need eggs, flour, sugar, and baking powder, but without the recipe you are not likely to be able to bake a decent cake (unless you happen to be a pastry chef, but few treasury professionals are).

During my corporate treasury days, I came across some business units that had come up with truly imaginative ways following the corporate treasury policy. In one subsidiary country, the general manager had outsourced currency risk management to a consultant whose job was to eliminate the effects of currency exposures to the unit’s operation.

Our CFO, being a crafty sort of fellow, smelled a rat and asked me to investigate what this consultant was all about. What I learned was nothing short of flabbergasting.

All currency-based transactions where accounted for at the previous month’s closing exchange rate. The consultant then promptly proceeded to sell currency-based receivables whenever the the spot rate was better than the previous month’s closing rate. If the spot rate did not exceed the closing rate, this “consultant” simply left the position uncovered. This way the consultant always managed to show a profit and the consultant had gained a reputation as somewhat of a guru at the operating unit.

The only slight problem with this neat little arrangement was that it had bugger all to do with ensuring the profitability of the business. It was, in fact, a pure hoax. I did manage to convince the consultant to start looking for new victims (err, clients) but quite a bit of damage had already been done.

How could this have happened? The business unit had nobody who had any understanding of currency risks. Guided by just the treasury policy, they knew that they had to cover currency exposures, but they had no clue what that really meant. The policy must be supplemented by practical worki instructions if you want to avoid situations like this.

The most important point of the treasury work instructions is to describe in detail what following the treasury policy actually means.

Sometimes the issue is not the lack of work instructions. Sometimes the business units simply do not understand why the policy must be followed. It can be hard for the business unit to understand why it must cover its US dollar exposure when everybody knows the dollar is going to get stronger — even the paper says so. Or why should the business unit fork its hard-earned cash over to be managed by the treasury; they could use the extra cash as a buffer against surprise expenses.

This is precisely why the work instructions should contain not only practical instructions but also some motivational information to the business units — reasons why they should actually do as they are told. This motivational section describes what is the purpose of systematic currency hedging and company-wide liquidity management.

From the Secret Guerilla Treasurer Training Academy

Treasury policy is often the only guideline business unit managers have for following the treasury’s preferences. The policy is an extremely important tool but, unfortunately, it is quite rarely written so that business unit representatives really understand it.

I have been involved in the writing of treasury policy in more than one company and here is how it really goes: we, the treasury masters of the universe, edit the texts for weeks and weeks to make sure it would be satisfactory to everybody and cover every aspect of the operation. The result is a perfect specialist treatise, so dense and intricate the even the experts themselves have a hard time comprehending it.

In an earlier blog, I shed light on the average business unit representative. You will probably agree with me that it is more than likely the he does not fully understand your perfect policy.  Now we get to a point where the customer service mindset of the treasury is tested.

A Guerilla Treasurer accepts that the non-comprehension is her problem, not the client’s. She critically reviews the policy and rewrites it so that even mere mortals can decipher it. Even if everybody in the treasury thinks the policy is clear as water, this does not necessarily mean everybody else agrees. As painful as it might be, I recommend testing this proposition.

Should you decide to take my advise, try to find a guinea pig who is a good sample of the treasury intelligence of your business unit representatives. I recommend you take your treasured policy document and march to your finance department, accountant, or controller. Ask him to read the document and ask whether he really understands what it is about and whether it gives actionable instructions. If you choose the right person, he probably has no need to look good but will give an honest opinion. Just make sure you can take the truth — it might not be what you want to hear.

The other end of the spectrum is a hastily written makeshift policy that contains broad, general statements such as: “all currency exposures are to be covered immediately”. Even though this sounds grand and simple, it is everything but. Currency exposure is really in the eye of the beholder; it can arise during pricing, ordering, or invoicing.

If the policy is not explicit about when the exposure is actually created, the business units — being accounting-driven — more than likely interpret it from an accounting perspective, and treat the exposure as created only when there is an invoice. If the treasury, on the other hand, wishes to cover all sales on a forecast basis, the policy fails to support this.

The policy must be explicit and detailed enough so as not to leave room for misinterpretations. At the same time the policy must be understandable and explicitly written. Challenging? You bet — but writing the policy is something that needs to be done properly as the policy is the cornerstone of effective B2T communications.

One proven solution is to supplement the policy with work instructions. But that is a topic for another entry.

From the secret Guerilla Treasurer Academy

Just about every treasury these days is a service centre. The treasuries understand that the business units of the company are important clients of them. In fact, the treasury is dependent on the business units.

It is the said units that provide the treasury with the raw materials, i.e. reliable and timely information about the cash flows of the business units. This is the Achilles’ heel of many a treasury — it is my contention that only truly B2T oriented treasuries can make this work, as they have understood the deeper meaning of customer service.

OK, how does Guerilla Treasurer understand the customer service?

If the client does not follow instructions given, it is not the client’s fault but the service’s. In client service, one cannot simply shrug one’s shoulders and blame the nincompoops being served for not even being capable of following simple instructions. (Not that one isn’t occasionally tempted…)   A consummate customer service professional proceeds to find out why the instructions are not being followed. And, more likely than not, at least part of the reason is the instructions not being clear enough.

If the instructions are clear, but the clients still pay them no attention, the likely reason is them not understanding why following the instructions matter. No-one is keen on diligently doing things the meaning of which they do not get. (At least if they have read my previous blog on creative laziness).

It is even possible that the instructions are clear and their importance is well articulated and yet the clients’ pay them no heed. In this case, the service provider must have the authority to monitor and even mandate the adherence thereof.

Let us consider for a moment what kind of beast the  average business unit representative is. She is a financial management professional, perhaps and accountant or a controller who sees treasury-related processes as an additional burden. In her mind, currency exposures are created when a customer is sent an invoice in a foreign currency or a foreign-currency invoice is received from a supplier. As she is also likely tasked with the liquidity of the business unit, she is quite understandably reluctant to transfer her funds to be managed by the treasury if that can be avoided. A healthy cash balance in the local bank — quite understandably — guarantees amicable relations and regular rounds of golf with the bank manager.

A Guerilla Treasurer makes sure the instructions are clear and understandable (even in Brazil, where English is not the native language), makes sure the purpose of the instructions is crystal-clear, and implements tools they can monitor the adherence to the rules.

The average corporate treasury development project goes something like this: the treasury gets allocated funds from the management to improve risk management and promptly decides to acquire a shiny, new Treasury

The State of Treasury Budgets

Management System (TMS).

The first six months goes by in a blur in the RFI/RFP/RFQ merry-go-around. When a decision finally gets made, the next three months are spent in the negotiating table with the chosen vendor wrangling about contract terms. The next eighteen months are then spent on a step-wise implementation of the system.

The whole project ties up the treasury’s development resources for several years and costs an arm and a leg.

Does the company get its money’s worth?

If the homework has been done properly and several basic things are in order, the answer is an emphatetic “maybe”. The project could have been much more productive, but that is a topic for another blog entry.

Quite often, however, this approach is simply barking up the wrong tree. If the basics are not in order, the investment into a new system is a waste of money and resources.

The key task of a treasury is to manage the financial risks — such as liquidity and currency risks — of the company. The risks are caused by the cash flows of the operative business. The treasury needs to have reliable, real-time cash forecasts and FX exposure reports. Otherwise the situation is GIGO (garbage in, garbage out) no matter how expensive and fancy the treasury systems as such are.

So what would a Guerilla Treasurer do? He would start by putting the basics in order.

The beauty of the whole thing is in the fact that the basics are relatively easy to put in order and it does not even have to cost very much — all the company needs to do is put its B2T (business-to-treasury) process in order. This, however, requires attention and willingness to look at things differently from the treasury.

The first prerequisite is that the operating units understand what is expected of them. This, in turn, requires the  treasury to understand the needs of the operating units and create instructions and policys in a language actual human beings can understand.

The second prerequisite is having appropriate tools; if the tools are built for the needs of the treasury only, there is a considerable risk that the operating unit people find them too hard to use.

In a true cliff hanger spirit, I will break here and save my step-by-step recipe for putting a company’s B2T process in order for the next several  installations of my blog.